Debt-Equity Regs Should Have Even Broader Scope, AFSCME Says

The American Federation of State, County and Municipal Employees ("AFSCME") represents 1.6 million state and local government, health care and child care workers and we write to express our strong support of the proposed rule on the Treatment of Certain Interests in Corporations as Stock or Indebtedness, also known as the "earnings stripping" rule. We are pleased that the Treasury Department is taking actions to protect the loss of critical tax dollars when U.S. corporations shift their legal address offshore, typically to a tax haven. Multinational companies too often exploit differential tax treatment by changing the geographic location of economic activity and profits. We are especially pleased that the proposed rule applies to all foreign acquisitions of U.S. companies and not just inversions.

Earnings stripping is a common way that corporations avoid paying the taxes they owe when they invert or when they merge with a foreign firm. Through this tax dodge, a U.S. firm purports to borrow money (often no money is actually borrowed but instead a note is issued to its parent and interest payments are made) from a foreign parent as a way to shift profits from the U.S. to a lower tax jurisdiction. In addition to the lower tax rate paid offshore, the U.S. firm gets a tax deduction, thereby further reducing its tax obligations owed to the U.S. government. Federal public policy should not authorize a company to lend itself money from a lower tax jurisdiction and then claim interest deductions on its U.S. taxes. There is no economic purpose for these profit shifting tactics except to avoid taxes. We support the new rules to treat payments as dividends, which are not deductible, instead of interest, which is.

Corporate tax base erosion from profit shifting is a large and consequential problem that reduces the revenues available to fund our government. Reduced revenue from the corporate tax base produces negative outcomes that result in lower government spending, a need for higher tax revenue from other sources, or increased budget deficits. The Joint Committee on Taxation estimates that corporate inversions could result in a loss to the Treasury of $41 billion over the next 10 years.¹ This is revenue that is needed for priorities that can improve our local communities and rebuild our crumbling infrastructure.

We also endorse the comment letter in support of this rule submitted by Americans for Tax Fairness. We agree with Americans for Tax Fairness that Treasury needs to expand the scope of this rule beyond what is currently proposed, and we hope you will do that before this rule is finalized.

We appreciate the opportunity to share our views on this important rulemaking. If you have any questions, or need additional information, please do not hesitate to contact John Keenan at (202) 429-1232.