Big-Name Companies Want to Pull Back the Reins on Debt-Equity Regs

We are writing to express our deep concern with proposed debt-equity regulations issued under Internal Revenue Code section 385 by the Treasury Department on April 4, 2016 ("385 regulations" or "proposed regulations"). The destructive impact that these proposed regulations are already inflicting on the ability of U.S. businesses to invest, to create jobs, and to simply manage our day-to-day operations cannot be overstated nor truly quantified.

While the goals stated in the Department of Treasury's April 4, 2016 press release were "to rein in inversions and reduce the ability of companies to avoid taxes by earnings stripping," the impact of the 385 regulations on U.S.-based businesses goes far beyond inversions or earnings stripping and severely harms the ability of companies to manage their day-to-day operations. To be clear, we do not oppose measures to curtail clearly abusive transactions designed to strip the U.S. tax base with intercompany debt; however we are deeply concerned with the breadth of the proposed regulations and the vast complexity and uncertainty that will result for U.S. businesses.

By reclassifying certain debt as equity, the proposed changes to Sec. 385 (i) disrupt ordinary business transactions of U.S.-based companies having nothing to do with tax, (ii) require radical restructuring of routine cash management functions, (iii) impose costs and burdens even steeper than those offered through third-party financing, and (iv) create tremendous uncertainty, downward pressure on U.S.-based company credit ratings (due to the push to third-party debt), and financial statement exposure. These problems are further complicated by new look-back and look-ahead reporting requirements and a retroactive effective date that has already had a detrimental effect on business practices.

The new regulations apply even where it can be indisputably demonstrated that the debt is arm's-length debt or where there is no possibility of earnings stripping out of the United States such as when dividends are paid to the United States from foreign subsidiaries. In this regard, the regulations are counterproductive, complicating or rendering impossible many companies' ability to manage cash to issue taxable dividends to shareholders.

Our impression is that Treasury has not given sufficient attention to these and other concerns, and we believe the regulations will further reduce the competitive position of U.S. businesses. In today's ultra-competitive global business environment, U.S. businesses already operate under the most burdensome tax system with the highest tax rate in the industrialized world. Redefining related-party debt as equity and overturning, via regulatory process, decades of well-established law and practice will serve only to weaken U.S. businesses and make them more susceptible to foreign takeovers.

The breadth of these regulations coupled with the stringent deadline for comments and Treasury's plans to finalize the rules quickly is unreasonable. Implementing such dramatic changes to the manner in which America's companies manage their financial resources without adequate time or consideration is simply dangerous to the U.S. economy. For example, forcing companies to eliminate legitimate cash pool operations and arm's-length intercompany lending would put billions, if not trillions of dollars at risk in private, and often risky, banks around the globe.

We respectfully request that Treasury limit the 385 regulations to their stated purpose of reining in inversions and protecting the U.S. tax base by either: (1) withdrawing the regulations until such time as they can be carefully reconsidered and sufficiently narrowed so that they do not unnecessarily hamper and disrupt U.S. business operations and put the millions of workers they employ at risk or (2) exempting foreign-to-foreign subsidiary lending from the regulations as such lending has nothing to do with either inversions or the erosion of the U.S. tax base, and also addressing the negative impacts on other ordinary business transactions.