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Walgreens Boots Alliance Urges IRS to Toss Out Debt-Equity Regs


Walgreens Boots Alliance Urges IRS to Toss Out Debt-Equity Regs

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Mr. Jacob Lew

 

Secretary of the Treasury

 

U.S. Department of the Treasury

 

1500 Pennsylvania Avenue, N.W.

 

Washington, D.C. 20220

 

 

Mr. Mark J. Mazur Assistant

 

Secretary for Tax Policy

 

Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, D.C. 20220

 

 

Ms. Emily S. McMahon

 

Deputy Assistant Secretary

 

Tax Policy

 

Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, D.C. 20220

 

 

Mr. Robert Stack

 

Deputy Assistant Secretary

 

International Tax Affairs

 

Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, D.C. 20220

 

 

The Honorable John Koskinen

 

Commissioner

 

Internal Revenue Service

 

1100 Constitution Avenue, NW

 

Washington, D.C. 20224

 

 

Mr. William Wilkins

 

Chief Counsel

 

Internal Revenue Service

 

1111 Constitution Avenue, NW

 

Washington, D.C. 20224

 

Re: REG-108060-15 Proposed Section 385 Regulations

 

Dear Sir and Madam:

Walgreens Boots Alliance is the first global pharmacy-led, health and well-being enterprise. The company was created through the combination of Walgreens and Alliance Boots in December 2014, following Walgreens exercise of its option to buy the remaining 55% of Alliance Boots, consistent with the agreement it reached with the owners of Alliance Boots in 2012 when it bought its initial 45% stake in Alliance Boots. During the time between Walgreens acquiring the initial 45% interest in Alliance Boots, the Walgreen Company Board of Directors considered in great detail whether to re-domicile Walgreen Co. (or a new holding company to be created from the combined Walgreens and Alliance Boots) outside the United States. The Walgreen Co. Board, following careful evaluation, decided that Walgreen Co. (or a new holding company) should remain a U.S. company and not re-domicile outside the United States. Upon completion of the combination of Walgreens and Alliance Boots, the newly created (in 2014) parent company, Walgreens Boots Alliance, became and remains to this day a U.S. multinational company. This transaction brought together two leading companies with iconic brands, complementary geographic footprints, shared values and a heritage of trusted healthcare services through pharmaceutical wholesaling and community pharmacy care, dating back more than 100 years.

As of August 31, 2015 (without subsequent adjustment for business acquisitions or dispositions), the company, together with our equity method investments, has a presence in more than 25 countries, employs more than 370,000 people and is the largest retail pharmacy, health and daily living destination in the USA and Europe. We are:

  • a global leader in pharmacy-led, health and well-being retail with over 13,100 stores in 11 countries

  • one of the largest global pharmaceutical wholesale and distribution networks with over 350 distribution centers delivering to more than 200,000 pharmacies, doctors, health centers and hospitals each year in 19 countries

  • one of the world's largest purchasers of prescription drugs and many other health and well-being products

 

The Company's size, scale, and expertise will help us expand the supply, and address the rising cost, of prescription drugs in the U.S.A. and worldwide.

Walgreens Boots Alliance has demonstrated our commitment to US and global health and well-being through our daily business operations as well as through innovative community-focused initiatives such as such as Vitamin Angels, flu-shot donations, health screenings and vaccination programs as well as being a leader in healthy living awareness.

We are writing in response to the Proposed Regulations under Section 385 of the Code that were issued by the United States Treasury ("Treasury") and the Internal Revenue Service ("IRS") on April 4, 2016. The Proposed Regulations would:

  • Authorize the Commissioner of the IRS to treat certain related party interest in a corporation as indebtedness in part and stock in part for Federal tax purposes

  • Establish extensive documentation requirements in order for certain related party interest in a corporation to be treated as indebtedness for Federal tax purposes.

  • Treat as stock certain related party interest that would otherwise be treated as indebtedness for Federal tax purposes.

 

These rules would apply to our company's intercompany loan transactions that involve U.S. and foreign subsidiaries and foreign-to-foreign subsidiaries. However, these rules do not purport to apply to intercompany loans between members of a U.S. consolidated group as long as the loan remains between members of the U.S. consolidated group. That said, these intercompany loans that are within the U.S. consolidated group may be subjected to the Proposed Rules under section 385 from a state tax perspective because of the significant lack of clarity of how the states will treat the consolidated group exception.

Walgreens Boots Alliance is especially concerned about these Proposed Regulations insofar as they will have a very negative impact on how U.S. multinational companies conduct their businesses.

Walgreens Boots Alliance appreciates the opportunity to provide comments on the Proposed Regulations and their potential impact on U.S. multinational companies. In short, like many other businesses, we have strong concerns about the potential business disruption, significant breadth of impact, and adverse consequences caused by the Proposed Regulations.

Because of these concerns, and the immediate effect of the new rules, we are urging Treasury to take three immediate actions:

 

(1) change the effective date so as to allow U.S. multinational companies an appropriate amount of time to analyze the Proposed Regulations, determine the impact, and modify existing company processes and controls both to comply with the final regulations and to refine cash management policies to serve the business needs;

(2) provide a complete economic analysis of how these regulations would affect American businesses and their competitiveness with non-U.S. based multinationals prior to considering finalizing the regulations, and;

(3) give thorough consideration to some needed modifications described herein.

 

We believe the Proposed Regulations, if issued in current form, would have a detrimental effect on U.S. multinationals. These regulations create great uncertainty, would be costly to implement, would require a significant change to a company's internal control processes to be compliant with SEC requirements. They also would negatively affect how a U.S. multinational corporation manages in treasury function in the ordinary course of business and, ultimately, will have an adverse effect on U.S. job creation. Onerous regulatory and administrative requirements are detrimental to any company's ability to invest and grow its business operations.

As you already may be aware, the Proposed Regulations overturn decades of case law, regulatory guidance, and fundamental tax principles. The changes being proposed are extensive. Moreover, they have an immediate impact while affecting historical business transactions.

While Treasury's stated intent was to target companies that changed their headquarter fiscal domicile outside the United States and the general earning-stripping techniques engineered by non-U.S. headed multinationals, the proposed regulations would actually apply to broad categories of transactions which arise in the ordinary course of business and long-standing operational practices in both domestic and international context of a U.S. multinational corporation.

The expansive impact of these proposed regulations on routine transactions are of profound concerns to Walgreens Boots Alliance. These new rules affect compliance with tax rules related to a very broad range of commercial business operations and transactions.

Of greater concern, the proposed regulations also would (1) require U.S. multinational corporations to prepare and maintain specific types of contemporaneous documentation to support an assertion of debt treatment, and (2) allow the IRS (but not a taxpayer) to bifurcate purported debt instruments in specific situations into separate debt and equity components.

Not only are these provisions administratively onerous, but they also will create significant operational complexity for U.S. multinationals. The Proposed Regulations would require taxpayers to create a significant amount of documentation, analysis and support for each and every loan that is created. Despite a taxpayer's best efforts, the IRS audit team will have ultimate power to determine whether an instrument is debt, equity, or part debt and part equity. From a business and financial statement perspective, this regulation, with the lack of specific guidance, will cause great uncertainty. These regulations will cause significant burden and cost on a taxpayer, coupled with uncertain positions on debt instruments, which will no doubt negatively affect our economy and jobs.

As a threshold matter, we believe that the Treasury and the IRS should withdraw the Proposed Regulations under § 1.385-3. Case law and administrative guidance look to the terms of the debt instrument, the debtor-creditor relationship, and the capacity of the borrower to meet the financial terms of the debt. These authorities do not prescribe rules or guidelines calling for the application of section 385 based on the context or transaction in which the debt is issued.

If the Treasury does not withdraw Proposed Regulation § 1.385-3, the Treasury and the IRS should provide an exception under that section for cash pooling and short-term financing transactions entered into in a corporation's ordinary course of trade or business.

Large U.S.-based multinational enterprises commonly conduct treasury activities through one or more controlled foreign corporations ("CFC") that function as in-house banks (treasury centers) in various regions of the world to provide real-time financial and risk management assistance to related operating and holding companies located in those regions. A treasury center typically uses various forms of cash pooling, hedging, and other related services for liquidity and risk management purposes. It is a proven fact that most corporate treasurers prefer to use a cash concentration system to manage global liquidity because it improves efficiency, eliminates balances from local accounts, and provides maximum flexibility as to how surplus cash is used or cash deficits are funded. Again, these are all connected to the actual business needs of the various operating entities and that heavily influenced by the cyclicality of the specific operations. As the funding needs for business operations may be short-term or long-term, corporate treasurers employ the treasury center to borrow from cash-rich affiliates and lend to cash-poor affiliates in the form of term notes, credit facilities, or cash pooling arrangements.

As you probably are aware, in a typical physical cash-pooling structure, such as the one employed by Walgreens Boots Alliance, cash is transferred from accounts of cash-rich pool participants into accounts of the treasury center, and the treasury center transfers cash to accounts maintained by cash-poor participants. From the corporate treasurer's perspective, the benefits of cash concentration include (1) optimizing liquidity management (across currencies and borders); (2) reducing interest charges; (3) reducing the need for external financing; (4) centralizing control of currency position for investment and risk management purposes; (5) reducing third-party credit risk; (6) centralizing operations to take advantage of economies of scale, aggregating purchasing power, and minimizing treasury transaction costs; and (7) obtaining greater visibility of information for control and governance purposes. Please note that these liquidity and risk management activities conducted by the treasury center are an integral part of a U.S. multinational's business operations. Corporate treasurers are not driven by tax considerations when entering into them.

The Proposed Regulations make no attempt to distinguish between financing transactions entered into for ordinary business operations versus other transactions (i.e., ordinary financing transactions will be caught by the onerous rules of the proposed regulations). For example, an operating CFC of Walgreens Boots Alliance may have participating account in a cash pool, on any day in which the account is in a deficit position, the CFC would generally be treated as borrowing from the cash pool leader. If the CFC enters into one of the prohibited transactions described in the proposed regulations, some or all of the CFC's borrowings could become equity interests held by the treasury center. This proposed treatment would result in substantial complexity for a normal-course financing transaction that typically has no direct relationship to the prohibited transactions addressed by the proposed regulations.

The Proposed Regulations would create another layer of uncertainty for these business-oriented operations. Of great concern to Walgreens Boots Alliance is the absence of a carve-out for internal cash pooling and short-term financing arrangements from the proposed regulations: this fact would give rise to an additional cost as it would require Walgreens Boots Alliance to utilize third-party financing, almost all located outside the United States, to provide a form of short- or mid-term liquidity that could easily be employed by utilizing internal resources. These unrecoverable additional costs would not benefit the U.S. economy in any way, shape or form, but they will actually harm the overall enterprise value and ultimately harm the U.S. shareholders and stakeholders. Here again the Proposed Regulations are detrimental to U.S. multinationals and ultimately business across the U.S.

The Proposed Regulations treat economically similar transactions differently and create a bias towards third-party debt, which increases borrowing costs. Such increased expenses will especially hurt retailers, as the retail business generally operates on low margins, and will have a direct adverse impact on the earnings per share of a majority of U.S. companies and, here again, could affect U.S. jobs.

We strongly encourage the IRS and Treasury to reconsider the application of the Proposed Regulations to treasury activities, with the goal of excluding routine cash pooling and other short-term financing transactions entered into in the ordinary course of a trade or business. We believe Treasury should have the rules apply only to non-U.S. to U.S. transactions -- for instance, at a minimum, provide a carve-out for "foreign-to-foreign" transactions as they do not have immediate U.S. tax implications. Walgreens Boots Alliance is not an inverted company and these rules should not hinder a U.S. multinational's business.

As briefly mentioned above, the Proposed Regulations provide special rules on the documentation requirement. These documentation rules, as proposed, are much broader than tax, and would require undue burden and stress associated with normal transactions for tax, treasury, finance including, but not limited to:

 

(1) Requiring the creation of new procedures, documentation standards and processes to comply with the tax technical aspects of these rules, including tracking all relevant transactions within a 72-month period.

(2) Requiring the supporting of financial accounting auditor demands on how public companies controls are sufficiently designed and operating effectively AS OF THE DATE REGULATIONS BECOME FINAL to ensure compliance.

 

only by ledger or journal entries, or by internal balance sheets should not be treated as "in the form of debt instruments" and should be excluded from Proposed Regulation § 1.385-2 rules.

Also, the effective date should be extended for at least 24 months. Allowing taxpayers the time to implement new procedures and requirements has been applied by IRS and Treasury for other broad-sweeping regulatory changes. There seems to be no reason why an extended transition period should not be granted.

Treasury and the IRS's objective was to target inverted companies and earnings stripping, but the Proposed Regulations will hurt U.S. multinationals that already pay high federal and state taxes given their brick-and-mortar business models. Congress's purpose in enacting Section 385 was to reduce uncertainty in current debt-equity case law and lower the administrative burden on both the IRS and taxpayers. The Proposed Regulations do not fulfil this purpose as they create greater uncertainty and result in significant administrative burdens for both the IRS and taxpayers. To the extent Treasury and the IRS have legitimate policy concerns regarding inverted companies and earnings stripping, they should draft narrowly tailored rules to address such concerns using Code provisions specifically designed for such perceived abuses, such as Section 7874 and 163(j), respectively, not general provisions such as Section 385, as the proposed regulations result in rules that are both over-inclusive and under-inclusive.

Above all, for Walgreens Boots Alliance, the enormous amount of administrative costs these regulations would add -- as with any additional costs -- could translate in a reduction in business investment and ultimately a reduction or cut back in operational jobs.

For this reason, we strongly encourage the IRS and Treasury to reconsider the application of the Proposed Regulations to ease the administrative burden on businesses like Walgreens Boots Alliance. Given the complexities of the Proposed Regulations, we ask you to reflect on and consider the challenges these regulations will impose on US multinationals. We also ask for greater simplification to comply with such regulations. For example, we ask that you consider introducing an undebatable one page template/document that more precisely defines whether an instrument is debt or equity.

Thank you again for allowing us to express our concerns with the Proposed Regulations. It is clear that some of the provisions are meant to address some much needed guidance around the debt-versus-equity dilemma, yet the Proposed Regulations go far beyond this issue and will affect U.S. multinationals in a negative way. Walgreens Boots Alliance is happy to work with the IRS and Treasury to create a set of regulations that are fair, implementable to taxpayers and have the desired effect intended for all parties. If the Treasury or IRS would like to discuss our comments, I would welcome the opportunity to do so on behalf of the company.

Sincerely,

 

 

Mark Weisz

 

Vice President Global Tax

 

Walgreens Boots Alliance
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