BRT Letter to the Office of Management and Budget on Debt/Equity Regulations | Business Roundtable


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June 7, 2016

Submitted electronically via

Office of Management and Budget
Attn: Desk Officer for the Department of Treasury
Office of Information and Regulatory Affairs
Washington, DC  20503

Re:  Reg 108060-15:  Collection of Information under Notice of Proposed
       Rulemaking (Internal Revenue Code Sec. 385)

Dear Sir or Madam:

On behalf of Business Roundtable, I am writing to provide comments on the proposed collection of information requirements contained in the notice of proposed rulemaking under Internal Revenue Code Section 385 (the proposed “debt/equity regulations”).

Business Roundtable, an association of chief executive officers who lead companies that operate in every sector of the U.S. economy, has strong concerns about the potential business disruption, significant breadth of impact, increased uncertainty, and adverse consequences caused by the proposed regulations. 

In particular, Business Roundtable believes the proposed documentation requirements are excessive and have been proposed without adequate consideration of their costs and alternative, less costly procedures.

The proposed debt/equity regulations as drafted – through their imposition of mandatory information collection costs, compliance and monitoring costs, and costs incurred from the restructuring of business organizations and transactions – would result in a substantial increase in regulatory costs that will harm U.S. business investment, economic growth and job creation and reduce America’s competitiveness.

Business Roundtable urges that there be a thorough reconsideration of the proposed regulations and the documentation requirements as drafted to avoid the substantial costs that they would impose on the economy.

In a separate letter to Congress dated May 26, 2016, Business Roundtable requested that Treasury be required to 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.  This will allow Congress and the public an opportunity to review the analysis and have it inform their views on the proposed regulations.

Impacts on U.S. globally engaged companies and the U.S. economy

Among the most impacted companies under the proposed information requirements are U.S. globally engaged businesses.  Based on the most recent data from the U.S. Bureau of Economic Analysis, in 2013 there were 2,243 U.S. parent companies directly employing over 23 million American workers.  In total, 76.6 million U.S. jobs – or 48 percent of the total U.S. private workforce – were estimated to be supported by the operations of these U.S. parent companies, including both direct and indirect jobs through their U.S. supply chains and the spending by their employees.  These 2,243 U.S. parent companies and their 26,919 foreign subsidiaries accounted for $788 billion of U.S. exports of goods to foreign countries – or 49.9 percent of U.S. goods exports in 2013.  Approximately 30 percent of the exports of these U.S. globally engaged companies were made directly to their foreign subsidiaries.

In addition to their economic value as large employers, globally engaged U.S. companies support U.S. economic growth through their capital investment and research and development (R&D).  In 2013, globally engaged U.S. companies invested $595 billion in U.S. plant and equipment.  Globally engaged U.S. companies are among the most innovative American companies.  In 2013, they spent $246 billion in U.S. R&D and accounted for 76 percent of all U.S. R&D performed by U.S. businesses.

The success of U.S. globally engaged companies and their contributions to the U.S. economy are integrally connected to their network of foreign subsidiaries.  Their foreign subsidiaries account for substantial U.S. exports, and linkages among foreign subsidiaries account for a significant amount of the foreign sales by foreign subsidiaries.  In 2013, the 26,919 foreign subsidiaries of U.S. companies sold $5.7 trillion in goods and services, of which 90 percent was to foreign customers, including $1.2 trillion to other foreign affiliates.

The 2,243 U.S. parent companies and their 26,919 foreign subsidiaries form an efficient network of operations that engages in billions of dollars in inter-company transactions on a daily basis.  The proposed documentation requirements would impose a substantial cost hurdle that could impact a substantial share of these transactions, including pooling arrangements, revolving credit facilities, and inter-company debt obligations, and potentially extend to other arrangements such as trade receivables, rent, and royalties.

Burden cost estimates

The burden cost estimate released with the proposed regulations estimated a total annual cost of $13 million assuming 21,000 respondents, spending a total of 735,000 hours annually on the documentation.

The Office of Management and Budget (OMB) acknowledges that its cost estimate excluded start-up costs needed to implement the systems to provide the required documentation, although there is no rationale for excluding such costs.  These costs would be substantial both to provide the required documentation for substantiation purposes and to provide the taxpayer information that it would need to avoid inadvertently engaging in transactions that under the proposed regulations would result in any outstanding debt instruments being treated as stock.

Such systems costs, sufficient to provide timely documentation of transactions among all of a company’s subsidiaries, would be substantial.  Based on initial discussions with company officials, estimates for the design and implementation of such systems range into the millions of dollars per company and could overwhelm the internal information technology departments of most U.S. companies, requiring much of the work to be performed by specialized outside consultants. 

After the start-up period, the OMB cost estimate assumes 35 hours annually would be required per respondent to document all qualifying transactions on a monthly basis (generally within 30 days of the issuance of the instrument and 120 days of receipt of principal and interest on such payments).  While newly designed computerized systems would assist in the documentation process, new personnel would be needed to evaluate and actively monitor the transactions on an ongoing basis.  Additional time and resources would be needed on an ongoing basis to maintain the systems procured during the start-up period.  Additional resources would be needed to assist in changing business operations so as not to engage in actions that under the proposed regulations would trigger the reclassification of debt instruments as equity.

The OMB cost estimate assumed the cost of personnel associated with these documentation requirements and changes in business operations required under the proposed regulations, including legal expenses, could be performed at an average wage of approximately $18 per hour.  This grossly underestimates the costs of the skilled legal, accounting, tax, business, and information technology professionals who would be needed to perform and provide consultation on the required services and documentation.  The cost estimate also neglects the costs of office space and infrastructure necessary to support these additional operations. 

Finally, it should be noted that the proposed regulations make the documentation requirements effective generally for debt instruments issued after the date of finalization of the regulations.  It is estimated that even if the proposed regulations contained no ambiguities as to all documentation requirements and transactions subject to these requirements, it would take a large company between 12 and 24 months to have the necessary systems in place to satisfy the documentation requirements.


The documentation requirements and other costs resulting from the proposed regulations are exponentially greater than OMB’s estimated burden of costs included with the notice of proposed rulemaking.  It is clear that substantial revisions in the proposed regulations are necessary to avoid excessive and disproportionate administrative burdens on the U.S. economy.

Business Roundtable urges that there be a thorough reconsideration of the proposed regulations and documentation requirements.  In particular, if the regulations go forward, their scope should be greatly narrowed.  In addition, a sufficient period should be provided before the documentation requirements take effect to allow businesses the time appropriate to design and implement the new systems and processes that will be needed to establish the required documentation. 


John Engler


Attachment:  May 26 letter from Business Roundtable to leaders of the U.S. tax writing committees
C:  Chairman Orrin Hatch
Chairman Kevin Brady
Ranking Member Ron Wyden
Ranking Member Sander Levin
Assistant Treasury Secretary Mark Mazur
Internal Revenue Service, Attn: IRS Reports Clearance Officer