Proposed new regulation issued in April by the US Treasury Department and the Internal Revenue Service (IRS) has serious implications for many routine treasury activities within American corporations, claims Treasury Strategies.
The aim of the new regulation, known as the Section 385 rules, is an attempt by the Obama administration to clamp down on corporate inversions by US companies. The proposed rules would “prevent a foreign company (including a recent inverter) that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent US acquisition.”
An analysis by accounting group EY said that the proposed regulations would:
• Treat as stock certain related-party interests that otherwise would be treated as indebtedness for federal tax purposes
• Authorise the Commissioner of the IRS to treat certain related-party interests in a corporation as indebtedness in part and stock in part for federal tax purposes
• Establish extensive documentation requirements in order for certain related party interests in a corporation to be treated as indebtedness for federal tax purposes
There would be “far-reaching consequences for [US] corporations that issue debt instruments to related corporations and partnerships,” concluded EY.
Treasury Strategies – a division of Novantas, which provides advisory services and technology solutions for financial institutions – believes that the proposals extend beyond the intended aim of reducing the number of US corporate inversions and would affect many more businesses.
The company’s managing directors (MDs), Anthony Carfang and Cathryn Gregg, have now written to Secretary of the US Treasury Jacob (Jack) Lew setting out their concerns.
They focus particularly on the proposed treatment of certain interests in corporations as stock or indebtedness. “This could have sweeping implications for many routine treasury activities such as cash concentration, cash pooling, inter-company lending and in house banks [IHBs},” say the MDs, which includes their own proposals with the analysis.
“We believe the language of the rule extends well beyond the intent of the Department of the Treasury.” Carfang and Gregg also offer to testify at an upcoming hearing on the proposals, scheduled by Lew for July 14.
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