Businesses Say Tax Proposal Goes Too Far

The federal government says U.S. corporations will spend a combined $13 million annually complying with proposed tax rules on internal corporate debt. But an industry trade group estimates that could be the cost for just one company.

That divide over compliance costs is one flashpoint in a widening regulatory dispute between companies and the Obama administration, and the tensions could rise in coming months as the government tries to complete rules the Treasury Department says are intended to curb tax avoidance.

Corporations and business groups, increasingly worried about the scope of the proposed Treasury rules, say U.S. officials underestimate the difficulty of creating systems to track and document internal loans and fail to understand how the rules disrupt common business structures that aren't about dodging taxes.

The proposed rules are just one part of the Obama administration's multipronged attack on tax-driven deals, including corporate inversions, that companies registered outside the U.S. have used to reduce payments to the U.S. Treasury.

Comments are now pouring into the government ahead of a July 7 deadline. Companies such as Nielsen Holdings PLC, S&P Global Inc. and Republic Services Inc. have proposed changes or raised concerns, such as how the rules would treat partnerships and their effect on the ability to claim foreign tax credits.

"In the last decade, this is one of the biggest business tax issues that we have worked on," said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers, a business group that says it might cost one member $13 million to comply. "It took us by surprise and the business community by surprise."

Republican lawmakers have complained about the breadth of the rules and asked for more time for companies to respond to the proposals. Democrats have warned about adverse effects on the financial-services, insurance and utilities industries. Top Treasury officials will meet with lawmakers on Wednesday.

But the Treasury Department is sticking to its plans to hold a July 14 hearing and finish the rules swiftly.

The goal is to reduce tax benefits companies can get with a foreign legal address. Companies that adopt a foreign residency can exploit the gap between the 35% U.S. corporate tax rate and lower rates abroad by loading U.S. subsidiaries with debt in ways their U.S.-based peers can't. They can deduct interest on that debt in the U.S., effectively pushing profits to lower-taxed jurisdictions.

The regulations under Section 385 of the tax code are aimed at such "earnings stripping" transactions. Under the proposal, the simplest forms of earnings stripping with debt would be considered nondeductible equity investments. The IRS would also link payments to the parent company with intercompany loans made three years before or after such payments. That would prevent companies from exploiting a loophole by doing in multiple steps what they now do in one.

Critics say the effort might upend common corporate-finance structures for U.S.-based and foreign companies. Because the government wrote the regulations expansively, to prevent companies from pursuing obvious workarounds, the effort would ensnare ordinary transactions, they say.

Trade groups say the government's $13 million compliance-cost estimate isn't even close to correct.

The government's estimate assumes compliance requires 735,000 hours of work annually for all companies, making the per-hour cost less than $18. Given that companies will deploy lawyers and accountants to document and analyze internal loans, that figure is "absurdly small," according to the trade group U.S. Council for International Business, which filed comments contending total costs could reach billions of dollars.

"The consequences of failing to provide documentation are punitive; therefore, companies need to be certain they have satisfied all of the documentation requirements," wrote William Sample, a tax executive at Microsoft Corp. and chairman of the council's taxation committee.

"We appreciate feedback from industry sharing their views on expected impacts," a Treasury spokesperson said. "We continue to encourage thoughtful comments that suggest solutions to any concerns as we move to finalize the regulations."

Steve Rosenthal, a senior fellow at the Tax Policy Center who supports the rules, said the $13 million compliance-cost estimate is low. But he noted that the revenue loss to the government from earnings stripping is much bigger. Treasury estimates the government would collect an additional $843 million a year.

Companies also are concerned the rules could affect cash-management operations, which often involve regional treasury centers that accumulate cash and distribute it to subsidiaries in what are effectively short-term loans. Treasury officials have said they are open to resolving this issue.

"If it were a targeted rule, the companies wouldn't be going nuts the way they are," said Carol Doran Klein, USCIB's vice president and international tax counsel. "It hits virtually everything they do."

Write to Richard Rubin at [e-mail]

(END) Dow Jones Newswires

July 06, 2016 14:15 ET (18:15 GMT)

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