Taxation

And the Drumbeat for Tax Reform Continues….

You’ve certainly heard manufacturers call for a major overhaul of our nation’s tax code, particularly in light of recent M&A activity in the international arena. In a Washington Post op-ed on August 8, the Senate’s leading GOP taxwriter — Sen. Orrin Hatch from Utah—echoes that call.

In calling for an end to political posturing over the issue, Sen. Hatch concludes “ [T]he real solution would be to create a tax environment more favorable to businesses in this country.”

We agree with Sen. Hatch that the “problem demands much more focus than campaign talking points.” Tax reform won’t be easy but there’s no better time than now to get moving on a  21st century tax system for the United States.  Our trading partners have done it and so can we.

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How to Encourage Investment in the United States

Here at the NAM, we’re big proponents of a manufacturing comeback and one of our top priorities is to make the United States the best place in the world to manufacture and attract foreign direct investment. A pro-investment tax climate is key to achieving this goal and manufacturers are all for it.

On the other hand, we are increasingly concerned about “one-off” changes to the current tax code, like the anti-inversion proposals under discussion in Washington that will actually discourage investment in the United States, taking a toll on job creation and economic growth.

In today’s Wall Street Journal, John McKinnon takes a closer look at the potential negative impact of the anti-inversion legislation just on foreign direct investment in Firms Warn Inversion Crackdown Carries Risks. This is a big issue for the manufacturing sector—U.S. subsidiaries of foreign companies employee more than 2 million U.S. workers, over 17 percent of America’s manufacturing workforce. As we’ve said many times before, we don’t need more tinkering with our broken tax code, what our country needs is a pro-growth, pro-competitive, fairer, simpler and predictable tax climate.

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New CFTC Chairman Agrees That Derivatives End-Users Shouldn’t Face Additional Requirements

In one of his first public appearances since becoming Chairman of the Commodity Futures Trading Commission (CFTC) in June, Tim Massad today expressly supported the need to make derivatives markets still work for nonfinancial companies when hedging risk.

During a Politico Morning Money event, Massad said that nonfinancial companies had nothing to do with the financial crisis, and that Congress made it clear in Dodd-Frank that end-users should not be burdened by new derivatives requirements. Massad went on to explain that the CFTC has the authority to ensure that end-users are not overly burdened. For instance, the CFTC has proposed margin rules that effectively exempt nonfinancial companies from mandatory margin requirements.

Manufacturers applaud the Chairman for his comments and appreciate his commitment to keeping end-users from paying the price for the mistakes of financial companies. However, the NAM disagrees with Massad’s later statement regarding clarifications to Dodd-Frank where he indicated that tweaks to the law are better made through rulemaking or no-action relief rather than through a legislative fix.

You don’t have to look far to see that a rulemaking just doesn’t cut it in some cases. Take the proposed margin rules as an example. While the CFTC believes the Dodd-Frank Act gives them the authority to not impose margin on end-users, the Federal Reserve has a different interpretation according to testimony by former Federal Reserve Chairman Ben Bernanke; “We believe that the statute does require us to impose some type of margin requirement.” The Federal Reserve’s proposed margin rule differs from the CFTC’s version, and unless the Fed changes their interpretation of the statute, a legislative fix is the only way to ensure that end-users will not be subject to unnecessary and costly margin requirements.

Furthermore, the Commission’s no action relief also does not provide enough certainty for manufacturers who need to know the rules of the road to hedge risk as part of normal business operations. According to the recent Coalition for Derivatives End-users survey, 85% of respondents that use centralized treasury units to hedge say they could not rely on, or were unsure about relying on, the CFTC’s no-action relief intended to allow them to avail themselves of the end-user exemption from clearing requirements.

Clearly, targeted legislative changes are necessary when it comes to end-users. That is why the NAM will continues to urge Congress to pass legislation to exempt nonfinancial end-users from margin requirements (S. 888) and to make sure manufacturers utilizing CTUs can still use the end-user clearing exception (H.R. 677).

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The Unintended Consequences of the “Truth in Settlements Act”

More transparency is usually a good thing, but you can have too much of a good thing — particularly when accompanied by costs that far outweigh the intended benefit. This is exactly the case with a bill called the “Truth in Settlements Act of 2014” (S. 1898) that was approved today by the Senate Homeland Security and Governmental Affairs Committee.

Although intended to improve transparency surrounding legal settlements, S. 1898 will add additional reporting and compliance burdens, potentially change the nature of legal proceedings, and negatively impact competitiveness. The Truth in Settlements Act requires federal agencies to explain if the settlements they announce are tax deductible and to post information about settlements over $1 million on their websites. All public companies also would have to state in their SEC filings whether they have deducted any of these settlement payments from their taxes.

It is clear the authors of the bill had financial institutions in mind when crafting this bill, as even the bill’s Fact Sheet cites mortgage settlement stemming from the financial crisis. Yet, the new disclosure and filing requirements apply to all public companies. By sweeping all companies into the new requirements, lawmakers are once again penalizing manufacturers for a financial crisis they had nothing to do with.

Additionally, the threshold of $1 million is also inconsistent and much lower in some cases than what companies currently file with the SEC. The additional disclosure requirements on settlements may cause more companies to choose litigation over settling cases, draining resources for both companies and the federal government.

Indeed a thorough analysis or costs-benefit analysis of this bill would ensure the legislation is targeted and has the results intended by its authors. Unfortunately, there have been no hearings prior to the markup where these concerns could have been raised.

The NAM opposes S. 1898 and urges Senators to oppose this bill. Instead, it would make more sense for a study to be conducted to review the settlement practices of federal agencies and companies before reforms are enacted.

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Four Years Later and Still Unclear

This week, at a House Financial Services hearing entitled  “Assessing the Impact of the Dodd-Frank Act Four Years Later,” manufacturers called on Congress to provide clarity for derivatives end-users and to enact legislation that ensures companies are not faced with undue regulatory burdens.

Four years into the rule-making process, regulatory uncertainty continues to harm manufacturers. Despite Congress’ intention to exempt derivatives end-users from costly margin requirements and clearing requirements, subsequent rules implementing Dodd-Frank are unclear and capture manufacturers trying to hedge risk. Tom Deas, Vice President and Treasurer of FMC Corporation, testified that even the rules that supposedly provide end-user exemptions do not provide relief.

When author of the 2010 law and former House Financial Services Committee Chairman Barney Frank was asked about potential updates to his legislation, he responded, “I agree with much of what [Deas] said about the end-user.”  House Agriculture Committee Chairman Frank Lucas mentioned several legislative fixes that the NAM supports saying, “End-users did not create the financial crisis of 2008 and should not be regulated like they did.” We couldn’t agree more. After four years of uncertainty, manufacturers welcomed this bipartisan support and urge lawmakers to act – better late than never.

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Manufacturers Support Pension Law Clarification

There is no question that maintaining a traditional defined benefit pension plan comes with significant complexity and costs for the manufacturers that sponsor these plans. We have written before about the millions of dollars manufacturers must pay the Pension Benefit Guaranty Corporation (PBGC) in the form of premiums, but manufacturers are also running up against further costs as a result of the PBGC’s interpretation of an existing pension law.

Under Section 4062(e) of the Employee Retirement Income Security Act (ERISA), companies with traditional pension plans must notify the PBGC when they cease operations at a facility and 20 percent of employees in the pension plan are separated from employment. The PBGC then determines if the company is liable for providing financial security to the pension plan. Unfortunately, the PBGC has been interpreting the law in an overly broad manner and undertaking enforcement measures even if it is not clear that a 4062(e) triggering event occurred.

As a result, manufacturers are holding off on making important changes to their business operations, such as closing a plant in an inconvenient location and moving employees to another location, because the liability requirement can force the company to sideline millions of dollars away from productive business investments.

The NAM met with the PBGC twice this year as well as the Department of Commerce to voice the concerns we have heard from manufacturers facing 4062(e) liability. Soon after these meetings, the PBGC announced that they would place a moratorium on their enforcement of 4062(e) until the end of 2014.

While the moratorium is a positive first step, manufacturers need the certainty of a permanent solution. To that end, Senators Tom Harkin (D- IA) and Lamar Alexander (R-TN) introduced legislation (S. 2511) to clarify the definition of substantial cessation of operations contained in Section 4062(e) so that manufacturers will know exactly what type of changes to business operations will trigger liability.

The NAM wrote a letter supporting the Harkin-Alexander bill, which was approved by the Senate Committee on Health, Education, Labor, and Pensions Committee today by voice vote, and urges the Senate and House to pass S. 2511 as soon as possible.

 

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Manufacturers Be Aware: Money Market Fund Reform Rules are Now Finalized

For years, regulators have threatened to impose new reforms on money market funds (MMFs) in an attempt to reduce the risk of future runs and maintain financial stability. Today, by a 3-2 vote, the Securities and Exchange Commission (SEC) approved final rules that will change the way MMFs operate. Since many businesses use MMFs to meet short term financing and investment needs, manufacturers should be aware that these new rules may impact how manufacturers manage cash.

The new rules, effective over a two year transition period, require that institutional prime funds adopt a floating net asset value (NAV) instead of using the current stable value, meaning that the share price will fluctuate. The rule also implements new discretionary liquidity gates and fees for all non-government MMFs.

After the reforms were proposed last year, the NAM, in a joint letter to the SEC, noted that the floating NAV may carry negative accounting, tax, and operational implications. The NAM also requested that the SEC hold a roundtable on the proposal to gain the perspective of key stakeholders before any changes are finalized – a request that was unfortunately ignored. The NAM has blogged before about the negative impact that the proposed MMF reforms could have on manufacturers and other business. For example, moving to a floating NAV could cost investors up to $2 billion initially and close to that amount in annual operating costs.

In her statement, SEC Chairman Mary Jo White said the Commission has worked to address at least one concern raised by the business community regarding the additional tax burden that the floating NAV would bring. To that end, the Department of Treasury and Internal Revenue Service will release guidance and proposed rulemaking today aimed at providing relief through a simplified aggregate tax accounting method and exempting investors from tracking individual transactions for tax reporting.

Republican Commissioner Daniel Gallagher voted in favor of the final rule, stating that his support had been contingent upon fixing the tax issue. On the other hand, Republican Commissioner Michael Piwowar told his fellow Commissioners that the public should have the opportunity to review and weigh in on proposed IRS tax rules before the SEC’s MMF rules are finalized, and opposed the rule for this and other reasons.

Now that the rules are final, manufacturers should consider the costs and administrative impacts that moving to a floating NAV, along with potentially paying fees or facing a gate when trying to redeem cash from a fund fees, will have on their cash management practices. Manufacturers should also review the proposed tax changes that the Treasury and IRS release today and consider if they adequately provide relief from additional tax reporting burdens.

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TRIA Reauthorization Passes Senate with Strong Support from Manufacturers

This week, in a rare moment of bipartisanship, the Senate passed Terrorism Risk Insurance Act (TRIA) reauthorization legislation. The program was created during the aftermath of 9/11 when primary insurers and reinsurers ceased to provide coverage for terrorism events. While it has never been used, the program provides a federal “backstop” in case of a catastrophic event.  Under TRIA, once claims against the insurance industry reach $100 million, the government would pay a portion of a company’s insured losses, after the insurer pays a deductible. The law caps the government’s annual liability at $100 billion and requires [] the Secretary of the Treasury to impose surcharges on property/casualty insurance policies to recoup 133 percent of outlays to insurers under the program.

So why is this important for manufacturers? TRIA has prevented the cost of workers’ compensation (WC) from increasing significantly. Unlike other lines of insurance, WC statutes rigidly define the terms of coverage so, without TRIA, insurance companies would limit their exposure by raising premiums and declining coverage to employers facing high terrorism risk. Because WC coverage is mandatory for nearly all U.S. employers, manufacturers operating in areas deemed to have a high risk of terrorism would be forced to purchase coverage in alternative markets, at a significantly higher cost.

Manufacturers support TRIA because it ensures that businesses in high-risk areas have access to affordable terrorism coverage and taxpayers are protected from any losses.  The NAM is pleased that S.2244, the Terrorism Risk Insurance Program Reauthorization Act passed with overwhelming bipartisan support – a vote of 94-3. We hope that the House passes its own reauthorization legislation that allows terrorism coverage to be available and affordable for all manufacturers.

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Setting the Record Straight

There’s no doubt that the U.S. tax code— which includes the developed world’s highest corporate tax rate, outdated international tax rules and a host of temporary provisions—is a drag on economic growth and competitiveness. And while Manufacturers continue to push for comprehensive tax reform, NAM members recognize that, until that happens, we have to operate and compete under the current system. Unfortunately, that reality is being largely ignored in the current rhetoric flying around Washington about corporate inversions.

In today’s Wall Street Journal Miles White, the Chairman and CEO of Abbott Laboratories, sets the record straight on the realities of the U.S. tax system in his oped,  Ignoring the Facts on Corporate Inversions, and notes that legislation to block inversions would simply make a bad system worse. We agree strongly with Mr. White that piecemeal proposals to change the tax code will do more harm than good and the real solution is one Manufacturers have been pushing for all along, “fact-based, thoughtful, comprehensive [tax] reform.”

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House Votes to Ease Regulation of Non-Banks Under Dodd-Frank

The  Dodd-Frank financial reform law enacted in 2010 in response to the crippling financial crisis imposed new regulations on financial markets and companies. Unfortunately, the law’s vast reach sweeps manufacturers into areas of new oversight and regulation, even though manufacturers had nothing to do with the financial crisis.

We have written many times before about the negative impact of Dodd-Frank derivatives requirements on manufacturers, but another provision of the law, which grants broad regulatory authority over companies involved in financial activities, threatens to designate some manufacturers as systemically important financial institutions (SIFIs).

The Dodd-Frank Act created a council of regulators made up of representatives from several different regulatory bodies called the Financial Stability Oversight Council (FSOC) that is charged with identifing existing or emerging systemic risks to the financial system. Section 113 of the Act authorizes the Council to consider whether a nonbank financial company could pose a threat to financial stability and if they determine that there is a threat, then they can subject that company to Federal Reserve supervision and “enhanced” prudential standards – aka more regulation.

The problem is the FSOC looks at a company’s size and scope as part of its determination for what is a nonbank financial SIFI, threatening some large global manufacturers that must engage in lending and financing as part of their everyday course of business. Despite the global reach of these companies, manufacturers did not contribute to the financial crisis and do not engage in the same type of financial activities that banks do, especially not ones that would threaten the financial system. A SIFI designation can bring unnecessary costs for companies that could be put to better use by investing in the business and creating jobs. The NAM wrote to FSOC previously to express concerns with their proposal.

FSOC has already begun to designate companies as nonbank SIFIs, but the House this week adopted an amendment to the financial services appropriations bill offered by Rep. Garrett (R-NJ) to the put an end to this process by ceasing funding for the FSOC designation of non-bank companies as SIFIs. Manufacturers that need to be engaged in financing large projects or machinery as a part of their regular business, should not be regulated as if they were large banks.  The NAM applauds the House action. Global manufacturing companies already face enough challenges remaining competitive internationally, and the NAM will continue to support efforts aimed at preventing unnecessary regulation of these businesses.

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