IRS inversion rules face blowback

A regulatory effort by the Obama administration to crack down on tax deals is facing backlash from business groups and lawmakers on both sides of the aisle.

While the Internal Revenue Service (IRS) rules were intended to combat inversions — transactions in which a U.S. company combines with a foreign company and reincorporates abroad for tax purposes — industry representatives and members of Congress say the proposed regulations are overly broad, with potentially damaging consequences for American companies.

“We believe any finalization of the proposed regulations in present form will have a profound and detrimental impact on business operations nationwide,” Republicans on the House Ways and Means Committee said in a letter to Treasury Secretary Jack Lew on Tuesday.

Worries about the rule aren’t confined to the GOP.

A group of Democrats on the Ways and Means Committee said last week in a letter obtained by The Hill that anti-inversion guidance is important to fight tax avoidance. But they also said “there may be a number of unforeseen circumstances in which the regulations could affect ordinary course business transactions between related parties in the absence of tax avoidance motives.”

At issue are rules proposed by the Treasury Department in April that would treat some intercompany debt as equity. It would also require documentation of intercompany debt.

The proposed rules are part of the department’s third round of guidance aimed at curbing inversions; the proposal is intended to go after a tax-avoidance strategy that companies use after they invert.

That strategy, called earnings stripping, is when U.S. earnings are moved to lower-tax jurisdictions through the use of debt. A foreign parent company loans money to a U.S. subsidiary, and the subsidiary then makes interest payments to the parent that are deductible from U.S. taxes.

Several companies have called off inversion deals since the Treasury Department began rolling out the package of rules.

But some stakeholders argue the impact of the rules could be more widespread, with unintended consequences even for companies that aren’t inverted.

“The breadth of the proposed regulations has shocked the business community — they have overturned decades of settled law and would create substantial disruption to normal commercial business practices,” said Matt Miller, a vice president at the Business Roundtable.

The deadline to comment on the proposed rules is July 7. If the rules were issued in their current form, the changes would apply to debt issued after April 4.

Business groups — including the Roundtable, U.S. Chamber of Commerce and the National Association of Manufacturers (NAM) — have asked the Treasury to make the guidance prospective and to extend the deadline to comment until at least Oct. 5.

A Treasury spokesperson said the department is not changing the 90-day comment period.

“This is a process we take very seriously and we continue to encourage thoughtful comments that suggest solutions to any concerns,” the spokesperson said.

IRS Commissioner John Koskinen on Tuesday pointed to a July 14 public hearing on the proposal. He told reporters that the Treasury has “expressed both an interest in hearing from people but also a willingness to reconsider the approach that’s been provided and make adjustments as appropriate going forward.”

Caroline Harris, vice president of tax policy for the Chamber, said the proposed rules are breathtaking in their scope.

“It impacts a wide swath of transactions,” Harris said, including those related to cash management and U.S. companies bringing money back into the country.

Harris said a later effective date for the rules would give companies time to understand them and put systems in place for compliance. “That’s going to be a time-consuming process,” she said.

Dorothy Coleman, vice president of tax and domestic economic policy for NAM, said companies often use interparty debt to fund operations and ensure subsidiaries have the right amount of cash. It is common for companies to do cash pooling, she said, where a subsidiary is treated as an intercompany bank that receives cash and loans money to other subsidiaries. Companies sometimes do multiple interparty loans in a day.

But under the proposed rules, a lot of intercompany loans would become equity, which could mean that one subsidiary has a new ownership interest in another subsidiary. That would “really blow up a lot of effective cash-management systems,” Coleman said.

Congressional Republicans have been critical of the breadth of the regulations.

Republicans on the Ways and Means Committee said that if the Treasury is intent on finalizing the rules, it should withdraw the parts that would substantially hurt ordinary business transactions and operations. They also asked the department to do an in-depth economic analysis of the proposal.

Republican lawmakers have panned the anti-inversion efforts, saying the only real solution is passage of a tax reform bill that lowers the corporate rate.

In their letter Tuesday, Ways and Means Republicans said the department “co-opted” a section of the tax code by using it to police inversions and earnings stripping. Last week, House Republicans released a tax reform blueprint that would cut the corporate rate to 20 percent and make other changes to make inversions less attractive to corporations.

In their letter, the Democrats on the Ways and Means Committee asked the Treasury to consider whether, in limited circumstances, exceptions or transition rules would be appropriate to add to the rules when they are finalized.

“It has been raised that certain business sectors, including financial services, insurance, and utilities, may encounter industry-specific challenges to implementing these regulations due to various regulatory requirements unique to those industries,” the Democrats wrote.

Sen. Ron Wyden (Ore.), the top Democrat on the Senate Finance Committee, said it’s important to go after inversions but warned that taxpayers should not unintentionally be hurt in the process.

“Policymakers need to take necessary steps to protect the tax base while not causing unintended harm,” Wyden said. “For that reason, I have been talking with taxpayers, my colleagues on the Committee and Secretary Lew to ensure that the cure for the virus isn’t worse than the disease. Treasury is working hard to strike the right balance.”