Debt-Equity Rules Put Brakes on Distributions: JPMorgan

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By Alison Bennett

July 20 — Financial services giant JPMorgan Chase & Co. has “striven mightily” to avoid triggering the government's earnings-stripping regulations, the company's top tax adviser said.

Allen Friedman, head of JPMorgan's tax planning group, said July 20 the group has been urging, “Do not make any distributions of any size to an offshore entity or back to the United States.” The tax department also is counseling caution on internal restructurings, he told the USA Branch of the International Fiscal Association.

Friedman added his voice to a unified message on the panel: Please give the financial industry a break.

The rules could deal a crippling blow to the industry's critical ability to quickly move money around the globe, panelists told Daniel McCall, Internal Revenue Service deputy associate chief counsel (International-Technical).

‘Very Close Attention.'

McCall didn't give specifics about what the IRS might do, but said the government is “paying very close attention” to industry concerns and understands that banks have to deal with stacks of regulations both in the U.S. and abroad that might impede their ability to comply with the earnings-stripping regulations.

McCall said the IRS is “mindful” that most of the comments it has gotten say the rules go too far. “Our challenge today is, can we appropriately tailor the regs to more discretely address the policy concerns,” he said. “We are addressing all of the different ideas.”

Asked about the effective date, McCall said that is usually one of the last decisions officials make when they're writing regulations and he couldn't comment further.

Proposed in April, the proposed rules (REG-108060-15) are intended to stop companies from stripping income out of the U.S. via loans to subsidiaries. They give the IRS the ability to recast those loans as equity rather than debt, causing interest deductions to disappear and potentially imposing hefty withholding taxes (65 DTR GG-1, 4/5/16).

‘Crazy Quilt' of Cash Movements

Banks, securities dealers, derivatives dealers, finance companies, leasing companies and others whose stock in trade is cash could all be hurt by the rules, panelists said.

Lucy Farr, a partner with Davis, Polk & Wardwell LLP, asked McCall whether the government would consider adding a “factor” to the rules that more narrowly targets earnings stripping, one that eases their impact on the financial industry.

She cited “a crazy quilt of daily cash movements” around a financial group that could be hit.

Farr and others on the panel said one challenge faced by the financial industry is that it is already highly regulated in multiple jurisdictions. The industry has to comply with rules in both the U.S. and other countries that often require banks and other financial institutions to structure debt in ways that could be kaput under the earnings-stripping regulations.

“Debt and cash are just different in a financial group,” Farr said. She said the industry's biggest concern is the funding rule, which allows complete recharacterization of loans.

Both Farr and James Peaslee, partner at Cleary Gottlieb Steen & Hamilton LLP, voiced big concerns about the possible “cascading” effect of the rules that could lead to chains of loans being recharacterized as equity (see related story in this issue).

Farr said in the banking industry, that could be like “dropping the match onto the pile of tinder.”

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

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