Top Republican tax writers again warned the Treasury Department on Monday to halt its push for new rules on corporate debt, saying that the attempt to stop multinationals from shrinking their U.S. tax bills will hurt a wide range of companies, and might be illegal.
In a letter sent Monday, Senate Finance Chairman Orrin Hatch called on Treasury Secretary Jack Lew to withdraw the rule, proposed in April, and resubmit it. Hatch suggested that the rule would hurt business and that it has been rushed out against federal requirements on regulations.
In a separate letter addressed to Lew on Monday, GOP members of the House Ways and Means Committee, led by chairman Rep. Kevin Brady, raised similar concerns. The lawmakers warned that the rule would "damage the economy" and concluded that "we cannot allow this to happen."
In July, Brady hinted that legislation might be necessary to stop the Treasury if Congress's concerns, some of which have been expressed by members of both parties, are not addressed.
The rules are part of the Obama administration's efforts to stop corporations from moving their headquarters overseas and lowering their U.S. tax bills.
The specific rules in question are aimed at curbing a practice known as "earnings stripping." Earnings stripping is when multinationals load up U.S. subsidiaries on debt to parent companies in low-tax jurisdictions. Because the interest payments on those loans are tax-deductible, the effect of such transactions is to shift taxable income out of the U.S. to a country where it will be taxed less.
Earnings stripping is thought to be one of the motivations for U.S. companies to move their headquarters overseas via mergers with companies in low-tax countries such as Ireland or Switzerland in so-called corporate inversions. Obama administration officials are fearful that inversions could undermine the tax base, and have sought to prevent them administratively as Congress has failed to advance tax reform.
To stop earnings stripping, the Treasury has proposed giving itself the authority to re-classify some forms of intra-company debt as equity, making it taxable.
Businesses have voiced fears that doing so could foul up the cash management practices of all kinds of companies, not just the corporate inverters the administration has sought to stymie.