Company Raises Concerns With Proposed Debt-Equity Regs

Re: Proposed Regulations under Section 385 (Reg. 108060-15)

 

1) Cash Pooling Arrangements:

We are concerned about the applicability of the proposed regulations to daily cash pool positions of our foreign affiliates. This system exists to manage our business cash needs on a global basis. It allows Ecolab to provide funding to its global affiliates to continue day-to-day business activities. Ecolab's global cash pool system has nothing to do with the Tax function or Tax planning; it is a basic Treasury function that allows Ecolab to efficiently manage global cash. The proposed regulations appear to require documentation each time a participant draws on or deposits into the cash pool, which in the case of Ecolab, may occur multiple times per day per entity. Having to document the daily cash pool position of over 97 foreign affiliates on a monthly basis will require Ecolab to add 1-2 FTE and incur additional expense of $100,000-$200,000 in outside legal and finance fees on an annual basis. Alternatively, Ecolab would need to borrow from 3^rd parties which would lead to a significant increase in Ecolab's cost of capital. The applicability of Section 385 should specifically exempt cash pooling operations or alternatively, treat all 100 percent owned CFCs as one taxpayer under concepts similar to the US consolidated group rules. In addition, there needs to be an exemption provided for the documentation of intercompany trade payables done in the ordinary course of business.

2) Documentation burden:

As mentioned above, the documentation burden required on all intercompany loans will be time consuming and force companies to divert resources to meet the ongoing, monthly reporting requirements. The regulations call for documentation that includes a sum certain, creditors' rights for the lender and ongoing monitoring of the borrower's ability to pay. Clear standards or requirements need to be developed for taxpayers to follow including such items as the financial ratios which need to be monitored at borrowing entities as well as timing requirements (e.g., the monitoring must occur monthly, quarterly or annually). Other specific guidance in terms of minimum required elements in loan agreements also needs to be provided. Ecolab's suggestion is that taxpayers be allowed to collect documentation throughout the tax year and provide it to the IRS at the start of every audit cycle (and not be required to presumably time stamp documentation throughout the tax year). Please consider creating a standard IRS form for reporting new intercompany loans and payments on those loans. This may help to create some certainty on documentation requirements and ease IRS administration burden.

3) Prospects for Double Taxation through the loss of foreign tax credits:

It is challenging for Ecolab to avail itself administratively of the exception to avoid the creation of a tainted E & P pool (from the debt to equity recast) and pay out current year earnings prior to the conclusion of each year end (e.g., pay out all current year earnings for 2016 before December 31, 2016). It's not possible to accurately estimate current year earnings and pay out a dividend before the end of the tax year as significant E & P adjustments are made annually and the actual earnings are only forecasted and estimated through December. This will very likely lead to conservative estimates of current year earnings and may result in a layer of annual earnings being added to Ecolab's unremitted foreign earnings. Reducing the amount of annual dividends back to the U.S. appears to be the opposite of what Treasury intends with respect to these regulations. Further, certain jurisdictions (e.g., Switzerland) will not permit current year earnings to be distributed until the annual accounts are filed in the subsequent year. A possible solution to this problem would be to allow taxpayers to remit current year earnings on a one-year lag basis, giving taxpayers additional time to accurately compute its amount of prior year earnings.

Ecolab is concerned that if it is unable to comply with the 385 Regulations, it will lose access to foreign tax credits due to the recast of intercompany loans into equity and be forced to leave earnings offshore that it would otherwise preferred to have repatriated to the U.S.

Sincerely,

 

 

Judy M McNamara

 

V.P. Taxes and Chief Tax Officer

 

Ecolab Inc.

 

St. Paul, MN