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Feeling the Pain: Treasury & Tax Prepare for 385 Regs

  • By Andrew Deichler
  • Published: 6/2/2016
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NEW YORK – It should come as no surprise that the Treasury Department’s controversial update to section 385 of the IRS tax code was on the minds of treasury professionals this week at New York Cash Exchange 2016. During a panel session Wednesday morning, practitioners weighed in on how the proposed regulations could impact intercompany loans and cash pooling structures.

Robert W. Campbell III, director of corporate accounting and reporting for Lydall Inc., explained that if his company has to unravel the cash pooling structures it has put in place, it is going to be “extremely painful.” His tax department is keeping a close eye on the situation and working with treasury to see what the proposed regulations could mean, region by region. “But I think there’s no way to get around how painful they could be,” he said.

Stevie Goida, CTP, senior manager of treasury for CRA International, explained that her organization’s tax department has also really taken the lead on the issue, but treasury is also heavily involved. “We’re in the early stages right now,” she said.
 
In CRA’s case, the regulations have added further urgency for treasury and tax to unwind balances from intercompany loans. In 2004, CRA acquired a business in the UK. Over the years, it loaned the UK company money in order to get it up and running, which resulted in a large long-term balance. “So we’re meeting with audit partners to see if we can unwind it and turn it into equity,” she said. “We tried to turn it into equity a few years ago, but the board turned it down. So I think with these new regulations, it’s making us look into it more.”

One of the biggest issues with the proposed regulations is how the IRS could look as far back as three years at an intercompany loan and determine that it is equity. Should that happen, a company would have to pay more taxes and restate its financial statements. That’s a problem, Goida noted, due to how much has changed. “There’s less documentation the further you go back, because now we’re in a different world with documenting procedures,” she said. “You have your ERP system, but that only takes you so far. With balances, you want the nitty-gritty to figure out why something happened or what business decision was made.”

Randy Rasmussen, vice president, global corporate controller, Kaseya, Luxembourg Holdings, SCA, said that his organization is likely going to restructure its intercompany transactions. “Right now, they’re running through intercompany payables and receivables, which are matched off together,” he said. “We’ll try to put that back into more of a loan structure.”

As noted in a letter sent to Treasury Secretary Jacob Lew by a number of advocacy groups and associations, companies are only just beginning to assess the ways in which the proposed regulations could impact their business operations and their U.S. and foreign tax positions. Campbell added that treasury groups will need to understand the rules a lot better than they currently do before they can fully form a new strategy. “With whatever the final regulation ends up being—if they’re going to close this door, then is another one going to open, and what are the options going forward?” he asked.
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