Treasury prods firms to fight tax provision

The Treasury Department has pushed American-based corporations to lobby against a tax provision prized by their foreign counterparts, according to people who have heard the pitch.

One senior Treasury official in particular, Danielle Rolfes, urged domestic companies to more aggressively target an incentive for interest expensing during a March tax conference in Florida, in a statement that one person in the room said was “almost unprecedented.”

{mosads}“I don’t think I’ve heard them try to split one segment of the business community from another before,” the person added.

Rolfes’s comments came at a time when the Obama administration was pushing to revamp the tax code for all businesses. President Obama and key lawmakers such as House Ways and Means Chairman Paul Ryan (R-Wis.) have since shifted their focus to a smaller deal that would simultaneously overhaul international tax rules for corporations and finance a long-term highway bill.

The White House and lawmakers have floated the idea of making changes to the interest deduction in both broader business tax reform and the potential international deal, one of the key issues on the docket for Washington this fall.

Obama, Ryan and other key policymakers such as Sens. Charles Schumer (D-N.Y.) and Rob Portman (R-Ohio) face an uphill climb in crafting an international tax agreement, given that tax reform talks have stalled in Washington for the better part of five years. Senate Majority Leader Mitch McConnell (R-Ky.) also has made it clear that he’s got little interest in those tax reform discussions and is skeptical the talks will amount to much.

Still, the comments from Rolfes, Treasury’s international tax counsel, underscore the high stakes in negotiations over a tax reform deal that would undoubtedly benefit some sectors while hurting others. The interest deduction has become even more of a target since last year, because it can be an incentive to complete the offshore tax deals known as inversions and because of the increasing global scrutiny of corporate tax avoidance.

The Treasury Department has said for months that the U.S. needs to implement stronger rules to combat a tactic known as “earnings stripping,” in which a foreign multinational company takes advantage of the interest deduction through loans to a U.S. subsidiary.

The Obama administration included a tougher approach in its latest budget, and there is bipartisan agreement that the current rules need to be examined in tax reform negotiations.

“Treasury staff often engage with stakeholders to discuss our policy proposals and perspectives,” a department spokeswoman told The Hill in a statement that insisted that the administration hasn’t altered its message on the interest deduction. “We have been consistent in our position on this issue.”

Some of Washington’s top business advocates said they had not heard Treasury lobby domestic multinationals to go after the interest deduction, and others who heard Rolfes’s pitch said they don’t believe the business community is too divided over the issue.

But tax analysts and lobbyists have acknowledged that the interest deduction has caused tension among domestic and foreign multinationals over the years. Plus, U.S.-based multinationals are currently feeling the pressure from an Organization for Economic Cooperation and Development initiative that seeks to crack down on tax avoidance.

“We are in agreement with the broader business community on the need for tax reform. The goal should be to make America the best place to invest and create jobs, for both U.S. and inbound employers,” said Nancy McLernon of the Organization for International Investment (OFII), a group that advocates for AstraZeneca, BP, Honda, Sony and dozens of other foreign-based multinationals with operations in the U.S.

Companies generally have been able to deduct the interest on their debts for around a century now, something advocates say allows businesses to invest in new equipment, expanded facilities and higher salaries. American subsidiaries of foreign corporations already face some limits on how much interest they can deduct.

Ryan’s staff has worked with the Joint Committee on Taxation during August to develop a House GOP draft of an international plan, according to aides. But the committee hasn’t let many details about their work slip out yet, which has unsettled some on K Street.

So far, the interest deduction hasn’t gotten as much attention as other potential planks in an international tax deal, such as a system that shields offshore corporate profits from U.S. taxation and a proposal to tax current offshore earnings to pay for roads.

But new limits on the interest deduction would almost certainly be a central part of any deal’s efforts to keep companies from gaming the system and lowering their tax bills.

Former House Ways and Means Chairman Dave Camp (R-Mich.) also proposed beefing up current interest expensing rules. Schumer and Portman raised questions about the proposals from Camp and Obama in a framework released in July but suggested that inversions made new, tougher limits a necessity.

The OFII has leapt into action with interest expensing in the mix, releasing a paper that insisted stronger rules could make it harder for companies to invest, even when paired with a reduction in the corporate tax rate that tops 35 percent. New limits on interest deductibility, the paper from Ernst and Young argued, would reduce investment in the U.S. by tens of billions of dollars.

McLernon acknowledged that the rise of inversions has made it harder to make that case. “There’s always a concern that politics gets ahead of the facts, and inversions have ginned up a lot of attention in these areas,” she said.

Others say the deal currently being discussed would be an especially bad agreement for these foreign-based multinationals. 

“If you’re lowering the corporate rate to 25 percent, that’s one thing,” said PricewaterhouseCoopers’s Rohit Kumar, a former McConnell aide. “But if this is part of an effort to raise taxes to pay for highways, the substantive case is quite thin.”

Martin Sullivan, a former Treasury economist, acknowledged that limiting interest deductibility without a cut in tax rates would be a rough deal for foreign companies and noted that Treasury studies have shown that  inverted companies are the culprits when it comes to taking advantage of the interest deduction.

But Sullivan added that it was “a pretty mainstream” idea to implement new limits on interest. “It’s very easy to shift profits if you let people issue debt wherever they want,” he said.