Treasury Section 385 proposal would hurt job-creating investments

It’s 2016 and we live in a world that’s more connected than ever. From digital technology to trade, U.S. job-creators of all sizes compete and thrive in a vibrant global economy.

With so much of the U.S. economy – and U.S. jobs – dependent on foreign trade and investment, why does America still rely on an income tax code rooted in old economies? It’s time for a U.S. corporate – and individual – income tax system that encourages an environment in which American companies can be dynamic and effective competitors in the global business arena!

{mosads}America’s broken and backwards tax policies and mountains of red tape are handcuffing the economy and discouraging much need job-creating investments. And rather than tackle true tax reform – which is a bipartisan supported solution – the Obama administration, in its waning hours, is again pushing a blunt regulatory solution in search of a problem.

In seeking to halt corporate “inversions,” the Treasury Department is expediting regulations – proposed Section 385 Regulations (Prop. 385 Regs.) – that will have disastrous and far-reaching consequences on job-creating investments for American companies (large and small) that have no intention whatsoever of pursuing an inversion. As we’ve seen, time and time again from Washington regulators, the Prop.385 Regs, which would fundamentally change basic cash management practices by treating debt as equity, is a far too broad approach and will result in unintended harm to U.S. job creators. 

American businesses rely on the free movement of cash to fund operations and day-to-day expenses and, in fact, U.S. tax policy has supported that true movement of cash for decades. By comparison, it’s similar to a typical family’s budget where husband and wife pool their paychecks into a common account to pay everyday expenses like the mortgage, auto loans, and groceries. Companies of all sizes implement the same basic cash management mechanism, but on a larger scale. Called “cash pooling,” this long-standing, common sense business practice serves as an effective tool for businesses to fund operations and cover expenses.

Despite this fundamental business fact, the Prop. 385 Regs would make this practice virtually impossible.

One NFTC member estimates that it would need two years and $30 million or more just to design the process, add resources, and build systems for implementation, while another puts the regulatory cost at $5 million annually.

That’s just two companies – multiply that regulatory cost over hundreds – if not thousands – of businesses, and the cost of compliance becomes staggering. Indeed, according to a 2016 PwC report, the administration’s latest regulatory overreach would “impose substantial compliance costs on U.S.-based taxpayers” – costs that should be reinvested back into research and development, operational expansion, and employee development, to name just a few. 

Combined with the world’s third highest corporate tax rate, the Prop.385 Regs  will have a chilling effect on job-creating investments and will cause a “large reduction” – as PwC found in their 2016 report – in the ability of U.S. businesses to compete globally.

And at a time when U.S. economic growth remains anemic at best, there’s a better way forward, and one that has bipartisan congressional support. First, Treasury must rewrite the Prop. 385 regulations to ensure they are narrowly focused – a sharp, precise action, rather than a bludgeon that crushes American businesses. As Oregon Democrat Sen. Ron Wyden stated in July, Treasury must be committed to getting this “right” so “that the regulations don’t interfere with routine business transactions.”

More importantly, however, if Congress is serious about raising revenue while ensuring American businesses can create jobs and compete on a global scale, then it must undertake broad based tax reform to fix our backward income tax system that acts as an albatross on the American economy. Enacting a modern, competitive tax code will strengthen America’s global competitiveness, encourage job-creating foreign investments, foster job growth, and, yes, generate more tax revenues.

Ms. Schultz is Vice President for Tax Policy at the National Foreign Trade Council (www.nftc.org), the premier business organization advocating a rules-based world economy and advancing global commerce.