BRT Comment Letter on Treasury Department Proposed 385 Regulations | Business Roundtable


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July 7, 2016

The Honorable Jacob Lew
United States Treasury Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Submitted electronically via (IRS REG-108060-15)

Dear Mr. Secretary:

On behalf of Business Roundtable, I am writing to provide comments on the notice of proposed rulemaking under Internal Revenue Code Section 385 regarding the determination of related-party instruments as debt or equity, issued on April 4, 2016 (the “Proposed Regulations”).

Business Roundtable, an association of chief executive officers who lead companies that operate in every sector of the U.S. economy, has very serious concerns about the business disruption and consequent harmful impacts on the economy that would result from the Proposed Regulations. As drafted, the Proposed Regulations have an extremely broad impact, create significant uncertainty, have adverse consequences completely unrelated and disproportionate to the Treasury Department’s stated concerns regarding “inversion” transactions and “earnings stripping.”

As described in detail below, Business Roundtable believes the approach taken in the Proposed Regulations exceeds the regulatory authority granted to Treasury by Congress under Section 385.  Further, the Proposed Regulations are inconsistent with fundamental principles of U.S. tax law, prior regulatory guidance, case law precedents, and Congressional intent. Should Treasury determine to finalize the Proposed Regulations in their current form, Business Roundtable expects them to be challenged in court.  In the meantime, however, business will be compelled to implement costly new systems to comply with the Proposed Regulations and to alter their normal business operations. Because the regulations would impose an enormous amount of unnecessary compliance costs as well as burdens on business activity that are out of proportion to the target of the rules, Business Roundtable urges the Treasury Department to withdraw the Proposed Regulations.

If Treasury does not withdraw the Proposed Regulations, then Treasury should modify the Proposed Regulations so that they would not adversely affect capital and ownership structures and business operations, including liquidity and risk management and the efficient use of capital, which are driven by fundamental business and commercial purposes, and not by tax considerations. In addition, the Proposed Regulations should be modified so as not to discourage foreign investment into the United States.

Further, if Treasury determines to finalize the Proposed Regulations, Business Roundtable believes that Treasury, at a minimum, must make modifications to eliminate unnecessary complexities, unadministrable vagaries, and unwarranted collateral consequences. Specific recommended areas to address are set forth below, including:

  • Limit the IRS Commissioner’s and rank and file agents’ unfettered discretion to treat an instrument as part debt and part equity.
  • Modify the documentation requirements to provide a workable exception for ordinary course and de minimis transactions.
  • Limit the range of transactions and instruments covered to reduce the unintended collateral consequences of the Proposed Regulations by:
    • Broadening the ordinary course of business exceptions,
    • Providing exceptions for regulated industries whose ability to engage in intercompany transactions is greatly circumscribed,
    • Preventing unintended impacts on ownership structures, such as the loss of S corporation tax status, through the recharacterization of debt as equity,
    • Excluding transactions occurring entirely outside the United States, such as between controlled foreign corporations, and
    • Taking steps to ensure application of the rules by the states avoids creating additional tax or reporting obligations.
  • Delay application of the Proposed Regulations to taxable years beginning on or after January 1, 2019 to allow time for companies to restructure existing arrangements, arrange for alternative sources of finance, and develop appropriate systems and procedures to comply with the new rules.

I. Background

In an April 5, 2016 press conference, President Barack Obama stated that the Proposed Regulation “directly goes at what’s called corporate inversions.”1 Similarly, the preamble to the Proposed Regulations describes prior Treasury notices indicating that Treasury and the IRS expected to issue “additional guidance to further limit the benefits of post-inversion tax avoidance transactions.”

As Business Roundtable has repeatedly stated, so-called “corporate inversions” are a symptom of an outdated and anti-competitive U.S. tax system. Addressing this symptom without addressing the underlying cause of the anti-competitive nature of the tax system will fail to stem the continuing decline of U.S. competitiveness and lost opportunities for American workers and U.S.-based companies in the global marketplace. The best way to address this is through tax reform to improve the investment climate which will make the country more competitive and create more jobs.

Similarly, Business Roundtable has previously expressed concern that piecemeal legislative and regulatory reactions on ‘inversions’ are not the answer – these approaches are rife with “unintended consequences and fail to address the true anti-competitiveness of the U.S. tax system.”

While Business Roundtable has urged tax reform as the best way to address this issue and warned against the unintended consequences that can arise from piecemeal attempts to address inversions, we could not have anticipated the extreme collateral consequences of the Administration’s attempt to address inversions through the approach under the Proposed Regulations.

Although Business Roundtable continues to believe the best way to address the economic forces leading to inversions is through tax reform, the Proposed Regulations – which in the President’s own words are offered as an anti-inversion measure – fail to limit their application to inversion and post-inversion transactions. Instead, the Proposed Regulations have an enormously sweeping set of applications that affect U.S. companies with entirely domestic operations as well as both U.S.-headquartered and foreign-headquartered companies engaged in foreign transactions occurring entirely outside the United States with no impact on, or even remote connection to, the U.S. tax base.  The attached technical paper gives examples of foreign transactions occurring entirely outside the United States that would be impacted by the Proposed Regulations.

The net effect of the Proposed Regulations, if finalized, will be to further deter U.S. business investment and make U.S.-headquartered companies less competitive in global markets. These impacts will directly harm American workers and lead to a more slowly growing U.S. economy.

Business Roundtable previously submitted comments on May 12 with over 20 other trade associations in which we respectfully requested that, at a minimum, Treasury change the effective date of the Proposed Regulations, extend the comment period, and ensure sufficient time is taken to review and address public comments.5 Business Roundtable additionally submitted comments to the Office of Management and Budget on the burdens imposed under the documentation requirements of the Proposed Regulations on June 7, 2016. Those comments noted that the costs imposed by the Proposed Regulations would result in significant harm to the U.S. economy and reduce America’s competitiveness.

Business Roundtable further requested in these prior comments that Treasury conduct a complete and thorough analysis of the potential business and economic consequences of the proposed regulations prior to the conclusion of the comment period. This analysis should take into account the impact of this tax increase on U.S. businesses, their investments and their employees. Further, it should consider the impact on foreign direct investment into the United States. Such an analysis is needed to give Congress and the public an opportunity to more fully understand the impact of the Proposed Regulations on the U.S. economy.

II. The Need for U.S. Tax Reform

Corporate inversions are just one symptom of a badly outdated and anti-competitive tax system. Without tax reform, U.S. companies will lose in global competition and the U.S. economy will lose new U.S. investment. As a result, jobs and economic growth will suffer, leading to more slowly growing wages and living standards for American workers and their families. The Proposed Regulations, which add to the cost of being a U.S.-headquartered company and disfavor U.S. business investment, exacerbate rather than ameliorate the anti- competitive nature of the U.S. tax system.

The United States has the highest combined federal and state statutory corporate tax rate of any developed country.7  The U.S. combined rate is nearly 15 percentage points higher than the average of the rest of the 34 developed countries in the Organization for Economic Cooperation and Development (OECD).  While nearly every other OECD country has reduced its statutory rate since 2000, the United States has not reduced its statutory rate since the enactment of the Tax Reform Act of 1986 – 30 years ago.

In addition to a high statutory tax rate, the United States also imposes a high effective tax rate on corporate income. In contrast to a presentation by the Administration suggesting the U.S. corporate effective tax rate is below the average of other G7 countries,8 the 2016 Budget of Canada shows the United States has the highest marginal effective tax rate in the G7.9 Analysis undertaken for the European Commission shows the United States has the second highest average effective tax rate and the third highest marginal effective tax rate among the 35 countries in the European Union, G7, and other OECD countries in Europe.10  Other independent studies comparing corporate effective tax rates across countries also find the U.S. effective tax rate to be among the world’s highest.

The United States is also one of only six OECD countries that has not adopted a modern international tax system. Most developed countries today operate under international tax systems whereby their companies are not subject to a second level of tax when active foreign business income is remitted home as a dividend. This allows their companies to compete in foreign markets and pay the same rate of tax as a local company operating in that market. In contrast, U.S. companies face an additional layer of U.S. tax when returning foreign income to the United States for investment at home. At least $2.3 trillion in accumulated foreign earnings was held by the foreign subsidiaries of U.S. companies in 2014.  Permanently unlocking these funds and future earnings so that they could be reinvested in the United States without penalty would result in increased U.S. investment and job creation.  The Proposed Regulations, however, would further raise the barriers to returning foreign earnings to the United States. Already, some Business Roundtable members have had to cancel planned repatriations of funds that would have helped finance significant domestic investments.

Tax reform providing a competitive statutory rate and a modern international tax system would allow U.S. companies and American workers to compete on a level playing field with the rest of the world. A more competitive tax system would lead to increased investment in the United States and faster economic growth, resulting in increased job creation and higher wages for American workers. The Proposed Regulations, in contrast, send us down the wrong path and would lead to a less competitive U.S. economy.

III. U.S. Jobs at Risk under the Proposed Regulations

Substantial U.S. employment is placed at risk by the Proposed Regulations, which concentrate their impacts on both U.S.-headquartered and foreign-headquartered multinational companies with U.S. operations. The higher costs imposed by the Proposed Regulations, if finalized, are likely to result in a reduction in U.S. employment and investment, and lower wages for those who remain employed.13
Based on the latest government data, 2,243 U.S.-headquartered companies operated internationally in 2013, competing in global markets on a daily basis for inputs, capital, and customers. These globally engaged U.S.-headquartered companies directly and indirectly contributed $8.3 trillion to U.S. gross domestic product in 2013 (57% of the United States’ private-sector economic output) and supported 76.6 million jobs in the United States (48% of its private-sector employment).

These globally engaged U.S. companies also provided substantial compensation to U.S. workers, paying an average of $78,081 per job in wages, salaries, and benefits in 2013.  This compensation was 40 percent higher than the average $55,649 in compensation paid to workers in other U.S. businesses. These payments boost consumer spending and drive additional consumer spending across the nation.

Foreign-based companies operating in the United States also provide significant additional U.S. employment. The Department of Commerce estimates that 12 million people (8.5 percent of the labor force) in 2013 had jobs in the United State due to either direct employment at foreign firms (6.1 million jobs), indirect and induced employment from foreign firms (2.4 million jobs), or indirect and induced employment from productivity spillovers resulting from foreign direct investment (3.5 million jobs).15 By raising the cost of financing new U.S. investment, the Proposed Regulations would discourage investment in the United States by foreign- headquartered companies, resulting in lost employment opportunities for U.S. workers directly employed by these companies as well as throughout their U.S. supply chain.

IV. Proposed Regulations Not Consistent With Congressional Intent

As discussed below, Business Roundtable is very concerned with the inconsistency between the approach taken in the Proposed Regulations and the clear Congressional intent under Section 385 and other provisions of the Code.
Business Roundtable believes that:

  • The Proposed Regulations disregard the substance of the instruments that would be recharacterized;
  • Treasury has failed to demonstrate how the Proposed Regulations can be reconciled with the statutory grant of authority;
  • The Proposed Regulations reverse prior policy decisions made by Congress in favor of the Administration’s policy proposals that Congress has either explicitly rejected or chosen not to act upon; and
  • Treasury’s proposed timeline fails to comport with the Administrative Procedure Act (APA) by applying an effective date that precedes the opportunity for notice and comment. Further, the comment period is insufficient given the complexity of the regulations.

For these reasons, Business Roundtable believes if Treasury does not withdraw the Proposed Regulations, it should adopt a more tailored approach that does not have the broad sweep or harmful impact of the Proposed Regulations.

In 1969, Congress enacted Section 385 to address an enormous body of inconsistent case law precedent developed over the preceding decades with respect to distinguishing between debt and equity.16 Given the variety of contexts and differing circumstances in which the question can arise, Congress acknowledged that “it [would be] difficult for the committee to provide comprehensive and specific statutory rules of universal and equal applicability.”17 Accordingly, Congress believed it was appropriate to delegate to Treasury the authority to prescribe such rules.

The statutory language set forth in Section 385 provides that any regulations promulgated by Treasury under Section 385 “shall set forth factors which are to be taken into account in determining with respect to a particular factual situation whether a debtor-creditor relationship exists or a corporation-shareholder relationship exists.” (emphasis added)

The legislative history to Section 385 clarifies Congress’s intent to provide “a statutory authorization for the Treasury Department to issue regulatory guidelines distinguishing between debt and equity.”18  “[T]hese guidelines are to set forth factors to be taken into account in determining, with respect to a particular factual situation, whether a debtor- creditor relationship exists or whether a corporation-shareholder relationship exists.”

Treasury’s testimony to Congress when it was considering the enactment of Section 385 in 1969 confirmed Treasury’s understanding that Congress was authorizing Treasury to set forth factors in regulatory guidelines for the purpose of determining whether the substance of an instrument was that of debt or equity. Therefore, it is clear that in enacting Section 385 Congress authorized Treasury to write guidelines that analyze the substance of an instrument by setting forth factors which would aid in distinguishing debt from equity in particular factual situations and which would be “taken into account” in making such determinations.

What is also clear is that Congress did not authorize Treasury to conclude per se whether certain instruments constitute, as a matter of law, debt or equity without regard to the terms of the instrument.  To do otherwise would have authorized Treasury to perform functions reserved to the judiciary such as to interpret unambiguous statutory language and to adjudicate factual cases. This is consistent with the Supreme Court’s decision that the terms in question “need no further definition” and the only question left to answer is one of fact, not law.

The Proposed Regulations, however, are contrary to the clear Congressional intent by conclusively treating an instrument as equity in situations where the courts and the IRS – until these regulations – would have treated the instrument as debt.  The rules do not set forth factors to be weighed against each other in a variety of factual circumstances for purposes of determining whether an instrument is debt or equity. Instead, the Proposed Regulations would determine conclusively that a failure to meet any one of the prescribed requirements automatically recharacterizes a debt instrument as stock, regardless of whether the characteristics of the instrument favor debt treatment. Treasury has made these determinations without any factual demonstration as to the consistency of the determination with the substance of the instrument or with regular practices among unrelated market participants. Such rules are clearly inconsistent with Congressional intent and also inconsistent with the regulatory authority provided to Treasury under Section 385.

Exacerbating this inconsistency with Congressional intent is the significant discretion Treasury has granted the IRS through the Proposed Regulations. The new rules would empower individual IRS agents to determine that debt instruments are part equity based solely on the agent’s discretion. The regulations provide no guidelines, parameters, or limits for this unfettered discretion. And mirroring this extraordinary level of discretion are twin anti-abuse and anti-affirmative use rules with respect to the documentation and per se recharacterization rules. These provisions empower the IRS to turn the rules on and off as an IRS agent sees fit, with little restriction beyond subjective determinations of a taxpayer’s principal purpose.  Congress plainly did not authorize the IRS to dispense with the judiciary and make its own ad hoc and one-sided determinations of whether an instrument is debt or equity, yet that would be the effect of the Proposed Regulations.

Furthermore, Congress did not give Treasury authority to overturn fundamental principles of U.S. tax law established by courts and prior regulatory guidance. But the Proposed Regulations would do just that by failing to respect the separate entity concept firmly established in U.S. tax law22 and by recharacterizing debt instruments as equity, even though the debt instruments bear the same features as instruments previously held to be debt by both the courts and IRS.23 Congress did not authorize Treasury to dispense with analysis of an instrument’s substance, yet this is precisely how the Proposed Regulations would operate.

Treasury’s regulatory overreach is evidenced by the Proposed Regulations’ inconsistency with other sections of the Code as well.  For example, the Proposed Regulations would limit the deductibility of interest paid to foreign persons and the redeployment of foreign earnings.24 Yet, Congress has already addressed the deductibility of interest paid to foreign related persons and redeploying of foreign earnings.

In recent years, several legislative proposals have been advanced with respect to the deductibility of interest paid to foreign persons,26 including annual proposals by the Administration since 2009,27 but Congress has not chosen to enact any of those proposals. Congress’s consistent refusal to act is as much an indication of its intent as Congress’s affirmative action to limit the nondeductibility of cross-border related-party interest to the contours of Section 163(j). It is the domain of Congress, not Treasury, to craft and re-craft federal tax laws. Congress has spoken on many of these issues, but Congress has not delegated authority to Treasury to issue regulations that would go beyond (i.e., disregard) Congress’s intent. In that regard, the Proposed Regulations also go beyond the BEPS agreement reached last year with respect to interest deductibility, which called for limitations on interest deductibility, not wholesale recharacterization of debt instruments as equity and complete denial of deductions for interest expense. Treasury officials have noted that the BEPS agreement permits the enactment of other targeted rules with respect to interest deductibility, but there is nothing targeted about the Proposed Regulations.

The Proposed Regulations are also irreconcilable with Congress’s stated intent for U.S. multinationals to redeploy foreign earnings free of U.S. tax costs – costs not shared by their foreign competitors. For more than a decade, bipartisan majorities of Congress have enacted and then extended Section 954(c)(6) with the intent of allowing just this.28 Further, the Administration has repeatedly supported extension of this provision when it was set to expire, most recently in its fiscal year 2016 budget proposals,29 and the President has signed each extension into law. Yet the Proposed Regulations would hamstring U.S. multinationals seeking to redeploy foreign earnings by disproportionately and unnecessarily imposing significant tax and non-tax costs on distributions, cash pools, and intercompany lending.

Equally alarming is Treasury’s determination to finalize the Proposed Regulations “swiftly” before it is reasonable to expect that Treasury can fully consider public comments.  Treasury and IRS representatives have repeatedly and publicly announced their intention to finalize the Proposed Regulations, without even so much as waiting to receive (let alone read and consider) public comments during the 90-day comment period. The rush to finalization is inconsistent with the interests of stakeholders and the impact of rules on the public. A rulemaking process and effective date that fail to allow for meaningful public comment are inconsistent with the APA. Accordingly, Business Roundtable strongly urges Treasury to extend its timeline to allow meaningful consideration of the public comments filed and adopt necessary modifications to ensure that the scope of the Proposed Regulations is sufficiently limited to not impact capital structures and basic operational practices and avoid costly impacts to the U.S. economy.

V. Technical Problems and Recommended Modifications with Respect to the Proposed Regulations

In addition to our concerns with respect to the policy and overreach of the Proposed Regulations, Business Roundtable notes that the rules are rife with unadministrable vagaries, unnecessary complexities, and unwarranted collateral consequences. Given these far reaching impacts, Business Roundtable believes withdrawal of the Proposed Regulations is the appropriate course of action. Below we discuss specific technical concerns we have with the Proposed Regulations and recommended modifications that we believe Treasury should consider if it finalizes the approach taken therein.

1. Prop. Reg. § 1.385-1(d)(1)—Bifurcation Rule
Limit the unfettered discretion of the IRS to treat an instrument as part debt and part equity

The bifurcation rule under Prop. Reg. § 1.385-1(d) would provide the Commissioner with unfettered discretion to treat an instrument as part debt and part equity. Although presumably the courts would review IRS decisions for abuse of discretion, the regulations provide no limitations on this authority and provide no parameters or guiding principles for the Commissioner, other than a vague reference to “general federal tax principles,” which, as the preamble explains, do not actually exist.
This unlimited grant of discretion injects significant uncertainty into the state of the law, essentially empowering IRS agents to apply the rules on an ad hoc basis in a manner they find reasonable. This is certain to result in the uneven treatment of similarly situated taxpayers. It will also produce significant additional controversy, creating substantial, unnecessary costs for both taxpayers and the IRS. Finally, financial statement preparers and auditors will need to speculate as to the probability of the IRS exercising its sole unfettered discretion, with no touchstones to guide their analysis, resulting in further uncertain and uneven treatment with respect to public financial statements. 

Therefore, Business Roundtable recommends Treasury provide clear and administrable standards of application for the bifurcation rule, including an exhaustive list of the factors that will be considered and examples of how IRS agents will apply their discretion.

2. Prop. Reg. § 1.385-2—Documentation Requirements
Except ordinary course and de minimis transactions and defer documentation requirements until procedures and systems can be reasonably implemented

Prop. Reg. § 1.385-2 establishes contemporaneous documentation requirements that will require significant diligence and result in increased compliance costs. The burdens imposed on taxpayers to document every intercompany debt instrument, including those arising in the ordinary course of business (e.g., trade payables from intercompany sales and services), no matter the amount, are completely disproportionate to the objectives of the Proposed Regulations.31 There is no risk of base erosion or some other tax benefit when related parties sell $50 of goods on 30-day non-interest-bearing terms. Failure to document this payable, however, could create split ownership that disqualifies multi-billion dollar internal reorganizations from otherwise available tax-free treatment. These results are beyond unwarranted. Therefore, Business Roundtable believes that the regulations should, at a minimum, provide an exception from the documentation requirements for ordinary course transactions and de minimis transactions.

Moreover, due to the number of transactions each multinational enterprise enters into and the complexity involved in developing internal controls, it is almost certain that businesses will not have sufficient time to establish the necessary procedures and systems by the time the Proposed Regulations are intended to be finalized. For example, Business Roundtable companies have noted that they will need significant time to document voluminous trade payables, cash pool borrowings, and revolver draws, and to develop annual credit ratings for each subsidiary as effectively required by the Proposed Regulations. Therefore, Business Roundtable additionally recommends postponing the effective date of the documentation requirements to taxable years beginning on or after January 1, 2019.

3. Prop. Reg. §§ 1.385-3 and -4—Proscribed Transactions
Limit the scope of proscribed transactions and defer application of the rules until systems are in place

The proscribed transaction rules under Prop. Reg. §§ 1.385-3 and -4 are over-inclusive and result in a number of collateral consequences that could not have been intended. This over- inclusiveness stems from Treasury’s use of Section 385 for a purpose for which it was neither intended nor designed rather than a provision more narrowly tailored to Treasury’s articulated concerns of preventing or discouraging inversion transactions and earnings stripping.

The collateral consequences include the potential for pervasive double taxation through lost foreign tax credits, phantom income from loan repayments and hedging transactions, U.S. withholding taxes not contemplated by taxpayers or U.S. treaty partners, and extraordinary complexity that imposes substantial, unnecessary non-tax administrative costs on taxpayers. Business Roundtable recommends the scope of the recharacterization under these rules be narrowed to address Treasury’s specific concerns without giving rise to collateral and cascading impacts.

Much of this complexity can and should be addressed by allowing taxpayers to rebut the presumption that a loan has funded a proscribed transaction due merely to temporal proximity. For example, multinational enterprises should be allowed to demonstrate that a related-party loan funds a third-party acquisition, an investment in capital assets, or research and development. These are very common uses of intercompany loan proceeds, yet the Proposed Regulations preclude taxpayers from even demonstrating that an intercompany loan is used for such a purpose.

The presumption under the Proposed Regulations that a loan has funded a proscribed transaction also creates a peculiar viral effect, whereby a single recharacterization can infect a series of intercompany loans (such as those conducted by cash pools and other intercompany financing vehicles), slowly and perpetually recharacterizing the entire intercompany debt structure of an enterprise. As a consequence of this viral application of the rules, a single inadvertent technical mistake by the taxpayer that triggers these rules (or the exercise of unfettered discretion by the IRS) can result in systemic collateral consequences. The Proposed Regulations must be modified to prevent the successive and perpetual application of the rules, which is burdensomely complex and unnecessary to achieve the stated intent and purposes of the regulations.

Excluding transactions between companies occurring entirely outside of the United States would also relieve the inordinate burden of the Proposed Regulations without impacting their desired objective to protect the U.S. tax base.  Complications arising out of the Proposed Regulations in foreign-to-foreign transactions impact both U.S.-headquartered and foreign- headquartered companies.

As suggested above, multinational enterprises’ treasury operations bear the largest brunt of the Proposed Regulations. Because enterprises frequently redeploy cash through intercompany loans to remain nimble, mitigate administrative and financing expenses, and minimize third- party credit exposures, these systems are at the greatest risk of being systematically recharacterized as webs of intercompany equity, resulting in pervasive double taxation, phantom income, and other tax and non-tax costs. In this way, the Proposed Regulations would cripple internal corporate treasury operations, forcing companies into added and more costly borrowing from third-party banks. To avoid this, exceptions should be provided for, inter alia, short-term cash pooling, bridge financing, intercompany netting programs, centralized payment systems, foreign currency hedging, and other internal treasury operations.

The Proposed Regulations can also impact the ability of a U.S. multinational company, following a domestic or foreign acquisition, to realign and integrate the acquired entity’s units along the U.S. company’s existing geographic and operational reporting lines. Restrictions on the ability of U.S. companies to reorganize acquired businesses will leave U.S. companies at a competitive disadvantage.

The Proposed Regulations also place an inordinate burden on regulated financial services companies. Such entities deploy capital on a global basis, but the flexibility needed to deploy capital effectively will be severely affected by the Proposed Regulations. These entities are regulated to ensure that they have sufficient capital and liquidity relative to their liabilities. The collateral consequences of having related-party debt reclassified as equity – in an industry where regulatory approval is required to transfer equity among related entities – are exceptional.

Finally, the compliance burden associated with tracking the necessary attributes and transactions to comply with Prop. Reg. § 1.385-3 is substantial and will require taxpayers to establish compliance procedures that cannot be completed immediately upon finalization of the Proposed Regulations. Actions that may be required of taxpayers include reorganizing their internal cash management strategy, renegotiating third-party banking relationships, modifying accounting systems, developing and disseminating internal controls and protocols, etc. If finalized, Treasury must provide a transition period that defers application of these rules to taxable years beginning on or after January 1, 2019 in order to provide taxpayers with time to implement the necessary systems and procedures to comply.                                                                                                                            

Business Roundtable believes it is essential that the Proposed Regulations be assessed with a full recognition of their substantial and far reaching impacts on the U.S. economy. These are not targeted rules to address the Treasury Department’s and the President’s stated concerns.

We appreciate your consideration of these comments and look forward to working with you to ensure that any regulations developed to address these matters do not adversely impact fundamental business practices and business operations and the health of the U.S. economy.

John Engler

Read Full PwC Report here: “Potential Impacts of Proposed Section 385 Regulations: Inbound and Outbound Examples,” PricewaterhouseCoopers LLP, July 7, 2016

C: Assistant Treasury Secretary Mark Mazur
Deputy Assistant Treasury Secretary Robert Stack
Commissioner John Koskinen, Internal Revenue Service
William J. Wilkins, Chief Counsel, Internal Revenue Service