Two members of the US House of Representatives Ways and Means Committee, Texas Republican Kenny Marchant and Washington Democrat Jim McDermott, are reviewing ways to curtail the tax deductibility of interest payments taken by large US businesses, according to a report by the
“Right now our tax system heavily favours debt over equity and there may be some good reasons to change that. If we did, we would affect how many corporations choose to raise capital and structure themselves,” McDermott told the
“How much to do this, how to do it in a revenue neutral way with transition oversight, and how to do it in a way that creates better economic outcomes and more jobs is a real challenge.”
report adds that the Senate finance committee is also looking at possibly limiting interest deductions for business, citing aides in the upper chamber of Congress. Both the House and the Senate are intensifying work on overhauling the US tax code and aim to produce compromise legislation in the next year or so.
notes that among developed countries, the US has the widest gap in the tax treatment of corporate investments with debt, which is extremely favourable, compared with equity, which is much less so. The case for narrowing the difference rests on several arguments; one of them that it would promote simplicity and lower compliance costs as companies would be less likely to resort to hybrid debt and equity financing arrangements for tax purposes that can result in challenges by the Internal Revenue Service (IRS).
It would also make the US less of a haven for foreign companies seeking to park their debt there to generate the maximum tax benefit, while also helping the US economy to be more nimble and less vulnerable to any future financial shock.
Businesses that borrow heavily would feel the greatest impact of any limitation of interest deductions. These include capital-intensive manufacturing groups and private equity portfolio companies, which are often highly leveraged.
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