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Tax-free cash repatriated...

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  • Tax-free cash repatriated...

    Oct. 6 (Bloomberg) -- The U.S. Treasury Department eased a rule to help U.S.-based multinational corporations borrow cash from their offshore subsidiaries without triggering taxes to help companies unable to borrow in credit markets.
    The Treasury and the Internal Revenue Service issued a notice late on Oct. 3 that doubles to 60 days the time foreign subsidiaries may lend money to their parent company without incurring a 35 percent tax penalty because ``circumstances affecting liquidity have made it difficult for taxpayers to fund their operations.''
    The move may provide relief for companies unable to issue commercial paper but that are reluctant to tap cash accumulated by their foreign affiliates, experts said. Companies hold cash abroad in part to defer paying U.S. taxes.
    ``Corporations have been eyeing their foreign subs as a source of funding and this represents a good first step to `open the spigots,''' said Robert Willens, who analyzes for investors how tax and accounting rules affect Wall Street.
    According to the notice, any money loaned must be repaid within 60 days to avoid tax consequences. Companies can use the technique only up to three times in 2008 or in 2009.
    U.S. tax law requires companies to pay taxes on their global income, although it allows deferral of that tax on some types of income earned overseas. Companies have deferred hundreds of billions of dollars using the exception and must pay corporate taxes of 35 percent after a credit for foreign taxes paid, when the money is repatriated to the United States.
    30-Day Window
    Long-standing rules give companies a 30-day window to borrow without having the transaction deemed as a taxable repatriation. The move to double that time period may help ease short-term cash needs for U.S. multinational companies.
    ``This is an obvious and important response to the freezing of credit markets and the difficulties companies are having with their commercial paper,'' said Carol Tello, a tax lawyer at Sutherland Asbill & Brennan LLP in Washington. ``The Treasury has found a way to help U.S. companies with their short-term financing needs that is highly significant.''
    The rule and the underlying law is different than a temporary tax holiday enacted in 2004 that allowed 843 companies to repatriate $312 billion stashed offshore at a discounted 5 percent rate because it's only a short-term benefit and can trigger the tax if the loan isn't repaid.