NYT - July 12, 1998
Lobbying Blitz Preserves Lucrative Corporate Tax Break
By LESLIE WAYNE
[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
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,
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
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."