The U.S. Treasury Department's final version of rulesaimed at curbing corporate inversions eliminates the threat to cashmanagement tools used by corporate treasuries, such as cashpooling, that was posed by the former version of the rules.

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“In response to thoughtful feedback, Treasury is providing abroad exemption for cash pools and other loans that are short-termin both form and substance, and therefore do not pose a significantearnings stripping risk,” the Treasury said in its Oct. 13 announcement of the final version of the rules.

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The Treasury's rules were designed to discourage U.S. companiesthat have undergone inversions from using earnings stripping, inwhich the foreign parent of a U.S.-based company makes a loan tothe U.S. unit, which then deducts the interest payments it makes onthat loan on its taxes. The rules allow the Internal RevenueService to treat related-party debt as part equity and part debt,limiting companies' ability to deduct their interest payments.

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Prior to the Treasury's announcement of the exception in thefinal rules, corporate treasuries worried the rules could affect transactionsthat can occur in pooling, when a multinational company sweepsup cash from subsidiaries' bank accounts and may use the funds tosubsidize subsidiaries that need it. The changes Treasury made inthe final version of the rule soothed those concerns.

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“The new regulations are fairly clear that pooling ispermitted,” said Daniel Blumen, a partner with consulting companyTreasury Alliance Group LLC, although he argued that the concernsabout the proposed regulations had been overblown. “The newregulations that came out have been a little more explicit withguidanceon what you can do and some exclusions.”

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In addition to the exemption for cash pooling and short-termloans, Treasury said it added exceptions to the rules for “ordinarybusiness transactions,” such as payments to affiliated companies,and “ordinary course transactions,” such as buying stock to use inemployee compensation programs.

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Blumen said that companies should still be cautious aboutnotional pooling. (Physical pooling involves funds moving fromlower-level accounts to a master account, while in notionalpooling, the funds don't move but interest charges are offset.)

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The regulations say that companies have to have materialdocumentation about their operations and the documentation mustinclude “relevant legal rights and regulations,” he said.

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“What that truly means in our interpretation: You're going toneed cross-guarantees, you're going to need to have proof of loansand cash management arrangements, you're going to have todemonstrate things are on an arm's-length basis—all things thatdon't exist in many of today's notional pooling arrangements,”Blumen said.

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Given the requirements, “you should be looking at your notionalpool carefully,” he added. “We think the better approach is aphysical pool.”

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Blumen noted, though, that the situation in which a companytakes its cash pools in different currencies and notionally poolsthem would not pose a problem. “That kind of notional pool remainsa nonissue because it's all within the same company,” he said.

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Anthony Carfang, a managing director at consulting companyTreasury Strategies, said that the regulations don't provide “thatsolid yellow line that says notional pooling is in or is out.

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“Frankly, notional pooling has a number of shades of gray inthere, and so different banks are different, different companiesare different, different countries are different—which is why it'simpossible to come up with a tightly defined rule around this,”Carfang said.

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“Companies can look at this relief, but they still ought toconsult their own lawyers and tax attorneys to get a final reading,because this is still tricky stuff,” he added.

Documentation Required

The final rules still require documentation of intercompanyloans, something consultants say many companies don't currently doa good job of. But the Treasury eased the timeframe for thatrequirement.

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“The original documentation requirements were that thedocumentation be contemporaneous, which means every time you do anintercompany loan, you have to stop and document it,” Carfang said.“Now, under the new rules, you only have to have the documentationcomplete by the time you file your tax return, which gives youmonths and months to get it done.”

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Daniel Blumen, Treasury Alliance GroupBlumen, pictured atleft, described putting together the documentation as a“housekeeping exercise—making sure people who are in the pool canactually be in the pool, that interest rates are set correctly, andthat documentation is correct.”

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“You've got a year to clean up your act,” he added. Theeffective date for the documentation rules was pushed back to Jan.1, 2018, from Jan. 1, 2017.

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And for any companies that may be pushing the envelope in theiruse of cash pooling, “we think these guys have basically gotten thewarning that you've got a year to fix this,” Blumen said.

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In general, companies should be keeping records, ensuring theyhave documentation, and checking that none of their intercompanyloans has exceeded 90 days, he said.

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“Look at the capitalization structure of your foreign entities,”Blumen said. “If those foreign entities are capitalized through thepools, through loans, that's explicitly what the IRS is targeting.Sometimes bank borrowing may be better if the tenor is longer thanwhat's appropriate through a cash management arrangement.”

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Final but Temporary

Carfang cautioned that portions of the regulations, includingthe exemption of cash pooling, are temporary.

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“What Treasury did in effect was say that everything that wasn'tin our original proposal that we changed, like cash pooling, is notfinal and will sunset in three years unless specificallyreinstated,” he said. “So the relief on cash pooling will need tobe formalized sometime within the next three years or it goesaway.”

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Carfang said, though, that the results of the U.S. presidentialelection make that situation less of a concern.

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He noted that the corporate inversions and earnings strippingthe regulations were designed to curb are a response to the factthat corporate tax rates are lower in many other countries thanthey are in the U.S.

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“There's probably a good chance in the next couple of years thatthat will be alleviated,” he said. “In effect, the underlyingproblem that [IRS section] 385 was attempting to solve may goaway.

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“Even if it doesn't, it's highly likely that a new Treasury willbe far more sympathetic to the needs of corporate treasurers andfar more willing to listen to the private sector on matters likethese,” Carfang added. “I would guess that the relief will be madepermanent.”

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Susan Kelly

Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.