“The new regulations are fairly clear that pooling is permitted,” said Daniel Blumen, a partner with consulting company Treasury Alliance Group LLC, although he argued that the concerns about the proposed regulations had been overblown. “The new regulations that came out have been a little more explicit with guidanceon what you can do and some exclusions.”

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

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

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

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

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

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

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

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

“Companies can look at this relief, but they still ought to consult 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 intercompany loans, something consultants say many companies don't currently do a good job of. But the Treasury eased the timeframe for that requirement.

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

Blumen, pictured at left, described putting together the documentation as a “housekeeping exercise—making sure people who are in the pool can actually be in the pool, that interest rates are set correctly, and that documentation is correct.”

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

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

In general, companies should be keeping records, ensuring they have documentation, and checking that none of their intercompany loans has exceeded 90 days, he said.

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

Final but Temporary

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

“What Treasury did in effect was say that everything that wasn't in our original proposal that we changed, like cash pooling, is not final and will sunset in three years unless specifically reinstated,” he said. “So the relief on cash pooling will need to be formalized sometime within the next three years or it goes away.”

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

He noted that the corporate inversions and earnings stripping the regulations were designed to curb are a response to the fact that corporate tax rates are lower in many other countries than they are in the U.S.

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

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