CHICAGO - The discussion in Washington D.C. about corporate inversions has implications for the municipal bond market, a Treasury Department official told bond lawyers meeting here.
Vicky Tsilas, an official in Treasury's office of tax policy, provided lawyers with updates about bond-related policies at the National Association of Bond Lawyers' annual Bond Attorneys' Workshop here.
An inversion is when a U.S. company buys a foreign company and then reincorporates in that company's country so that it can lower the amount it pays in taxes. Inversions are becoming increasingly popular, and have gained a lot of attention from Congress and the Obama administration.
Tsilas noted on Thursday that Senate Finance Committee Chairman Ron Wyden, D-Ore., said that inversions have been caused by a high U.S. corporate tax rate. When there are discussions about corporate tax rates, "it's not in a vacuum, because discussions of reforming corporate tax rates also do lead to discussions of reforming individual tax rates," Tsilas said. "And obviously, there's discussions about bonds."
In order to lower tax rates without losing revenue, Congress would have to make changes to tax preferences. This could include curbing the tax-exemption for governmental or other types of municipal bonds.
Tsilas also encouraged bond lawyers to make suggestions to an infrastructure finance working group established by President Obama. She echoed a comment that Kent Hiteshew, director of Treasury's state and local finance office, made earlier in the NABL conference.
Market participants' proposals could be for guidance changes in addition to legislation, Tsilas said. She mentioned letters from the National Association of Water Companies and others that ask Treasury to update remedial action rules so that tax-exempt bonds used to finance water facilities will not become taxable if a public-private partnership is used to finance upgrades to the facilities years later.
Additionally, Tsilas discussed the items on the Treasury and Internal Revenue Service 2014-2015 priority guidance plan.
The plan includes regulations on arbitrage investment restrictions and final regulations on rebate overpayment.
Kim Betterton, a partner at Ballard Spahr in Baltimore, asked if the fact that the plan didn't include "final" arbitrage regulations meant that there would likely be another round of proposed regulations in that area. Proposed arbitrage regulations released last year included a new definition of issue price that market participants believe is unworkable. Betterton said that the fear of those proposed rules becoming finalized in the current form keeps her up at night.
Tsilas did not say if there would be another round of proposed regulations but acknowledged that the language on the guidance plan was deliberate. The plan saying arbitrage "regulations" as opposed to "final regulations" reflects the fact that there are two sets of outstanding proposed regulations, issued in 2007 and 2013, that cover many topics. On the other hand, the proposed rebate overpayment regulations are very similar to an existing revenue procedure, Tsilas said.
Another item on the guidance plan is a project on updating guidance for when management contracts do not create private business use. If there is excessive private business use and private payments, governmental bonds could become private-activity bonds and possibly taxable and 501(c)(3) bonds could become taxable as well.
The management contract issue has been a particular concern recently in the health care sector because some arrangements encouraged by the Affordable Care Act involve collaboration between public or nonprofit hospitals and private health care entities.
But Tsilas said that Treasury is not just thinking about updated guidance on management contracts in the context of healthcare. She noted that the existing guidance is very broad and is applicable to a variety of areas.
The guidance plan also includes finalizing regulations on public approval requirements for private-activity bonds. The proposed regulations were released in 2008. James Polfer, head of the tax-exempt bond branch in the IRS chief counsel's office, said at the BAW on Friday that Treasury and the IRS hopes to release the final regulations soon.
"We recognize that it's important to the community," he said, adding that the market views the proposed regulations favorably.
The chief counsel's office recently released a private-letter ruling that Polfer said shows, along with the proposed rules, that the IRS is committed to a more liberal interpretation of the public-approval rules. The chief counsel's office has also been liberal in granting issuers more time to spend the proceeds of qualified school construction bonds and qualified zone academy bonds, he said.
Under federal tax law, 100% of the proceeds of those types of bonds have to be spent within three years unless the issuer gets an extension. The IRS is willing to grant extensions, Polfer said, "if we see that after issuance, there have been unforeseen circumstances that cause it to be extremely, problematically, even impossible, to spend the proceeds in the expenditure period, and also that we see that there's an expression of a commitment to spend those proceeds with due diligence."
