Next month, House Ways and Means Committee Chairman Kevin Brady (R-Texas) is expected to unveil what was referred to in Politico in as a “comprehensive blueprint on where we want the tax code to go.” The goal is to prepare Congress to move on tax reform when a new President takes office next year.
This news is encouraging for 2017, although the hope is that Congress takes some legislative action this year on overhauling our tax code, namely to put a stop to the U.S. Treasury Department’s foolish decision to punish American business with piecemeal regulations.
Treasury’s most recent regulations will have unintended consequences far beyond the goal of trying to stop U.S. companies from inverting. Corporate inversions are when U.S.-based businesses restructure so that the parent company becomes foreign-based, moving its tax address overseas in an effort to lower the tax burden. Inversions occur because the corporate tax rate in the United States is 40 percent, the highest in the developed world. To put that 40 percent in perspective, Ireland’s top corporate tax rate is 25 percent.
The new rules – to be finalized after a comment period ending July 7 – were proposed under Section 385 of the Internal Revenue Code which gives the Treasury Department power to issue regulations to determine if holdings by a U.S. corporation should be treated as debt or equity for federal tax purposes.
Despite Treasury’s past efforts to discourage such financial maneuvers (in September of 2014 and November of 2015), inversions have continued, hence the more stringent regulations this round. While initially they might have had Treasury’s intended effect – Pfizer announced it would not move forward with its merger with Ireland-based Allergan – many experts fear that among some of the overall regulations’ consequences, everyday cash management techniques within corporations will get swept up as well.
Bloomberg recently reported that Coca-Cola, which last summer announced a merger with counterparts in Germany and Spain, warned in a recent securities filing that one of the new Treasury proposals could reduce the anticipated yearly savings of nearly $375 million. According to the news report, the merger doesn’t meet all aspects of an inversion, although Coca-Cola is warning investors that the Internal Revenue Service may still classify it as such.
As Sam Kaywood Jr., co-chairman of the Federal Income & International Tax Group at law firm Alston & Bird LLP in Atlanta, put it to Bloomberg, “Companies are in a bit of a state of shock because of how sweeping the regulation is.” Additionally, David Hariton, a corporate tax lawyer at Sullivan & Cromwell LLP, said “the proposal could mean unexpected tax bills for firms ranging from private equity funds, which use internal debt transactions to pay investors, to large foreign banks that are now restructuring their U.S. units into holding companies, as required under the Dodd-Frank Act.” In order words, Treasury’s regulations actually punish American companies and entities that have not even inverted.
Chairman Brady referred to the new regulations as a “Band-Aid” that “will make it even harder for American companies to compete and will further discourage businesses from locating and investing in the United States.”
America’s competitiveness is jeopardized by other tax policies in place today. For example, a recent report from the American Council for Capital Formation found that our tax policies are hindering investment and savings into the economy. The report notes that, “Although the U.S. still produces the second largest share of world output after China, investment and productivity are sluggish and our international economic performance is lackluster.” Significantly, the report argued, “the U.S. corporate tax structure is considered to be one of the reasons for its lagging investment.”
This report, coupled with a disappointing Gross Domestic Product growth in the first quarter of the year, makes it clear that we need comprehensive tax reform, not sporadically announced government regulations. Enacting a simplified, uniform tax code that lowers the corporate tax rate and moves the U.S. to a territorial tax system will go a long way towards fostering the investment and economic growth the nation – and taxpayers – so desperately need.
David Williams is president of the Taxpayers Protection Alliance.