Democrats on the tax-writing House Ways and Means Committee are objecting to a resolution from House Republicans to repeal recently finalized Treasury Department rules that would discourage corporate tax inversions.
The Treasury Department rules take aim at a practice known as “earnings stripping,” limiting the ability of companies to lower their taxes by using transactions involving debt that do not support new investment in the U.S. The regulations require large corporations claiming interest deductions to document any loans to and from their affiliates, as businesses typically do when they borrow from unrelated lenders.
The Treasury released the final regulations last October, despite objections from the American Institute of CPAs and the Big Four Accounting firms (see Treasury finalizes earnings stripping regulations, Big Four protest proposed IRS regulations on tax treatment of corporate debt and equity and AICPA urges Treasury and IRS to delay effective date of Section 385 proposed regulations). The Treasury used its authority under Section 385 of the tax code to reduce one of the major tax benefits of inversion by curtailing “earnings stripping.” The rules were finalized after significant changes that incorporated extensive feedback from the business community.
The rules have not succeeded in stopping every inversion, which only an act of Congress would be able to do. But the announcement of the regulation prompted the pharmaceutical giant Pfizer to cancel its plans to become a foreign company by merging with Allergan, which would have cost the U.S. Treasury an estimated $35 billion in tax revenue.
However, House Republicans are introducing a pending resolution that would invoke the Congressional Review Act—an expedited process for repealing rules—to roll back the Treasury’s anti-inversion measure while prohibiting the Treasury from promulgating any future rules to prohibit this type of tax avoidance. The measure seems to contradict President Trump’s repeated calls for removing tax incentives for multinational corporations that move jobs out of the U.S. by relocating their domiciles to low-tax countries.
In a letter to their House colleagues Wednesday, Democrats on the Ways and Means Committee asked them to oppose the resolution.
“We urge you to vote no on H.J. Resolution 54, a Republican proposal to repeal Treasury’s finalized debt-equity regulations issued under Section 385 of the tax code,” they wrote. “These regulations are intended to combat aggressive corporate tax planning techniques that, rather than serving an economic purpose, are used by some corporations to avoid taxes.”
Tax Policy Subcommittee Ranking Member Lloyd Doggett, D-Texas, pointed out that the anti-inversion rule had already succeeded in blocking some deals such as the Pfizer-Allergan merger. “Corporations that benefit from our educated workforce, national security, and infrastructure should not be able to claim the benefits of being American, while renouncing their citizenship in order to avoid their responsibilities as taxpayers,” he said in a statement. “While much more action is needed, these important rules have already stopped some shenanigans. Repealing this modest Treasury rule would be an invitation for more corporations to head abroad. The pending repeal resolution represents a troubling leap backwards.”
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