Companies Insist on IRS Break While Extolling Rate Reform
Nissan North America Inc. favors legislation that “significantly simplifies” the U.S. tax code -- except for Sections 30C and 30D.
Those are “critical” provisions, the company warns, that help consumers purchase its Leaf electric vehicle and charging equipment. Similarly, Starbucks Corp (SBUX). champions a current exception that lets it defer U.S. taxes on income earned by its Swiss-based coffee-trading operation. The PGA Tour is trying to keep a rule that lets companies fully deduct event tickets. Enterprise Products Partners LP (EPD) wants to make sure pipeline companies won’t be required to pay corporate income tax.
Even as they praise the goal of revamping the tax code, dozens of companies and organizations want to ensure that a rewrite doesn’t come at their expense. In letters to lawmakers, companies are asking to be left alone.
“It’s pretty frustrating, because they want the best of both worlds,” said Representative Kenny Marchant, a Texas Republican on the tax-writing House Ways and Means Committee, which is posting the letters on its website. “They want to keep all their deductions and have a lower rate.”
Camp’s proposal, which he hasn’t released, would curtail tax breaks and use the revenue generated from those changes to lower individual and corporate rates. He also plans to change the international tax system, imposing lighter burdens on the active foreign income of U.S. companies along with rules to prevent companies from shifting profits outside the U.S.
Any revenue-neutral tax change would inevitably create winners and losers as a flatter system equalizes effective tax rates that are now disparate across industries and generally lower than the 35 percent statutory rate. A Treasury Department report last year said the average effective U.S. corporate tax rate was 26 percent with the construction industry paying 31 percent and utilities paying less than half that.
“Nobody can defend the status quo in its totality, and part of the process is hearing from taxpayers and others that have an interest in it, and those types of responses aren’t surprising,” said Representative Peter Roskam, an Illinois Republican on Ways and Means. “You start with a clean sheet of paper and say: What would a tax code look like if you were going to design it from the ground up?”
In response to Camp’s request for written comments, potential winners and losers detailed their concerns about a blank-sheet tax code. Most are concerned about losing benefits they have in the current code.
In its letter, Nissan defended the $7,500 tax credit for purchasing plug-in cars such as the Leaf, maintaining that the breaks should continue temporarily. Consumers are eligible for a credit of as much as $1,000 for charging equipment per location while companies can get as much as $30,000.
The letter emphasizes the environmental benefits and potential cost savings to consumers. It also mentions facilities run by Nissan or other companies in the industry in Tennessee, Mississippi, Michigan, California, Missouri, Indiana and North Carolina.
“When you’re rolling out a new technology, there has to be some help,” Tracy Woodard, Nissan’s director of government affairs, said in an interview. “While we are still in the phase of trying to ramp up to get more and more sales of EVs, incentives still matter.”
Companies could suffer if their favored tax breaks are curtailed because they have been capitalized into the value of the business, said Lawrence Zelenak, a tax law professor at Duke University in Durham, North Carolina.
“The status quo has amazing anchoring power,” he said. “And to be fair, it probably ought to have substantial anchoring power.”
Starbucks relies on a break deep within Section 954 of the Internal Revenue Code to shield its coffee-buying operation in Lausanne, Switzerland, from immediate U.S. taxes. Fiddling with that corner of the tax system, the company maintains, would put Starbucks at a “severe competitive disadvantage.”
Starbucks supports reviewing tax breaks for domestic manufacturing and accelerated depreciation “as long as it is done in a fair and comprehensive way,” Brian Ugai, the company’s vice president for tax and customs, wrote in the letter.
He emphasized the exception for income from coffee trading. Generally, overseas income generated by buying and selling property is subject to immediate U.S. taxes, unlike active business income.
The law, however, makes an exception for “agricultural commodities which are not grown in the United States in commercially marketable quantities.” A list of such items maintained by the Treasury Department includes coffee, cocoa and tea.
In his letter, Ugai also said any rules that provide lower tax rates on companies’ earnings from intangible income define the term intangible so that it encompasses the trademark, “innovative marketing” and “store design concepts” that are “integral and interdependent in creating and sustaining the Starbucks experience.”
Jaime Riley, a spokeswoman for Starbucks, declined further comment.
The pleas for the status quo in the tax code are being made by companies in such diverse industries as oil, banking, insurance and manufacturing.
Marathon Oil Corp (MRO). wants to be able to deduct intangible drilling costs. Liberty Mutual Insurance is seeking to retain deferred taxation on its overseas investment income. Capital One Financial Corp (COF). and other regional banks want to keep interest fully deductible.
Marchant said he’s asked companies to go back and recalculate what their tax bills would look like with fewer breaks and a lower rate, though he knows the simpler tax code he wants won’t benefit everyone.
“If you do a tax-neutral deal, somebody’s not going to come out all right,” he said.
Some U.S. companies, such as 3M Co. and Walt Disney Co (DIS)., explicitly listed breaks they would be willing to trade for a lower rate.
The PGA Tour’s letter, written by Commissioner Tim Finchem, highlights the non-profit association’s “unique” structure in which tournament proceeds go to charities. A series of tax provisions, including rules governing transactions with taxable entities, allow that to continue.
The tour is “aware that Congress has been concerned from time to time with the issue of whether the privilege of tax exemption is being misused by some entities,” Finchem wrote as he urged more “robust enforcement” along with retaining the current breaks.
Representative Jim McDermott, a Washington Democrat who has been in Congress since 1989, said he expects the negotiations over the tax-code rewrite to take a long time as legislators sort through the pleadings.
Veteran lawmakers are slower to commit to a proposal, he said, because they know to discount companies’ claims and look for the connections and implications of any plan.
“They always give you these hyperbolic worries and you say: well, let’s think about that for a minute,” said McDermott, a Ways and Means member. “When you touch one place in a spider web, it all moves.”
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