WASHINGTON — Businesses are pushing back at Obama White House proposals aimed at eliminating corporate inversions, a controversial strategy in which companies merge with foreign firms to escape higher U.S. corporate taxes.
At an event in Washington, tax experts aligned with influential business lobbying groups said the so-called section 385 rules under consideration by the Treasury Department will hurt large and small businesses alike, dampen investment in the U.S. and even delay much-needed tax reform.
Carolyn Lee, a tax specialist at the National Association of Manufacturers, said the Treasury has derailed the broader cause of tax reform by ratcheting up its focus on stopping corporate inversions.
“Our efforts for tax reform came to a halt because of the bombshell in the form of the section 385 regulations,” Lee said in a panel discussion at the Bipartisan Policy Center, a non-profit think tank. “We’re hoping the Treasury will heed the business community’s concerns and withdraw the proposed regulations so we can get to the larger discussion of tax reform.”
Most inversions occur because high tax rates make U.S. companies less competitive vs. foreign rivals, executives say. They argue the problem is best addressed by updating the tax system to put American firms on par with foreign competitors and make the U.S. a more attractive place to invest.
Businesses have complained vociferously since the Treasury tightened tax regulations last year, a move that short-circuited several high-profile deals, including Pfizer Inc.’s ill-fated proposal to merge with Ireland-based Allergan Plc and relocate its U.S. headquarters to Dublin.
Even with the tougher new rules, inversions continue. In 2015, a slew of inversions helped to generate a wave of mergers and acquisitions and boost direct foreign “investment” in the U.S. to record levels. Most of that investment actually involved acquisitions of U.S. companies, however.
The Treasury’s latest approach has been tailored to prevent a strategy known as “earnings stripping” in which companies use foreign affiliates to lower their reported profits and what they owe in taxes to the U.S. government. The Treasury has said the new rules will make it more difficult for companies to adopt tax-avoidance strategies.
Businesses argue that one of the unintended side affects may be reduced investment. Companies may be less willing to expand their U.S. presence or they could seek to beef up operations abroad to get around tighter Treasury rules that make it harder to conduct business domestically.
“Every one of our member companies is affected by these tax regulations,” said Matthew Miller, Business Roundtable vice president.
He said the proposals would give rank-and-file IRS agents almost unfettered power to determine if the terms of complicated mergers and acquisitions meet legal muster. “That’s scary.”
The better long-term approach, businesses say, is to overhaul the tax system. The U.S. tax code “stands alone because it is so bad and out of date,” Lee said.
President Obama and Republican leaders have discussed tax reform for several years to no avail despite a consensus in Washington that something needs to be done.
Presumed Republican presidential nominee Donald Trump has vowed to reform the nation’s tax system, but he’s also been highly critical of American companies that have move their headquarters or operations to other countries. That’s a marked change reflecting growing pressure on Republican lawmakers to modify their long-held support for more lenient treatment of business.
The Treasury Department has set a hearing to discuss the regulations for July 14.
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