Compliance Burdens Still Loom as Debt-Equity Rules Narrow

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By Laura Davison

Oct. 17 — The Treasury Department’s final debt-equity regulations include a number of exceptions, but many companies—particularly foreign multinationals—will still have to comply with the rules.

The regulations (T.D. 9790) have been tailored so that they mostly affect companies that engage in earnings stripping, said Robert Willens, a tax consultant in New York. This means that foreign multinationals with a substantial presence in the U.S., such as Royal Dutch Shell plc and Nestle S.A., or companies that have inverted are the most likely to have intercompany loans that will be caught up in the rules, he said.

While there are significantly fewer debt instruments subject to the final rules than were included in the proposed version, there are still meaningful compliance burdens with the regulations, Joseph M. Pari, national principal-in-charge of KPMG LLP’s Washington National Tax practice, told Bloomberg BNA.

The first step is for companies to determine what type of debt they have in place that could be subject to recharacterization rules under tax code Section 385, Pari said.

If you have a debt instrument that is subject to those rules, “you need to have systems in place to track the debt, what happened to it, how it came into existence, changes with respect to that debt,” Pari said. “There will be a fairly deep dive with respect to knowledge gathering.”

Data Documentation

The next step is to have mechanisms in place by Jan. 1, 2018, to capture data about any debt subject to the Section 385 regulations’ documentation requirements. The level of difficulty to build this system will vary from company to company, depending on the data already being collected.

The rules included a number of exceptions that mean far fewer transactions will be subject to the documentation requirements. In addition, the documents have to be reported once a year, rather than within 30 days after the issuance of the loan. This change was included in the proposed regulations.

“It’s gotten a little simpler. We have the ability to do annual documentation about the ability to repay. The changes make the rules much more manageable,” Wade Sutton, a principal at PricewaterhouseCoopers LLP, told Bloomberg BNA. “Overall, it will be an easier task than we were expecting when we were looking at the proposed rules.”

PwC has approached this by building onto existing treasury management systems, though the approach is slightly different depending on the level of sophistication of clients’ current programs, Sutton said.

“To a great extent, the documentation requirements can be managed by existing personnel within the tax and treasury function,” said Maruti Narayan, of counsel at DLA Piper. “When we read the first batch of regs, many were convinced that they would have to establish an entirely new division—a group of people who were proficient in documenting loans to comply with the regulations.”

Other Considerations

About 95 percent of clients were going to have real problems dealing with the proposed regulations, Sutton said. It is too early to determine how many will still have intecompany loans subjected to them, but it will likely be far fewer, he said.

However, companies need to make sure they understand where they are subject to rules for state purposes, even if they aren’t for federal purposes, Pari said.

“Companies are going to want to examine their intercompany lending and borrowing to make sure that it does bear the hallmarks of arm’s-length lending and borrowing,” Narayan said. “To the extent that people were sloppy or inconsistent with documentation in the past, this was a cautionary tale for people. Even though the regs are a lot more workable, people are still going to have to take the time to properly document their loans.”

To contact the reporter on this story: Laura Davison in Washington at

To contact the editor responsible for this story: Meg Shreve at

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