BRT Letter to Congress on Treasury Department's Proposed Debt/Equity Regulations | Business Roundtable


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May 26, 2016

The Honorable Kevin Brady
Chairman, House Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

The Honorable Orrin Hatch
Chairman, Senate Committee on Finance
United States Senate
Washington, DC 20510

The Honorable Sander Levin
Ranking Member, House Committee on Ways and Means
U.S. House of Representatives 
Washington, DC 20515

The Honorable Ron Wyden
Ranking Member, Senate Committee on Finance
United States Senate
Washington, DC 20510

Dear Chairmen Brady and Hatch and Ranking Members Levin and Wyden:

On behalf of Business Roundtable, I am writing to urge Congress to take swift action with respect to proposed regulations issued by the Treasury Department on April 4, 2016, under Internal Revenue Code section 385 (the “debt/equity” regulations).

Business Roundtable has strong concerns about the potential business disruption, significant breadth of impact, and adverse consequences caused by the proposed regulations. Because of these concerns, and the immediate effect of the new rules, I urge Congress to require the Treasury Department to take three immediate actions: (1) extend the comment period by at least 90 days (to October 5, 2016); (2) change the effective date; and (3) provide a thorough and complete economic analysis prior to considering finalizing the regulations.

Expansive Impact of Proposed Regulations

The proposed regulations overturn decades of case law, regulatory guidance, and fundamental tax principles. The changes being proposed are extensive and dramatic. Moreover, they have an immediate effect. While Treasury’s stated intent was to target “inversions” and “earnings stripping,” the proposed debt/equity regulations would actually apply to broad categories
of transactions which arise in the ordinary course of business in both the domestic and international context.

The expansive impact of these proposed regulations on routine transactions is giving rise to profound concerns within the business community. These new rules impact compliance with tax rules related to reorganizations, spin-offs, consolidated returns, the use of foreign tax credits, legal entity classification, eligibility of withholding tax exemptions, and various other operations and transactions.

For example, as drafted, the rules would effectively nullify the ability of large businesses to pool available cash across business units.  Such routine loan facilities are used on a daily basis and the proposed limitations on their use would raise the cost of capital for U.S. businesses, reducing U.S. investment, wages, and employment. The proposed regulations would also disrupt the ability of U.S. multinationals and foreign direct investors to pay dividends from their foreign subsidiaries, further hindering their ability to bring needed cash back to the United States. In addition, the new rules would negatively impact the ability of multinationals to be competitive in expanding operations overseas through acquisitions of foreign assets.

Classification of an instrument as debt or equity has many tax, legal, and practical consequences. The classification is relied on in many aspects of ordinary business operations. Uncertainty or a risk of re-classification presents a severe impediment to the use of intercompany financing for operations, and will significantly increase the cost of capital and limit the amount of capital available to invest in the United States.

Need for Thorough Economic Analysis before Considering Finalizing the Regulations

The proposed rules have been designated a “significant regulatory action,” requiring a regulatory impact analysis. We believe the two-page analysis of the regulations prepared by the Office of Management and Budget was not adequate in assessing the significant impact on capital structures of U.S. and foreign businesses. Accordingly, Business Roundtable also urges Congress to require Treasury to provide a more thorough and complete economic analysis for Congress and the public to review and use in comments, prior to considering finalizing the rules.

The OMB regulatory impact analysis related to the proposed regulations states that “the effects of the proposed regulations on real resources are expected to be small,” and contains a Treasury estimate that the economy-wide paperwork burden associated with the costs of new, potentially monthly, documentation requirements would be approximately $15 million per year.  However, the paperwork burden estimates are significantly understated.  Given the 21,000 businesses estimated by Treasury to be required to prepare the new documentation information, this would imply an annual documentation cost of around $700 per business, per year.  A more realistic estimate of the documentation costs would be exponentially higher.

Similarly, the analysis contains an estimate from Treasury that suggests the regulations would result in a tax increase of approximately $10 billion over 10 years. If the revenue estimate is understated by the same order of magnitude as the paperwork burden, then the proposed regulations could amount to a significantly greater tax increase on U.S. businesses.

Given the significant effects of these rules, a complete and thorough analysis of the potential business and economic consequences of the proposed regulations should be conducted by Treasury prior to the conclusion of the comment period. This analysis should take into account the impact of this tax increase on U.S. businesses, their investments, and their employees.
Further, it should consider the impact on foreign direct investment into the United States. This will allow Congress and the public an opportunity to review the analysis and have it inform their views on the proposed regulations.

Letter to Secretary Lew from 23 Trade Associations

In a May 12, 2016 letter to Treasury Secretary Jacob Lew, Business Roundtable and other business groups requested that Treasury extend the comment period to October 5, 2016, and change the effective date to make the regulations applicable only to debt instruments issued more than 90 days after the regulations are finalized, rather than the proposed immediate effective date for debt issued on or after April 4, 2016. We continue to believe that given the widespread and uncertain impact of these regulations, having them take effect for debt issued on or after April 4, 2016, is not appropriate. In addition, the business groups asked Secretary Lew to dedicate adequate resources to analyze all comments received and to ensure that the final regulations take into consideration the expressed concerns rather than racing to finalize the rules on an arbitrarily rapid timeline.


Congressional action to require Treasury to extend the comment period by at least 90 days (to October 5, 2016), change the effective date, and conduct a thorough and complete analysis of the business and economic consequences of the proposed debt/equity regulations, will help ensure that the public has a meaningful opportunity to evaluate and comment on the proposed rules. These long-standing rules have been relied upon by businesses for decades, and it is difficult to understand why these sweeping changes should be finalized before all stakeholders and policymakers have had an adequate opportunity to evaluate, and weigh their consequences.

On behalf of Business Roundtable, I appreciate your consideration of this matter and would be pleased to provide any information that might further assist you.


Mark A. Weinberger Global Chairman and CEO EY
Chair, Tax and Fiscal Policy Committee Business Roundtable



Attachment: May 12 Letter from Trade Associations to Secretary Lew C: Speaker Paul Ryan
Majority Leader Mitch McConnell Minority Leader Harry Reid Minority Leader Nancy Pelosi
Members of the Senate Committee on Finance Members of the House Committee on Ways and Means

May 12, 2016

The Honorable Jacob Lew United States Treasury Secretary
U.S. Department of the Treasury 1500 Pennsylvania Ave., N.W. Washington, D.C. 20220

Re: Proposed Regulations under Section 385 (Reg.-108060-15)

Dear Secretary Lew:

The undersigned associations, representing thousands of global and domestic businesses in the United States across many industries, have serious concerns about the potential impact of the proposed debt-equity regulations under Internal Revenue Code section 385 (the “proposed 385 regulations”), released by the Treasury Department on April 4, 2016. The proposed guidance, which overturns long-standing tax principles and well-established case law and regulations, will significantly increase the cost of doing business in the United States, and create further obstacles to much needed investment, job creation and economic growth.

Because of the significant and disruptive impact of the proposed 385 regulations on critical business operations of a wide swath of employers in the United States, we respectfully request that, at a minimum, Treasury:

  • Change the effective date for the proposed debt-equity recharacterization rule from applying to debt instruments that are issued on or after April 4, 2016, and instead apply the rule to debt instruments that are issued on or after the date that is 90 days after the proposed regulations are finalized;
  • Extend the public comment period from July 7, 2016, to October 5, 2016, at the earliest; and
  • Dedicate adequate time and resources for a thorough review and analysis of the public comments on the proposal rather than seeking to finalize the regulations on an arbitrarily rapid timeline.

Broad Impact of the Proposed Regulations

Based on Treasury’s April 4 press release, the proposed 385 regulations are designed “to further reduce the benefits of and limit the number of corporate tax inversions, including by addressing earnings stripping.” Nonetheless, even a cursory review of these regulations clearly indicates that they go far beyond cross-border mergers and apply to a wide range of ordinary business transactions by global and domestic companies both in and outside the United States.

Indeed, the proposed 385 regulations affect all aspects of both a company’s capital structure and the funding of its ordinary operations and fundamentally alter the U.S. tax rules on intercompany debt by overturning the well-established facts and circumstances analysis used by the courts and the Internal Revenue Service (IRS) to determine whether an instrument is debt or equity. Whether an instrument is debt or equity has significant, collateral consequences to business operations that go well beyond the interest deduction on the instrument and include the legal classification of an entity, eligibility for withholding tax exemptions under tax treaties and the ability to file a consolidated tax return. These issues present a severe impediment to the use of intercompany financing for even normal operations and will significantly increase the cost of capital and limit the amount of capital available to invest in the United States.

Businesses Need Adequate Time for Analysis

Given the magnitude of these proposed changes, companies still are in the initial stages of assessing the many ways the proposed 385 regulations will impact their business operations and their U.S. and foreign tax positions. In particular, businesses need additional time to analyze the proposed rules relating to specified transactions, including the 72-month funding period rule, the new documentation requirements and the bifurcation rules, as well as how each business will be able to effectively administer those sets of rules.

Companies’ analyses and business planning are further complicated by the retroactive April 4, 2016, proposed effective date for the rules allowing Treasury to recast related-party debt as equity. In order to understand the broad effects that these proposed rules will have, corporate tax departments must confer with their corporate treasury counterparts located across the globe. In addition, because of this retroactive effective date, companies have to plan and conduct their operations as if the proposed regulations were effective currently, at the same time as they try to analyze and understand the proposed rules. Moreover, with the proposed April 4 effective date and the potential for existing debt to experience a “significant modification,” even current finance structures of many businesses are at risk.

More than 30 days after the regulations were released, the companies represented by our organizations believe that they have only begun to identify the potential impact the proposed 385 regulations will have on their business operations and on a wide range of transactions including, but not limited to, implications for standard corporate cash management techniques, including cash pooling; potential double taxation as a result of the loss of foreign tax credits; determinations of control between related parties under I.R.C. section 368(c) in connection with various tax free transactions; the qualification of a reorganization or spin-off; determinations of deemed debt issuances in connection with the acquisition of related party indebtedness; whether a company continues to be a member of the U.S. consolidated return group; and allocations of partnership items to partners under I.R.C. section 704. As these analyses continue, we expect our members to identify other basic and routine transactions that are potentially impacted.

Moreover, since the proposed regulations were not included in Treasury’s updated 2015- 2016 Priority Guidance Plan, released February 5, 2016, businesses did not have any advance notice of this far-reaching proposal.

Consequently, we strongly urge Treasury, at a minimum, to change the effective date of the proposed debt-equity recharacterization rule from applying to debt instruments issued on or after April 4, 2016, and instead apply the rule to debt instruments on or after the date that is 90 days after the regulations are finalized and extend the comment period until at least October 5, 2016.

Extensive and Thorough Review by Treasury is Critical

As outlined above, the proposed 385 regulations will have a significant, negative impact on the cost of capital for investment, business operations and planning at global and domestic businesses throughout the U.S. economy, which will slow job creation. Our organizations are extremely concerned by Treasury’s plan to “move swiftly to finalize” the proposed regulations. We believe that it is premature for Treasury to discuss fast-tracking the regulations even before it has reviewed public comments and held a hearing on the proposal.

Overturning more than half a century of jurisprudence by adopting a rule that is inconsistent with how the IRS and taxpayers analyze an instrument (looking at the substance of the instrument, as opposed to the proposed rules that disregard substance in favor of form), should not be rushed. There are numerous technical issues with the proposed regulations, and it is incumbent upon the Treasury and IRS to adequately consider the interaction of these proposed rules with other parts of the Internal Revenue Code.

Given the impact on jobs, investment and economic growth, it is critically important that Treasury dedicate adequate time and resources for a thorough review and analysis of the public comments on the proposal and the potential impact of the proposed regulations before moving forward on any final rules.

Thank you in advance for your consideration of our requests. We look forward to meeting with you and your staff to discuss our concerns.


Advanced Medical Technology Association American Chemistry Council
American Forest & Paper Association American Petroleum Institute Association of Global Automakers Business Roundtable
Distilled Spirits Council
Financial Executives International Information Technology Industry Council National Association of Manufacturers National Foreign Trade Council
National Retail Federation
Organization for International Investment Retail Industry Leaders Association
S Corporation Association
Securities Industry and Financial Markets Association Semiconductor Industry Association
Software Finance and Tax Executives Council Trans-Atlantic Business Council
U.S. Chamber of Commerce
United States Council for International Business United States Telecom Association

cc: The Honorable Penny Pritzker, Secretary, U.S. Department of Commerce
The Honorable Mark Mazur, Assistant Secretary for Tax Policy, U.S. Department of the Treasury Mr. Robert Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Department of the Treasury