As the Director of Government Relations of A.P. Moller Maersk Group, I urge the legislature to allow a deduction for interest expense by de-conforming from IRC 163(j) when conforming to the Tax Cuts and Jobs Act (TCJA). Preserving interest expense deductibility would ensure that the Commonwealth prevents a corporate tax increase, stops a hike in the cost of capital and remains competitive for investment.

For over 20 years, A.P. Moller Maersk Group has operated in Virginia. Currently, we employ 150 people in Virginia. Our U.S. Flag division , Maersk Line Limited, is headquartered at Norfolk, VA with additional offices in Reston, VA. On a daily basis, Maersk Line Limited employs nearly 750 Seafarers on 33 U.S. Flag ocean vessels. Maersk Line Limited has invested over $500 million in its fleet; therefore, the cost of capital remains a critical line item. 

The Tax Cuts and Jobs Act (TCJA) was a seismic shift in tax policy that dropped the federal corporate income tax rate and added new base broadeners. Since states conform to this larger tax base but not to the rate cuts, conformity to the TCJA tax law would increase Virginia's corporate tax base by 13% according to analysis by EY. One of these many base broadeners is IRC 163(j), which limits interest expense deductibility. 

The ability to deduct interest as an ordinary and necessary business expense is a longstanding principle of U.S. tax policy that reduces the cost of capital, which helps encourage investment and expansion. For Virginian companies ,like mine, having more capital translates into building new plants and facilities in the United States or acquiring new assets to further grow in this market. However, if Virginia fails to preserve interest deductibility, the Commonwealth would be enacting a hidden tax increase that would raise the cost of capital and increase taxes on Virginian employers. As international competition for capital allocation has never been fiercer, keeping the cost of capital down remains important.

Interest deductibility was only limited by the Tax Cuts and Jobs Act to help pay for a 40% corporate income tax rate reduction and move to 100% immediate expensing - two clear policy objectives to make the United States more competitive. However, Virginia is not cutting its tax rate and currently de-conforms from federal immediate expensing rules under IRC § 168(k). Congress clearly intended for these two rules to work together. Therefore, Virginia should allow a deduction for interest expense by de-conforming from IRC § 163(j) because it already deconforms from IRC § 168(k). On the other hand, failing to preserve interest deductibility impacts companies twice in Virginia: they would be denied immediate expensing and limited in interest expense deductibility. Taken together, this double impact is antithetical with the pro-growth business environment fostered by this legislature. 

To date, Indiana, Wisconsin, Tennessee, South Carolina, Georgia and Connecticut have de-conformed from IRC 163(j), preserving interest expense deductibility while adopting conformity. Many of these states are direct competitors to Virginia. 

For the reasons outlined in these comments, A.P. Moller Maersk Group urges Virginia to preserve interest expense deductibility as historically allowed by Virginia by de-conforming from IRC 163(j). 

Thank you for your consideration.

Sincerely

Doug Ludwig

I am writing on the behalf of the Organization for International Investment (OFII), which represents over 200 international companies with significant U.S. operations. Currently, there are 780 international businesses that employ over 187,000 Virginians within the Commonwealth.

Federal §163(j) was designed to limit business interest deductibility to 30% of a taxpayer’s adjusted taxable income plus floor plan financing interest. This restriction serves to prevent companies from overleveraging debt. The relevant percentage is determined on a consolidated group basis. In Virginia, taxpayers may also take an annual subtraction equal to 20 percent of their business interest disallowed as a deduction under Federal §163(j).

According to the “Guidelines Regarding the Business Interest Limitation,” released on November 25, the Virginia Department of Taxation notes that state affiliated groups may differ from federal consolidated groups and confirms that separate Virginia filers will need to calculate their 163(j) limitation on a separate entity basis. Taxpayers filing combined returns in Virginia will likewise need to compute the 163(j) limits as if the entities in the combined return filed separate federal returns.

I would ask that the department carefully consider how other separate filing states refer to the federal consolidated calculation and modify the proposed guidelines. Otherwise, Virginia could penalize taxpayers simply because of how they are structured, creating a potential distortion and disallowing ordinary interest expense that was not intended to be disallowed under §163(j). 

Companies do not necessarily structure their group financing on a separate company basis, so requiring a calculation of a §163(j) limitation on any other basis than a consolidated group approach may result in a distortive result, including a disallowance of interest on routine business transactions. 

The application of the §163(j) calculation can be difficult in states that require taxpayers to file on a separate company basis or as part of a group different from the taxpayer’s federal consolidated group. However, several states have explored this issue and determined that the appropriate approach was to start with a taxpayer’s federal consolidated §163(j) interest limitation. 

For instance, Pennsylvania requires taxpayers to file on a separate company basis but has provided guidance that a corporate taxpayer that files its federal return on a consolidated basis will not be expected to limit its separate company interest expense deduction for Pennsylvania purposes in a given tax period unless the federal consolidated group of which it is a member reports a §163(j) business interest limitation at the federal level for the same tax period.[1] Thus the determination of the §163(j)  interest limitation for a Pennsylvania separate company filing taxpayer is determined on a consolidated group basis to the extent the taxpayer files as a member of a federal consolidated return.  This approach is consistent with congressional intention. 

Likewise, New Jersey and Tennessee, two states that have historically required taxpayers to file on separate company basis, have issued similar guidance.[2] Massachusetts has also issued guidance providing for a separate company limitation in a combined group setting. This approach, in effect, allows a combined group computation because it allows an excess limitation of one member to be offset against a potential disallowance of another.[3] 

Since Virginia has decided to conform to §163(j), I urge you to consider adjusting the guidelines to an approach that starts with a taxpayer’s federal consolidated §163(j) interest limitation and not require the Virginia taxpayer to recompute the limitation at the state level.

 If you have questions, please contact Meredith Beeson, director of state affairs, at mbeeson@ofii.org or 202-770-5141.

Thank you.