On 10th of October, Council US Department of the Treasury, issued the press release on the new regs: 

• “Today, the U.S. Department of Treasury and the Internal Revenue Service (IRS) issued final regulations to address earnings stripping. This action will further reduce the benefits of corporate tax inversions, level the playing field between U.S. and non-U.S. businesses, and limit the ability of companies to lower their tax bills through transactions involving debt that do not support new investment in the United States. These regulations also require large corporations claiming interest deductions to document loans to and from their affiliates, just as businesses of all sizes do when they borrow from unrelated lenders. The rules were proposed in April along with temporary anti-inversion regulations. The final rules announced today are the product of extensive public comment and engagement.”
• Coupled with Treasury’s previous actions to address corporate inversions, today’s final regulations balance the operational needs of companies while preventing the erosion of our U.S. corporate tax base. Specifically, today’s final regulations narrowly target problematic earnings stripping transactions – transactions that generate deductions for interest payments on related-party debt that does not finance new investment in the United States – while minimizing unintended consequences for regular business activities.
  • Exempting cash pools and short-term loans: Treasury requested comments in the proposed regulations on whether special rules are warranted for cash pools, cash sweeps, and similar arrangements. In response to thoughtful feedback, Treasury is providing a broad exemption for cash pools, which are it essentially common funding accounts for related businesses. Treasury is also providing an exemption for loans that are short-term in both form and substance.
  • Providing limited exemptions for certain entities where the risk of earnings stripping is low: Transactions between foreign subsidiaries of U.S. multinational corporations and transactions between pass-through businesses are exempt from the final regulations. Financial institutions and insurance companies that are subject to regulatory oversight regarding their capital structure are also excluded from certain aspects of the rules.
  • Expanding exceptions for ordinary business transactions: Treasury has significantly expanded the exceptions for distributions to generally include all future earnings and allowing corporations to net distributions against capital contributions. Treasury is also including additional exceptions for ordinary course transactions, such as acquisitions of stock associated with employee compensation plans.
  • Easing documentation requirements: Treasury has relaxed the intercompany loan documentation rules for U.S. borrowers. The regulations also extend the deadline by one year until January 1, 2018.

However,  it generated all sorts of comment and a series of webinars on the impact, mainly focussed around that US Treasury’s wish that “while minimizing unintended consequences for regular business activities.”

Long term impact

The changes could, when implemented in its final form, could force both Treasury and Tax to change a company’s borrowing and inter-company policies and procedures to minimize future cost and retain access to current sources of liquidity. The consequences of non compliance could be significant, according to Jeff Wallace at debtcompliance.net, namely: 

• loss of tax deductions (interest expense) 
• characterization of debt as equity
• potential restatements of financials 
• additional internal expenses to manage inter-company activities. Costs could include efforts to realign banking / organizational structures. 

Bruce Lynn, at thefcg.com believes that, “These regs will give treasury a larger voice in liquidity / risk decisions, but will require developing / enhancing “credit worthiness” policies and procedures similar to those employed by banks if intercompany activity is be regarded as “real” debt and avoid reclass as equity which will turn cash movements into taxable events (e.g. deemed dividends).”

While iTreasurer commented, “Treasury and IRS lighten the load on some of Section 385’s heavier lifts. Big pooling win:

• “The comment process worked,” said Peter Connors, a tax law Partner with Orrick, Herrington & Sutcliffe LLP. “The IRS narrowed the scope of the regulations dramatically, and targeted them to their legitimate concerns. Debt issued by foreign persons is completely outside of the rules, completely narrowing the scope of the regulations. The documentation requirement still exists but it has been relaxed. However, the 72 month look-back funding rule remains, which means that companies will still have to set up internal processes to avoid unintended footfalls.”
• iTreasurer overall conclusion was that, “Some reprieve for treasurers and corporations in general. And perhaps more importantly, their voices were heard and Treasury came up with what many consider a fair, well-thought-through response. “We engaged extensively with businesses, tax experts, the public, and lawmakers and carefully considered their comments and recommendations,” Treasury Secretary Jacob Lew said in a statement. “As a result of this process, the final rule effectively addresses stakeholder concerns by more narrowly focusing the regulations on aggressive tax avoidance tactics and providing certain limited exemptions.”

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CTMfile take: The regulation changes to 385 are a big deal, and will have corporate treasury departments working overtime to cope. CTMfile WEBchats on this topic coming.