GOP Senators: Treasury rules could erode tax base

A group of Republicans on the Senate Finance Committee said that proposed Treasury Department rules aimed at curbing offshore tax deals “threaten to further exacerbate our current economic woes.”

“Far from the stated intent of addressing abusive tax transactions, we are concerned that the actual effect of these regulations will be to drive investment and capital outside of America’s borders, further eroding the U.S. tax base,” the senators said in a letter to Treasury Secretary Jack Lew dated Friday.

The letter was signed by GOP Sens. Dean Heller (Nev.), Pat Roberts (Kan.), John Thune (S.D.), Tim Scott (S.C.), Mike Crapo (Idaho), John Cornyn (Texas) and Johnny Isakson (Ga.).

It’s the latest letter from lawmakers expressing concerns about the proposed rules, which would treat some inter-company debt as equity. Both Democrats and Republicans on the House Ways and Means Committee have said they are worried that the rules could hurt ordinary business transactions.

Treasury proposed the rules in April as part of a package of guidance aimed at curbing “inversions” — transactions in which a U.S. company merges with a foreign company and then reincorporates abroad to lower its taxes. 

But lawmakers and business groups have said the rules are broad and would affect companies that have not participated in inversions.

The GOP Senators listed several changes that they want Treasury to make to the rules if the department finalizes them. These include ensuring that businesses organized as S corporations don’t lose that tax status if their debt is recharacterized as equity, extending the deadline for meeting documentation requirements and exempting more small businesses from the rules.

The Senators asked Treasury to extend the comment period on the rules, which currently ends Thursday, and to thoroughly consider any comments received. They also asked Treasury to change the effective date so that the rules would be prospective once finalized.

“While we believe a better approach would be to focus on a more narrowly-tailored effort to target those tax transactions that are actually abusive, we urge you to—at a minimum—address the concerns raised in this letter should Treasury insist on finalizing the proposed regulations,” the GOP Senators said.

A Treasury spokesperson said last week that the comment deadline was not being changed. Treasury officials are scheduled to discuss the proposed rules with congressional tax-writers on Wednesday.

Not all comments on the rules have been negative. Members and supporters of liberal organizations Americans for Tax Fairness and Daily Kos have sent Treasury comments in support of them.