When it comes to our local and national economy, Ohioans can collectively agree: the stronger, the better. With the near-catastrophic events of the financial crisis in 2008, our state economy has luckily been resilient and remains one of the most competitive in the nation. But in April, the U.S. Department of Treasury proposed new tax regulations that could effectively undermine this progress in the Buckeye State and interfere with Ohio-based businesses’ operations in ways never before seen.
Under current law, a U.S. subsidiary of a multinational corporation can issue its own debt to its foreign parent as a dividend distribution. The foreign parent can then transfer that debt to a low-tax foreign affiliate for the U.S. subsidiary to deduct on its taxes. But the Treasury Department’s new regulations would allow it to reclassify some debt as equity, resulting in a potential tax on the gross transactions from U.S.-based companies to their foreign subsidiaries and vice versa at the U.S. corporate tax rate of 39 percent.
The intended goal of these regulations is allegedly to stop the practice of inversions in which a U.S. company merges with a foreign company, then establishes the new headquarters in that country to lower its tax rate. But as Ernst & Young put it, “The proposed regulations reach well beyond the inversion transactions that may have been their primary impetus; they extend to routine financing transactions for both non-U.S-based and U.S.-based multinational corporations.”
Multinational companies’ foreign transactions could in essence see their taxes increase to 50 percent—a staggering number that would eliminate available cash used by companies for critical needs including bringing to market their goods and services, paying their employees, paying for operating facilities and even donating to research and charitable institutions. Companies would be “bleeding money,” and the result could be as costly as job losses, reduced wages and less efficient operations.
Take Cincinnati-based Procter and Gamble (P&G), a multinational corporation with operations in over 80 countries. An Ohio Chamber member, P&G has been a staple of the Cincinnati community since 1837, manufacturing products not only for Ohioans, but for the world. Should the Treasury regulations go into effect, the everyday cash management techniques it deploys for business operations would be negatively affected. This outcome would be an especially hard hit for the state considering globally engaged U.S. companies supported 2.9 million jobs in Ohio and brought in an estimated $295 billion in local revenue in 2013.
The regulations would take no prisoners, harming every sector regardless of size and strength and potentially starting an historic domino effect on our national economy. Justifiably concerned, the U.S. Chamber of Commerce earlier this month sent the Internal Revenue Service (IRS) a letter underscoring the potential consequences of Treasury’s actions. In addition, the U.S. Chamber and twenty two other national business associations representing the telecommunications, energy, medical, retail, automotive, manufacturing and beverage sectors sent a separate letter to Treasury Secretary Jack Lew outlining the broad impact of the rules while also requesting a 90-day extension so industry and experts could be allotted the proper amount of time to fully analyze the sweeping proposal. Given the historic and potentially irreversible effects at stake, this is certainly not an unreasonable request.
Our nation already struggles with an incredibly costly and complex tax code that leaves American businesses less competitive both globally and here at home. Add in these proposed rules and we will undoubtedly stifle what is left of our economic entrepreneurship and ingenuity, putting us further behind our foreign competitors. Ohio has been a bright light in a national economy that remains stagnant. We can’t let overreaching regulations from Washington dim that light.