House Republicans warned the Treasury Department Tuesday that its proposed rules meant to prevent corporations from moving their headquarters abroad would harm many businesses across the country.
The Republican lawmakers said that businesses from all industries have been worrying about the rules, and demanded that the Treasury allow more time for public comment and push back the current July 7 deadline.
“We believe any finalization of the proposed regulations in present form will have a profound and detrimental impact on business operations nationwide,” wrote the Republican members of the Ways and Means Committee, which has oversight over taxes. Chairman Kevin Brady of Texas and all the Republican members of the committee signed the letter.
At issue is an aggressive Treasury proposal to change the tax treatment of corporate debt in order to prevent multinationals with foreign headquarters from shifting income out of the U.S. and into tax havens.
The rulemaking was prompted by the rash of corporate “inversions,” or tax-driven deals in which U.S. companies merge with businesses in low-tax countries and then move the headquarters of the combined company to the low-tax jurisdiction.
One possible motivation for such transactions is that the new company could engage in “earnings stripping,” or loading the U.S. branch up with debt owed to the foreign parent company. The interest on that debt would be tax-deductible in the U.S., so the net effect would be to transfer taxable income out of the U.S., with its 35 percent corporate tax rate, to a lower-tax country.
The Treasury sought to curb such earnings stripping with a rule allowing the IRS to treat certain kinds of intra-company debt as taxable equity. The rule, however, which was far broader than many expected, would affect not just inverted companies but also many other U.S. firms, provoking a backlash among industry groups and even some Democrats.
The Republicans claimed that the rule would create “unacceptably high levels of uncertainty and adverse collateral consequences for non-tax motivated business activity.”
They also noted that House Democrats formally raised similar concerns in an earlier letter to the Treasury. Sander Levin, the Michigan representative who is the ranking member on the committee, had earlier in the year introduced legislation to curb earnings stripping.
The Treasury did not respond to a request for comment.
