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Invacare Corporation, based in Elyria, is among the companies that wrote to urge the Treasury Department about consequences of a proposed regulation.
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WASHINGTON -- Some of Ohio's most prominent companies, including Procter & Gamble, Timken and Invacare, told President Barack Obama's administration today that regulations intended to crack down on corporate tax loopholes will harm businesses instead.
The 47 companies' concern is a set of rules designed to keep corporations from shifting their ownership to lower-tax countries in a set of unusual transactions, with a smaller foreign company buying a larger U.S.-based one.
This is known as a corporate inversion, and companies that have inverted include Mentor-based Steris and Cleveland-based Eaton Corp., both now part of once-smaller companies based in, respectively, Great Britain and Ireland.
These and other companies that already operated internationally justify their moves as making sense for strategic global-business reasons. But the Obama administration and other critics note that inversions result in shifting corporate profits to headquarters in countries with lower tax rates.
The inversion may change little if anything in U.S. operations. Even though they're now based abroad, the corporations can still get U.S. government contracts, for example. But a foreign headquarters saves the company money on income taxes -- or, as critics see it, costs the United States tax revenue.
In April, the Treasury Department released rules and proposals to clamp down.
The clampdown, however, could create more harm than good, say the Ohio businesses, in a letter to Treasury Secretary Jacob Lew. The letter was signed by, among others, Procter & Gamble, Timken, Invacare, Steris, Whirlpool, Cardinal Health, Forest City Realty Trust, and Ohio-based operations of Nestle, Anheuser-Bush, Miller Coors and the Kraft Heinz Company.
Most of these companies are headquartered in the United States and have not announced plans to change that. The problem is that the proposed regulations would affect any company with cross-border operations, regardless of whether it inverted, according to the Organization for International Investment, another critic of the proposal.
The proposed regulations "go far beyond Treasury's stated intent to curtail abusive transactions," the letter from the Ohio companies said. "If the regulations were to become final in their current form, they would significantly impede the ability of our businesses to invest and create jobs in Ohio."
What Obama wants to do:
Part of what Treasury rolled out in April used existing authority to restrict tax savings for so-called serial inverters -- companies that inverted overseas and then, within three years, became part of yet another inversion scheme with another U.S.-based company.
Without the tax savings, the companies would lose an incentive to merge. The announcement served to kill a planned merger by U.S.-based Pfizer, a pharmaceutical maker, with Allergan, which is based in Ireland as a result of earlier mergers.
Another part of the restrictions -- the one addressed specifically by the Ohio companies -- is not yet final. It would restrict a technique used to shift debt from a foreign operation to a U.S.-based affiliate.
This gives the appearance that the U.S. operation has lower earnings (because of the debt), reducing its U.S tax obligation. The Obama administration wants to restrict this practice -- called earnings stripping -- unless the debt is actually used to finance U.S. business operations.
The change would recharacterize certain debt instruments as equity -- also known as stock. This would then affect the tax deductions of interest payments on the debt, some of which might have to be treated as dividends instead. The IRS would make the determinations.
Why the companies object:
If the IRS interjects itself in decisions about what is and isn't legitimate debt, the Ohio companies contend, it will result in unfounded and possibly unfair decisions. The main points of the companies' complaint:
- "The proposed regulations will complicate, and in some cases eliminate, our companies' ability to self-finance our job growth and could obstruct access to capital."
- "The broad language of the regulations creates uncertainty resulting in serious hesitation to make long-term commitments in an already challenging business environment. The regulations would inflict significant costs on our businesses, with no direct or indirect benefit to consumers, by mandating new and extensive tracking, documentation and compliance requirements."
- "Finally, the subjective nature of the regulations and the new bifurcation authority given to the IRS would all-but ensure compliance issues and increased controversy."
What happens next:
Complaints from businesses have rolled in, and some of the Ohio companies already signed comments sent to Treasury. A date for finalizing the regulations has not been announced but is likely soon.
The Business Roundtable and other leading corporate groups have already said they expect the regulations to be challenged in court if they are finalized as proposed.
Today's letter simply lays down another marker from the business community.
How politics enter the picture:
The letter was prepared and circulated well before Monday night's presidential debate. But the topic of corporate taxes and loopholes became fodder in the debate as Democratic candidate Hillary Clinton said she supported efforts to bring back "money that's stranded overseas."
Republican Donald Trump said lower corporate tax rates would solve the problem.
"I'll be reducing taxes tremendously, from 35 percent to 15 percent for companies, small and big businesses," Trump said.
At 35 percent, this country's federal corporate tax rate is the world's highest. But analysts point out that many companies use tax strategies and deductions to avoid paying that rate. That's a point used by both sides, one that wants to curtail the use of loopholes and the other that says a lower, more equitable rate would eliminate the need for tax gamesmanship.
Trump's remarks -- and the Ohio businesses' letter -- goes to a point made repeatedly by other Republicans including U.S. Sen. Rob Portman. Portman, who also faces an election in November, says Congress needs to rework the corporate tax code in a comprehensive way rather than tackling it a piece at a time.
Portman's office today played a role in making sure the businesses' letter got out to the press.
"This letter is just another sign that one-off solutions to combat inversions and foreign acquisitions are not the answer to cure our broken tax code," Portman said in a statement. "These new, complex rules will make our already burdensome tax laws even more complicated, and, as the letter states, will make it harder for businesses to grown and create jobs here at home."
The answer, Portman said, is "comprehensive international tax reform that lets businesses invest and create jobs here in the United States."