Business groups and other stakeholders at a public hearing Thursday urged the Obama administration to withdraw, or at least narrow the scope of, proposed regulations aimed at curbing offshore tax deals.
“In this case, the damage dwarfs the benefits,” PwC’s Pam Olson said at a hearing at the Internal Revenue Service headquarters.
Kevin Nichols, a Treasury Department senior counsel, said the hearing was part of the comment process. “We are reviewing and analyzing comments, including the comments presented today,” he said.
The Treasury Department and IRS officials at the hearing asked few questions and didn’t give any indication of what changes they would make to the proposed rules.
Treasury and the IRS proposed a package of guidance in April aimed at limiting “inversions” — transactions in which a U.S. company merges with a foreign company and reincorporates overseas to lower its tax burden.
The package included proposed rules that would recharacterize some inter-company debt as equity in an effort to limit a tax avoidance strategy used by companies that have inverted, called “earnings stripping.” It was these rules that were the focus of the hearing.
Business-group representatives and lawyers speaking at the hearing said the rules would hurt a lot of transactions that are completely unrelated to inversions.
Daniel Goodwin of the Structured Finance Industry Group said the potential adverse tax consequences from the rules “would significantly reduce liquidity, erode investor confidence and disrupt the capital markets.”
If markets are more limited, “credit providers, such as auto lenders, credit-card issuers, mortgage lenders, small business lenders and student-loan providers at worst may be not be able to fulfill their financing needs,” he said.
Caroline Harris, vice president of tax policy at the U.S. Chamber of Commerce, said the rules would “make efficient global cash management nearly impossible” and in some instances would lead to double taxation.
Some commenters have argued that Treasury and the IRS had the authority to issue the proposed regulations.
Joseph Judkins, an attorney at Baker & McKenzie, said that parts of the rule are contrary to statute.
But Penn State Law Professor Samuel Thompson said that Treasury has “clear and unambiguous authority” to issue the regulations.
He also said his students analyzed the written comments submitted about the regulations and found that none of them said that earnings stripping was good.
During a conference at the Urban-Brookings Tax Policy Center Thursday, Treasury Assistant Secretary for Tax Policy Mark Mazur defended the proposed rule and said they occurred due to congressional inaction.
“The U.S. Congress has not acted in this area, so Treasury and the IRS have used the substantial regulatory authority provided by the tax code,” Mazur said, according to Morning Consult.