Nurev at Kreative.net Nurev at Kreative.net
Sun Jul 12 03:03:11 PDT 1998

For discussion and educational purposes only. ==============================================

NYT - July 12, 1998

Lobbying Blitz Preserves Lucrative Corporate Tax Break


[A] lobbying blitz by some of the biggest names in

corporate America has succeeded in maintaining a

lucrative tax break for multinational corporations --

one that allows them to avoid U.S. taxes and reduce

their foreign tax bill, too.

The tale of their lobbying success is contained in the

fine print of a House-Senate conference report on the

bill to overhaul the IRS, which Congress approved on

Thursday and President Clinton is expected to sign.

The pressure on the Treasury Department began soon after

it tried in January to stop the fast-growing

tax-avoidance maneuver involving "hybrid structures,"

entities permitted by a loophole created two years ago

when the Clinton administration implemented measures to

simplify taxes.

The loophole, which the Joint Committee on Taxation

estimates will cost $800 million in federal revenue over

five years and up to $1.8 billion over 10 years, allows

American multinational companies to use foreign tax

havens to reduce their U.S. and foreign taxes on profits

from overseas operations.

The Treasury Department's effort to rein in use of the

loophole set off an intense lobbying campaign by some of

the nation's biggest accounting firms, which had been

aggressively marketing hybrid structures, and by a host

of corporate giants, including Philip Morris, General

Motors, Microsoft, Merrill Lynch, Xerox, Exxon, Hallmark

Cards and the bottling arm of Coca-Cola.

First, the lobbyists got all Republican and nine

Democratic members of congressional tax-writing

committees to send angry letters to Treasury Secretary

Robert Rubin complaining that he was stepping on

Congress' turf and asking him to back down. Initially,

Rubin refused.

Then, turning up the heat, Sen. William Roth Jr.,

R-Del., chairman of the Senate Finance Committee,

inserted an amendment into the IRS bill putting a

six-month moratorium on the Treasury Department's

enforcement of a regulation closing the loophole and

shifting to Congress future control of policy on


When the dust settled, after several months of

negotiations up and down Pennsylvania Avenue, Roth

agreed to drop his amendment in return for an agreement

by the Treasury Department to allow multinational

companies that already use the loophole to continue to

do so -- permanently. The Treasury Department also

agreed to allow some limited new hybrid structures to be

set up for the next six years and promised not to

revisit this issue for at least two years.

"This measure signaled that Congress can't stand up to

industry," said Michael McIntyre, a tax law professor at

Wayne State University in Detroit who has written

extensively about this tax loophole. "This is one of the

biggest tax giveaways. It's outrageous, and as tax

policy, it is indefensible. This is so far beyond the

pale of what is considered legitimate tax avoidance."

Business succeeded through a winning combination of

arm-twisting, letter-writing and hiring some of the best

tax-lobbying talent in Washington, including many who

helped create the tax law. Eleven business coalitions

were formed to lobby the issue.

The loophole allows American companies to set up

offshore "hybrid" tax arrangements that, through

complicated swaps, let companies escape U.S. taxes on

overseas profits and turn those profits into deductions

to reduce their foreign tax bill.

The arrangement, which is legal, permits a multinational

corporation to set up a holding company in a tax haven

like the Cayman Islands or Liechtenstein.

By swapping profits from an overseas operation, say a

big American company's Brazilian subsidiary, for a loan

from the company's Cayman operation, the following

happens: The American company's Brazilian operation, and

its profits, disappear for U.S. tax purposes, and the

company now has a huge, and deductible, loan payment in

Brazil to cut its foreign taxes. These continuous swaps

take place entirely outside the company's U.S.


Major accounting firms have been actively marketing

hybrid structures over the last few years to businesses

eager to cut their tax bill. Accounting firms that

lobbied to keep the arrangement were Ernst & Young,

Deloitte & Touche and Price Waterhouse. Kenneth Kies

headed the Price Waterhouse effort. Until late last

year, he was the chief of staff on the Joint Committee

on Taxation, and he is a close confidant of the

committee's two chairmen, Roth and Rep. Bill Archer,


"Virtually everyone in the business community cares

about this," said Daniel Berman, a Washington lobbyist

representing a coalition of American companies. Berman

left the Treasury Department, where he was a top

international tax lawyer, in September and is well known

among congressional tax writers.

"All multinational companies care about this, and nearly

everyone is a multinational these days," Berman said. "I

spent a lot of time explaining to people about this in

person and in writing, and I sent a lot of faxes all

over the place. Of course, we spent some time drafting

potential solutions."

Treasury officials would not comment. But the

department's effort to close the loophole with a

regulation known as Notice 98-11 was intended to stop

American companies from shifting more and more of their

operations overseas to take advantage of the loophole.

"This was a short, concentrated blitz," said Jennifer

Shecter, a researcher at the Center for Responsive

Politics, a Washington nonprofit organization. "Within

moments of Treasury issuing that notice, corporate

mobilization took place. Various companies hired the

guys who used to write the rules to call up their

friends in Congress. They hired the best of the best and

they got a significant government agency to back off."

The whole issue may be revisited again in 2000, when the

Treasury Department will try to close the loophole

again, it has said.

"Ending hybrid structures was averted temporarily," said

Berman, the corporate lobbyist. "Treasury is still

proposing to finalize its regulations by the year 2000,

and I expect there will be a lot of congressional

dialogue before that happens to stop it from happening."

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