Treasury to Address Cash Pooling in Final Debt-Equity Rules

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By Laura Davison and Kaustuv Basu

July 6 — Treasury officials told lawmakers that they expect to ease the restrictions on cash-pooling transactions in the final version of the controversial debt-equity regulations, a senior House Ways and Means Committee member said.

Cash pooling, a funding technique involving a central bank account used by a group of subsidiaries, has been one of the top concerns for businesses expressing concern about the reach of the proposal that gives the Internal Revenue Service the ability to reclassify intercompany debt as equity.

“They made clear they are doing this seriously,” ranking member Sander Levin (D-Mich.) told reporters as he emerged from the July 6 meeting. “They are meeting with people. They are taking into account all the concerns and they intend to proceed.”

However, one of the other top requests from lawmakers and taxpayers—to move slowly on the final rules—likely won't be heeded, Senate Finance Committee Chairman Orrin Hatch (R-Utah) said. “It's my impression is that they are going to go right ahead,” he told reporters.

Treasury is expected to release the final rules this year. The regulations include a retroactive effective date for transactions dating back to April 4, 2016.

No Need for Speed

“They said repeatedly that they are listening, but they also stated repeatedly that they are going to act swiftly on these regulations,” Ways and Means Chairman Kevin Brady (R-Texas) said. “Swiftness isn’t the quality we are looking for, it is accuracy and correct policy.”

The bipartisan, bicameral meeting comes after lawmakers from both parties have criticized a Treasury proposal under tax code Section 385 to curb transactions that move corporate income offshore. Members have said the rules (REG-108060-15), which address so-called earnings stripping, go way beyond stopping inversions and could adversely affect routine business transactions.

Brady said he would prefer a comprehensive cost-benefit analysis before Treasury moves forward with the regulations. Asked whether Treasury officials seemed open to changing the timeline for the regulations, Brady said “there didn’t seem to be an interest in that.”

Rep. Dave Reichert (R-Wash.) said the officials expressed a willingness to change the regulations to address concerns that S corporations could be forced to be structured as C corporations under the rules, because S corporations can only have one class of stock. If the government were to reclassify a debt instrument as an equity interest, a company could violate the S corporation rules.

Plan of Attack

Brady said before a closed-door meeting with Mark Mazur, Treasury's assistant secretary for tax policy, and Robert Stack, deputy assistant secretary for international tax affairs, that House Republicans continue to look at every option to slow the regulations.

“I’m not setting aside any option on attacking this. If there is a rush to put these in place this year with all the damage it does in local communities, we’re going to look at every option,” Brady said.

Brady previously said that he was open to pursuing the seldom-used Congressional Review Act (CRA) as a way to derail the regulations. Senate Republican tax staffers have also been studying the act and its potential use, especially if a Republican administration were to take over in January.

Brady said he didn't have any great expectations as a result of the meeting, but said he was hopeful “they will listen to a broad range of serious concerns.”

Poison Proposal

Along with lawmakers, industry groups have been pushing Treasury to narrow the scope of the regulations to apply only to companies engaging in inversions or earnings stripping. Treasury has been meeting with trade associations, including the National Association of Manufacturers and the Reinsurance Association of America, in recent weeks to discuss how the proposal would affect different sectors.

Judy McNamara, vice president of tax at Ecolab Inc., told reporters that companies are pressing Treasury to include an exclusion for cash-pooling transactions, a standardized documentation process and for the final rules to apply prospectively, rather than from the April 4, 2016, date in the proposed regulations. Ecolab is a member of NAM.

McNamara also wants the regulations to nix a rule that allows the government to look forward or backward three years to connect transactions. That should be reduced, to one or two years at the most, she said.

“The Treasury Department has burned down the entire house in its attempt to kill a rodent,” McNamara said. The best-case scenario would be for the government to abandon the project, but that probably isn't realistic, she said.

Scholarly Support

With Capitol Hill discussions ongoing, 16 tax law academics wrote to Treasury on July 6 urging that the Section 385 rules be finalized in their current form.

The rules are a “responsible and much-needed change” that will help protect the U.S. tax base, the academics, including senior Harvard Law School lecturer Stephen E. Shay, wrote.

Acknowledging concerns about administrative burden and potential impact on other areas of the tax law, the letter said it is up to Treasury to decide which claims of hardship have merit. However, it isn’t the government’s job to solve all the technical objections that might come up, it said.

With assistance from Aaron E. Lorenzo and Alison Bennett in Washington.

To contact the reporters on this story: Laura Davison in Washington at ldavison@bna.com and Kaustuv Basu in Washington at kbasu@bna.com

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

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