August 7, 2017
The Honorable Steven Mnuchin
Secretary of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
RE: SIFMA Response to Notice 2017-38
Dear Secretary Mnuchin:
The Securities Industry and Financial Markets Association (SIFMA)1 appreciates the opportunity to provide comments with respect to Notice 2017-38 which lists significant tax regulations pursuant to Executive Order 13789. The last section of Notice 2017-38 invites comments with respect to the regulations listed.
We applaud the Treasury Department for listing the regulations under Section 385 (T.D. 9790) and Section 367 (T.D. 9803) in your initial report, as SIFMA recommended in our letter dated June 2nd, as well as the regulations under Section 987 (T.D. 9794), and we urge you to consider the actions recommended below to reduce the regulatory burden and complexity for taxpayers. In addition, we greatly appreciate Treasury’s recent announcement in Notice 2017-36, stating Treasury’s decision to delay the effective date for the documentation rules in Treas. Reg. Sec. 1.385-2 until January 1, 2019. This additional delay will ease the compliance burden, nevertheless SIFMA continues to believe these rules should be withdrawn or substantially modified for the reasons explained further below.
I. IRC Section 385 Regulations
Final Section 385 regulations (T.D. 9790) were published in the Federal Register on October 21, 2016. SIFMA filed a detailed comment letter on the impact of the Section 385 regulations on the financial services industry when the rules were in proposed form.2 While Treasury made numerous changes to the rules that we believe were necessary to avoid some of the severe impacts on our member firms and the economy, there are a number of recommendations that we would still urge Treasury to adopt.
Enacted in 1969, Section 385 authorizes the Treasury Department to issue regulations setting forth factors to be taken into consideration when distinguishing between debt and equity in particular factual circumstances. Prior to 2016, no such regulations were in effect.
In April 2016 Treasury proposed a broad set of regulations under Section 385 that would recharacterize related party debt as equity in a wide variety of circumstances, a principal purpose of which was to prevent tax inversions and other tax-motivated transactions. In reality, the impact extended well beyond such purpose to ordinary course intercompany loans and payables that are central to the effective management and operation of liquidity and capital in any global financial service institution. The October 21, 2016 final regulations significantly narrowed the proposed rules as they apply to financial institutions in the context of certain transactions, particularly through the exemption provided to members of a “regulated financial group,” but they retained the rule that recharacterizes related-party debt arrangements as equity if certain documentation requirements are not satisfied. No exemption or similar special consideration was given to the unique challenges and risks these rules would present to financial institutions.
Given that funding is the basic operating need of a financial institution, allowing it to serve its clients effectively, SIFMA members are impacted more severely than other industries. Our members must enter into a high volume of ordinary course intercompany funding transactions throughout their organizations to ensure that funding is continuously, rapidly and efficiently deployed to meet clients’ needs at all times. Large global financial institutions can engage in thousands of intercompany funding transactions as frequently as daily and in amounts in the billions of dollars among hundreds of affiliates in the ordinary course of business. Such funding transactions can include simple loans for liquidity, normal trade payables for shared support services, collateral postings for derivatives or other types of transactions that are germane to the conduct of a financial services business. Recharacterization can occur under the final regulations long after intercompany debt transactions occur, complicating merger transactions, creating book and tax accounting mismatches, and introducing new regulatory and operating capital concerns for financial service companies.
1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.
2 Letter from SIFMA to the Hon. Mark Mazur Regarding IRS REG-108060 (Proposed Regulations Under Section 385), July 6, 2016 (http://www.sifma.org/issues/item.aspx id=8589961304).