Section 385 Still a Big Concern

August 12, 2016

By Ted Howard

The August edition of iTreasurer, which marks our 400th issue, has as its themestrends in corporate finance and enterprise risk management. Along with thosetwo topics we also continue our focus on the US Treasury Department’s Section385 proposal, which was seemingly slipped into broader proposals to counteractinversions. Indeed, Section 385 appears to be so invidious it has dominated treasuryconversations since it was issued in early April. That’s because it threatens some verycritical cash management tools.

And a late July NeuGroup webinar bears this out. Companies participating in thewebinar are doing their best to prepare in light of what they know so far. For one,companies are taking inventory of their intercompany loans (a Sec. 385 target) to seewhat’s out there; some, ahead of the proposals, were already adding more robustinterco loan structures with credit analysis of other bank-like servicing; now othersare following suit. Meanwhile, regarding pooling structures (another Sec. 385target), most attendees of the webinar are just crossing their fingers and hopingcash pooling is spared. However, attendees who indicated using the lucky handgesture strategy followed it up with a resigned “but I’m probably being naïve.”

With that heightened interest in mind, contributing editor and peergroup leader Anne Friberg explains how Sec. 385, along with OECD’s G20-mandatedbase erosion and profit shifting plans, mark a continuation of the war on basiccorporate cash management structures. “The G20 base-erosion-profit-shifting (BEPS)15-point action plan from 2013 seemingly opened the gates for a global crackdownon tax-efficient structures, and its latest manifestation is the US Treasury’s Section385 rules that are now being mulled over and expected to be finalized in September,”Ms. Friberg writes. And “in its current form, Section 385 casts a very wide netthat touches uncomfortably on intercompany funding. This has corporate treasurersworried not only for their interco loan portfolio, but also their liquidity managementstructures, designed for efficiency and for keeping working-capital costs low.”

Now onto the themes. Founding editor Joseph Neu explores anothergreat topic of interest in “Funding Strategies in Uncharted Territory.” This year hasbeen a bit of a rollercoaster for companies contemplating how they will fund variousprojects like M&A. There was continued uncertainty in Europe, and at home a Fedtalking about rising rates and general FX market jitters amid a stronger dollar. EvenBrexit, which early on was distant and seemingly impossible, helped to fuel investoredginess, Mr. Neu writes. However, this edginess eased over the first half, withthe help of a large issue by a NeuGroup member in February that was credited withreopening moribund bond markets. “The reality of lower-for-longer interest rates inthe US also helped assuage concerns about less favorable funding conditions. Still,H1 was uncharted territory for corporate bond markets in many ways and the roadahead is similarly unmapped.”

And last but not least, theme two: ERM. contributor and peer groupleader Bryan Richardson profiles Harley-Davidson’s ERM program, how it all began, itsstructure and the person who drove the initiative to its current award-winning character.The key to its success: “Harley-Davidson has taken a near-textbook approach toimplementing their ERM program, starting with the CFO taking executive ownership ofthe program and setting a tone at the top,” writes Mr. Richardson. Enjoy the issue.

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