04/05/17

USA: Companies urge Trump to ditch anti-inversion rules

US companies are seeking a quick win on tax from the Trump administration by urging it to overturn an Obama-era crackdown on tax avoidance tied to inversion deals, reports The Financial Times.

The issue gives the pro-business Trump team a hard choice as companies complain the Obama rules are hurting them, but proponents say they have helped deter inversion deals to cut tax bills, which Donald Trump railed against as a candidate.

Lobby groups spanning manufacturers, bankers and retailers wrote to Steven Mnuchin, Treasury secretary, this week asking him to rescind the rules, which were introduced in part to stop American companies fleeing US taxes.

“These regulations will impose excessive and unwarranted compliance and financial burdens on businesses operating in the United States, distorting investment and other business decisions, to the detriment of US jobs,” they wrote.

Inversion deals, which proliferated from 2014 to 2016, sparked outrage among Republicans and Democrats as US companies used them to cut their tax bills by merging with foreign rivals to acquire an overseas address. As a candidate Mr Trump called them “job-killing” deals.

Companies are now seeking to capitalise on the president’s order in April that Mr Mnuchin review all Obama-era tax regulations, which could be repealed using his executive powers without any broader congressional action on tax reform.

The White House last week launched a renewed push to get a comprehensive tax reform bill through Congress but it faces a series of formidable obstacles.

Company lobbyists say the anti-inversion crackdown turned into a broader effort to reduce the favourable tax treatment of debt finance versus equity — something inverted companies have exploited — and complain it is causing collateral damage to other businesses.

Specifically, the Obama administration sought to tighten generous rules that let companies deduct interest on loans between affiliates from their taxable income, a practice known as “earnings stripping”. It is common among US multinationals and foreign groups with US subsidiaries.

Companies say the measures, which were finalised by the Obama administration in October 2016, will increase the cost of capital for US business while introducing burdensome new requirements for compliance and computer systems.

Signatories to the letter to Mr Mnuchin included the National Association of Manufacturers, the American Bankers Association, the National Retail Federation and the Business Roundtable group of blue-chip chief executives.

With foreign multinationals in the US particularly vulnerable, Nancy McLernon, president of OFII, a trade group representing them, said the rules “will make the US less competitive for global investment, which doesn’t seem to fit with the president’s pro-growth agenda”.

Aware of Mr Trump’s anti-inversion campaign tirades, company lobbyists are straining to separate their concerns about the taxation of so-called intra-company debt from the inversions debate.

“Even though the Obama administration unveiled these regulations within the politics of inversions, that’s not what these regulations are,” said Ms McLernon, noting that a separate set of measures had been unveiled targeting inversions directly.

But they face an uphill struggle. While Mr Trump has been fiercely critical of his predecessor in many areas, he has also showed a willingness to embrace Obama policies — including some elements of Obamacare — that are popular with voters.

Mark Mazur, who helped devise the regulations as assistant secretary for tax policy at the Treasury in the Obama administration, said the Trump administration would be taking a risk by repealing them.

“If you break it, you own it. It’s kind of like that,” he said. “You can reverse these regulations, you can reverse the inversion regulations. But when the first big US company decides to invert, then you own that. If you are about investing in America, keeping jobs in America, you should be against tax avoidance through earnings stripping.”

He added that some of the corporate complaints were overblown. The compliance requirements were modest, he argued: “It’s no more than you or I would have to go through to get a personal loan.” In addition, the regulations did not apply to loans made to a US subsidiary with a genuine investment purpose, such as funding the construction of a new factory, he said.

But Dorothy Coleman, vice-president of tax and domestic economic policy at the National Association of Manufacturers, said: “A lot of the practices addressed by the regulations are a longstanding part of companies’ whole treasury functions.”