Business executives want the Treasury to reconsider new rules meant to limit corporations from moving their headquarters overseas, arguing that the tax change was written too broadly and will hit all kinds of companies.
The Treasury must allow businesses through the end of the year to comment on its rules to prevent companies from loading up on debt to lower their U.S. tax bills, Caterpillar CEO Doug Oberhelman said Tuesday on a conference call with reporters organized by the Business Roundtable, a major business group.
“It really is an anti-competitive writing that puts U.S. companies at a distinct disadvantage to competitors, and actually will have the opposite effect of what they’re trying to do,” said Oberhelman, who is chairman of the Business Roundtable.
The rule aims to limit multinational companies’ ability to lower their taxes through a practice known as “earnings stripping.” Earnings stripping involves issuing intra-company debt through the U.S. subsidiary that sends tax-exempt interest payments to the parent company in a low-tax jurisdiction where those payments will incur less of a tax bill.
The Treasury aimed to curb the practice by requiring companies to justify intra-company loans, giving the IRS power to probe such transactions, and allowing for some loans to simply be reclassified as equity in some cases.
The Obama administration advanced the rule on the grounds of undercutting the benefits of so-called inversions, in which U.S. companies merge with a smaller foreign business in a low-tax jurisdiction and then move the headquarters of the combined company to the low-tax country to escape high U.S. taxes on worldwide earnings.
But the rule was written broadly enough to affect many companies that have not undertaken such tax-driven deals.
The tax rule “catches any company with a foreign subsidiary that has any kind of debt or equity, and that’s every one of them, and essentially rewrites the rules overnight,” Oberhelman said.
April’s ruling was the third effort by the Obama Treasury to limit inversions through administrative action, but it is the one that has most rankled business groups. Treasury Secretary Jack Lew has said that only tax reform will end inversions, and that the administrative actions are a stopgap measure to protect the U.S. tax base.
