The Treasury Department’s proposal under Section 385 could come any day now, and cash pooling may be exempt from the rules. Meanwhile, republican lawmakers have stepped in to voice their opposition.
Some observers say the rules could be announced as soon as Friday, October 15. According to one corporate treasurer who this week met with Treasury Department officials, it appears as though pooling structures will be spared. “The tone of the meeting was positive,” the treasurer said, adding that the decision could be immediate. “It will come with a foreign-to-foreign exception [which means good news for corporate cash pooling].”
“This is going to generate a lot of controversy even after it is implemented,” said a tax attorney at a recent meeting of The NeuGroup’s Treasurers’ Group of Thirty. “And people have already tried to invalidate it; Baker & McKenzie has submitted FOIA requests to find out how they got to this. But if it is really draconian, lots of parties will try to have it invalidated.”
But despite pooling likely being left out of the rules, treasurers will still have their hands full with documentation aspect of the law. This concerns intercompany lending, in which companies will have to treat the loans like a bank would, that is servicing that would exist in a debtor-creditor relationship. According to law firm Orrick, Herrington & Sutcliffe documentation must be prepared to reflect four major categories of legitimate indebtedness:
- A binding obligation to repay (“First Requirement”) (30 day window after relevant date; relevant date = date on which member of expanded group becomes issuer of new or existing EGI)
- Creditor’s rights (“Second Requirement”) (30 day window after relevant date; relevant date = date on which member of expanded group becomes issuer)
- Reasonable expectation of repayment (“Third Requirement”) (30 day window after relevant date; relevant date = date member becomes issuer with respect to EGI or any later date on which issuance is deemed to occur under Reg. § 1.1001-3)
- Actions evidencing a genuine debtor-creditor relationship (“Fourth Requirement”) (120 day window after relevant date – relevant dates can include, for example, dates of payments of principal and interest, acceleration events, default, etc.)
Signed by 24 Republican members of the committee and no Democrats, the letter notes that the Treasury Department delivered the proposal to the Office of Management and Budget for review by the Office of Information and Regulatory Affairs. The latter is typically the final stop before a proposal is approved as a regulation; the proposal was submitted September 30, 2016.
“We believe the rules if finalized would have a significant adverse impact on the American economy, discouraging investment and hurting American jobs and workers,” the letter states.
The proposed rules would treat intercompany loans in certain circumstances as equity, eliminating the deduction for the interest payment on the note held by the US affiliate. Those circumstances include when a subsidiary distributes a note to a parent, or acquires the stock of another corporate group member or parent for a note, or in a re-organization acquires the assets of another company in the group for a note. The proposal also imposes significant documentation requirements to avoid reclassification of intercompany lending.
A poll of Neu Group members attending the Global Cash and Banking Group meeting in late September found that the Section 385 proposal and bank-account-management compliance tied for second in their list of top projects and priorities, each at 35%, following cash positioning and liquidity management at 50%. Attending members were particularly concerned about having the tools in place to document transactions in accordance with their understanding of the proposed rule.
The letter says that Treasury Secretary Jacob Lew met with the committee September 14 and “made clear that his goal is to finalize the regulations but that he would do so only if he could get the rules right.” The letter then notes that Treasury has received thousands of pages of comments on the proposal by small and large businesses that identify problems with the proposal and recommend its “complete overhaul,” adding that “the only responsible thing to do is to issue revised rules in proposed form in order to allow further review and comment.”
Treasury has not disclosed the shape of the proposal it sent to the OMB. However, on September 12, Brian Jenn, an attorney-adviser with Treasury’s Office of International Tax Counsel, acknowledged Congressional criticism and comments from market participants, according to Bloomberg BNA. Speaking at the Practicing Law Institute in Chicago, he said the Treasury Department is committed to addressing unworkable parts of the legislation, adding that it has already expressed plans to “fix” cash pooling used by corporates to manage cash and simplify the documentation requirements, according to Bloomberg.