WASHINGTON (Reuters) - Two-dozen Republicans from the U.S. House of Representatives asked the White House and the Treasury on Wednesday not to finalize proposed regulations meant to crack down on companies that try to reduce their U.S. taxes by rebasing abroad, fearing it will harm business and the economy.
In an Oct. 5 letter, Republican members of the tax-writing House Ways and Means Committee warned administration officials that regulations now under final review at the White House Office of Management and Budget (OMB) need to be revised to avoid unintended harm to the economy.
The proposed rules, known as “385” regulations because of the section of the U.S. tax code they address, are part of the Obama administration’s effort to stop a wave of tax inversion mergers, which occur when a U.S. company is bought by a smaller foreign firm in a country with lower tax rates and redomiciles there to avoid paying higher U.S. taxes.
“We urge you not to finalize the 385 regulations in haste,” Ways and Means Chairman Kevin Brady and 23 other Republican committee members said in Wednesday’s letter. The letter was addressed to Treasury Secretary Jack Lew and OMB Director Shaun Donovan.
“We believe these rules, if finalized, would have a significant adverse impact on the American economy, discouraging investment and hurting American jobs and workers,” the lawmakers said. “Getting the rules right will require further engagement with stakeholders to prevent irreparable damage.”
The Treasury said in a statement that it continues to urge Congress to address tax inversions through legislation and has “engaged extensively” with stakeholders from the public and private sectors on the regulations.
After unveiling the 385 regulations in April, Treasury forwarded them to OMB for a final 90-day review last Friday and said it was close to issuing a final version.
The 385 regulations address a business practice known as “earnings stripping,” by which a newly inverted company shifts domestic profits overseas as tax-deductible interest payments on debt owed to its foreign parent. The new rules would convert some interest payments into equity dividends, which are not tax deductible in the United States.
A separate Treasury rule to prevent serial inversion deals by foreign companies was implemented on a temporary basis in April but is also expected to be finalized this year. The serial inversion rule, which is the target of a lawsuit, as not yet been forwarded to OMB.
Some experts believe Treasury could wait until late December to issue final regulations to avoid any potential action by Congress.
Reporting by David Morgan