On November 2, 2017, the Reductions Act and the ] "A was introduced to the House of Representatives. This law has immediate and far – reaching implications for tax – exempt finance .
Among others, the Act respecting tax cuts and jobs:
Repeal the power to issue "qualifying private business bonds" after December 31, 2017. These bonds generally include all tax-exempt bonds that are not "government bonds" and include tax – exempt bonds issued in favor of 501 (c) (3) organizations and many other types of tax – exempt bonds.
Repeal the power to issue prepayment obligations after December 31, 2017. The repeal applies to early repayment of government bonds as well as bonds issued in favor of 501 (c) (3) organisms.
Repeal the power to issue tax – exempt bonds for professional sports stadiums after November 2, 2017.
Repeal the power to issue "tax credit obligations" after December 31, 2017. This repeal relates to a much more limited type of special bonds benefiting from the tax benefit.
Summary of key points
The legislation will not affect "governmental" obligations issued to state and local governments, with the exception of early repayment of bonds and bonds issued for professional sports stadiums. .
Some categories of tax-exempt bonds are more at risk of repeal or restriction than others. The proposed legislation indicates that the categories most likely to be repealed or restricted are: all classes of tax – exempt bonds issued to borrowers other than governments of the United States. States or local (ie "qualified private obligations"); advance repay the bonds; and tax – exempt bonds for professional sports stadiums. It is important to note, however, that qualifying private bonds include a wide range of different types of tax-exempt bonds for different purposes, and that the power to issue certain types of tax-exempt bonds may be different. Exempt qualifying private bonds could be at greater risk than others.
A "market race" is a distinct possibility. The proposed repeal of the power to issue qualifying exempt tax-exempt corporate bonds and callable bonds could result in a significant increase in the volume of tax-exempt bonds for these purposes. before the end of 2017.
The "grandfather" of the bonds issued before the change of the tax law. The tax-exempt status of bonds issued prior to the relevant effective dates would not be affected by the proposed legislation.
The transition rules for current bond repayments issued prior to the effective dates will be of crucial importance and are much less certain than in the past. The proposed Tax and Employment Tax Act does not contain any "transitional rule" that allows the repayment of qualifying private bonds issued before the effective date. If adopted legislation contains such transition rules will be of critical importance to many borrowers. In the past, Congress has allowed in many, but not all, cases to enact new restrictions on tax-exempt bonds, tax-exempt refunds of bonds "issued" prior to the date of issuance. 39, entry into force. For a number of reasons, the transition rules for paying short-term tax-exempt bonds are much less certain than in the past.
Some types of tax-exempt financing structures are exposed to risks of tax law changes that are not readily apparent. Types of financing structures that may have "hidden" tax changes include "direct purchases" by banks, tax – exempt commercial paper and interest – free, discounted loans. ;tax.
Issuers and borrowers should consider separately the risks of outstanding bonds and the risks associated with future financing plans. The risks for outstanding bonds are not the same as the risks for future financing plans. The separate evaluation of these risks can help to target a plan of action.
It may be prudent for issuers to evaluate future financing plans and consider a plan of action to speed up the timing of certain financings.
It may be prudent for issuers and borrowers to evaluate and take steps to manage the tax risk of their outstanding obligations.
It may be prudent for issuers and borrowers to begin evaluating capital raising tools that would replace tax-exempt financing. It is likely that various capital raising structures will be added to the issuance of taxable bonds to replace tax – exempt financing if certain types of tax – exempt financing are repealed. or further restricted.
A description of the relevant provisions of the Tax Reductions and Jobs Act
The Tax Reduction and Employment Act was introduced on November 2, 2017 in the US House of Representatives by the Chair of the Committee on Ways and Means and Political Affairs, Mr. Brady. Although the promulgation of an important law on tax reform is of course uncertain, this bill has very important implications for tax-exempt financing. Developments over the next few weeks, including in particular the planned introduction of tax reform legislation in the US Senate, will help to better understand the risks presented by the introduction of the law on tax cuts. 39, numbers and jobs.
Repeal of the power to issue "eligible private activity bonds". The proposed legislation would repeal the power to issue all "qualifying private activity bonds" after December 31, 2017. "Eligible private business obligations" include many different types of exempt bonds. that are issued to borrowers other than state and local governments. Exempt tax obligations to be repealed include all "exempt facility bonds" under section 142 of the Internal Revenue Code (the "Code") (bonds for airports, wharves and wharfs and multi-family dwellings when funded projects are treated as private funds). ), "Single Family Housing" Bonds Issued Pursuant to Section 143 of the Code, Restricted Issue Bonds Issued Pursuant to Section 144 of the Code and Obligations 501 (c) (3) ) issued pursuant to section 145 of the Code (such as bonds issued to hospitals and non-profit universities). The repeal does not apply to traditional "government" bonds, which generally do not finance projects treated as private, with the exception of early repayments of bonds and debentures. obligations for professional sports stadiums. Some types of "government" tax-exempt bonds are issued for the benefit of individuals, but are not technically treated as "private bonds" (for example, some general obligation obligations used to grant subsidies to private persons); the power to issue such types of obligations would not be repealed.
The bill would introduce a number of amendments to the Code that would seem to purport to purge references and provisions relating to "eligible private activity obligations".
Repeal of power to issue "early redemption of bonds". The bill would repeal the power to issue all callable bonds after December 31, 2017. Callable bonds are bonds issued more than 90 days prior to repayment. the bonds are actually retired. This repeal would apply to early repayment of "government" bonds as well as early repayment of "qualified 501 (c) (3) bonds". This is the provision of the Act on tax cuts and jobs that would bring the most harm to tax exempt issuers. government bonds.
Repeal of power to issue bonds for professional sports stadiums. The bill would repeal the power to issue tax-exempt bonds to fund or refinance capital expenditures of an institution that, for at least five days during a calendar year , serves as a stadium or arena for professional sporting exhibitions, games or. The repeal would apply immediately to bonds issued after November 2, 2017. Although this repeal would only apply to the obligations that finance professional sports stadiums, the ban is written in a strict manner. For example, the ban does not provide for any "de minimis" relief, so it seems that a bond issue would not be exempt from tax if even a dollar is spent for a professional sports stadium. In addition, because of the proposed immediate effective date, the proposed prohibition may immediately require a special examination of tax-exempt bonds that have not yet been issued. Bonds issued after November 2, 2017 for professional sports stadiums may require, at a minimum, special investor disclosures.
Repeal of the authorization to issue tax credit obligations. The bill would repeal the power to issue tax credit obligations after December 31, 2017. Although many types of tax credit obligations have been allowed under An earlier law, the Code currently only allows for a relatively small number of tax credit obligations. . For example, the power to issue Qualified Area Academy Bonds would be repealed. As a result, this provision has much less significant and far – reaching effects than the provisions on tax – exempt bonds.
Exempt tax bond markets could be significantly disrupted long before the enactment of tax legislation
In the risk assessment presented by the federal tax reform, a particularly important point is that issuers and borrowers could be significantly affected by the credible possibility of specific tax legislation well before the promulgation. Over the years, members of Congress have repeatedly introduced legislation providing for immediate effective dates that would limit the power to issue various types of exempt obligations of any kind. tax. For example, in June 1996, Senator Moynihan introduced the Law on the issuance of scam bonds, whose effective date is immediate, which would have prohibited the Issuance of tax-exempt bonds for sport stadiums. Because investors generally require a high degree of tax security, the introduction of this type of legislation could have the immediate effect of restricting the issuance of certain types of tax-exempt bonds, especially if the legislation is presented by a prominent member of Congress. or if legislation is presented with bipartisan support.
Similarly, the mere introduction of a credible law restricting the issuance of tax-exempt bonds, such as the Law on Tax Cuts and Jobs, could lead to a "race to the market" even though the law is never passed.
For these reasons, there is a significant risk that issuers and borrowers will be immediately affected by the Act on Tax Reductions and Removals and the prospect of tax reform.
An earlier statute may indicate an assessment of the likelihood of a change in tax law unfavorable to tax-exempt financing
It is obviously not possible to predict with certainty the exact form that the tax legislation will take, or even if a fundamental law of tax reform will be promulgated in the near future. However, a risk assessment of the Tax and Employment Reduction Act can be based on the history of legislation and previous legislative proposals. At the very least, it is reasonable to expect the drafters of any final law to at least take into account the effectiveness of previous laws.
In general, the history of federal tax legislation regarding tax-exempt bonds since 1968 has placed increasing limits on the issuance of tax-exempt bonds. , including in particular the permitted uses of the product of tax-exempt bonds.
A general historical trend has been the imposition of increasing limits to the issuance of tax-exempt bonds for beneficiaries other than state and local governments. More specifically, in 1968, 1982, 1984 and 1986, by imposing restrictions on the issuance of these obligations (now called "qualified private obligations"), in particular by limiting the types of eligible projects and, in most cases, to impose limits on the volume of these bonds, and in 1986 Congress imposed restrictions on the early repayment of bonds.
As a result, the unfavorable provisions for eligible private business obligations and bonds repayable in advance are consistent with a long history of real changes to tax law and proposed legislation. For example, at a Ways and Means Committee hearing on exempt bonds on March 19, 2013, the Republican and Democrat members of the Committee raised particular questions about the political justifications for the power of 39, issue qualifying private bonds exempt from tax. Thus, the history of changes to the tax legislation and previous bills lead to an objective assessment that the power to issue eligible private bonds exempt from tax and early redeemable bonds risk strong to be repealed.
Risk Assessment for Different Categories of Tax-exempt Bonds
According to the proposed provisions of the Act on tax cuts and jobs and the history of prior statutes, it is clear that certain types of bonds exempt from taxation are taxable. Taxes are more likely to be repealed or restricted than others. bonds may be at risk.
As we have seen above, the Act respecting tax cuts and employment would repeal the power to issue eligible private activity bonds, prepayable bonds. and obligations of professional sports stadiums; therefore, the power to issue these types of tax-exempt bonds is clearly under threat.
It is important to note, however, that "eligible private business obligations" include a large number of different types of tax-exempt bonds that can be issued for different purposes. It is quite possible that the promulgated legislation will repeal the power to issue certain types, but not all, of qualified private activity obligations.
For example, one could reasonably assume that private-sector bonds issued for the purpose of financing public-owned public infrastructure might be less likely to be repealed than other types of eligible private bonds. For example, many tax-exempt bonds issued for state-owned airports and wharves are issued as eligible private activity bonds. The political arguments that it is appropriate to subsidize borrowing for this type of public infrastructure can be particularly convincing.
On the other hand, a number of provisions of the Tax and Employment Reduction Act suggest that the power to issue eligible 501 (c) (3) bonds may be more at risk. One of the themes of this bill seems to be the desire to adopt tighter rules for 501 (c) (3) organizations in order to increase federal revenues. For example, the Jobs and Tax Reduction Act would impose a new excise tax on some investment income from private colleges and universities. In this regard, there seems to be no reason to assume that 501 (c) (3) organizations will necessarily benefit from favorable treatment in the laws enacted.
Type of bond issue
The greatest risk
New government bonds
Current repayment of government bonds
All prepayment obligations
Government Bonds and 501 (c) (3)
New private monetary bonds for state-owned infrastructure
Airports, water systems, wharves and wharves owned by the state but privately operated
Private Activity Bonds for Organizations 501 (c) (3)
Non-profit hospital, educational and cultural institutions
Private activity bonds for projects not owned by the government
Multi-family housing, low emission obligations for manufacturing, solid waste disposal
Private activity bonds to make loans to the public
Single-family housing, housing for veterans and student loan bonds
Acquired Rights for Exempt Tax Obligations in Circulation
The provisions of the Act on tax cuts and jobs would not have a negative impact on the tax-exempt status of tax-exempt bonds issued before the relevant effective date of the repeal. This approach is in line with previous legislation.
In most previous legislation, Congress has been careful to avoid the retroactive imposition of limitations on tax-exempt bonds, largely to avoid disruption of financial markets. The "grandfathering" model of outstanding bonds has generally been to provide that the new restrictions only apply to bonds issued after a date of entry into force. For example, this model was followed in the provisions relating to the date of entry into force of the 1986 Tax Reform Act.
This "grandfathered" approach has the weight of history and fairness for financial markets, but it must be recognized that it has a considerable cost to the US Treasury. United. According to this approach, the tax expenditure of tax-exempt bonds has a long "tail". Indeed, many tax-exempt bonds for funded purposes that were banned decades ago continue to be in circulation. Even though the repeal of the power to issue certain types of tax – exempt bonds is promulgated in a new law, tax – exempt bonds issued prior to the date of issuance. Relevant entry into force may also continue to be in circulation for decades.
This large "limit" of expenses related to tax-exempt bonds probably means that the provisions relating to the date of entry into force will be the subject of close scrutiny in a context where the reduction of tax expenditures is paramount. In light of the historical approach of Congress, the retroactive legislative repeal seems to remain improbable, but this favorable approach is not absolutely certain.
Acquired rights on current refunds of outstanding tax-exempt bonds?
The Tax and Employment Reductions Act contains no "transition rule" that would allow for the current refund of tax-exempt bonds issued before the effective date. We expect such transition rules to be a particularly important issue for the public finance sector as legislation progresses.
A related, but different, issue of the "grandfathering" clause of bonds issued prior to new legislation is whether, or how, the refinancings of these "grandfathered" obligations may continue to benefit acquired rights. The Cuts and Jobs Act and the previous legislation lead to the conclusion that there is considerable risk that the final legislation does not necessarily result in "earlier" refinancing granted after the date of entry into force. force of the new legislation.
Due to the tax expenditure related to the tax-exempt bond, the "grandfathering" approach to refunds is expected to have a significant impact on revenues and would likely attract The authors of the legislation.
Earlier legislation restricting tax-exempt bonds has often provided grandfathering for subsequent refinancing, but the congressional approach has been inconsistent and staggered. Perhaps more particularly, the 1986 Tax Reform Act contained detailed transition rules that allowed for acquired rights of refund. Indeed, such transition rules remain relevant on the municipal market, even 31 years later, since many types of tax-exempt bonds prohibited in 1986 (for example, for private control pollution and sports facilities) continue to be reimbursed obligations excluded.
However, not all new legislation has included favorable transition rules. Specifically, the American Recovery and Reinvestment Act of 2009 allowed the issuance of Build America Bonds in 2009 and 2010, but does not allow the issuance of Build America bonds.
In the past, many tax exempt bond issuers and borrowers have drawn their conclusion from the argument that Congress is likely to be favorably disposed to allow repayment "tax-exempt" obligations, because such treatment was considered "win-win situation." In other words, if an ongoing refund reduces the interest cost to the borrower, the amount of revenue that the federal government could lose in income tax could also be reduced.
However, a closer look at this "win / win" argument casts doubt on the question of whether it will continue to prevail for exempt bond issuers of any kind. tax. A more refined analysis of the effects on federal government revenues of "grandfathering" of current refunds could be quite complex. the important point, however, is that it is entirely possible for Congress to consider that such a grandfathering clause for refunds will result in significant additional federal spending.
Therefore, the risk of losing the ability to repay tax-exempt bonds outstanding in the future should be considered one of the most important considerations for issuers and borrowers .
Although the transition rules for tax-exempt refinancing are of great practical importance for issuers and borrowers (and for federal tax expenditures), transition rules have generally been treated after the fact. in previous tax legislation. As a result, the assessment of this risk will require a particularly thorough review of the legislation as it develops.
Reimbursement and Reissue Risk Assessment
The real possibility that Congress will prospectively revoke the power to issue certain types of tax-exempt bonds and does not provide for transitional rules for exempt refinances of outstanding bonds makes it particularly important the assessment of the risk related to the date of effect.
Some of these risks are more obvious than others. For example, if the adopted legislation does not contain any transitional rules for refunds, the "reissue" issues will become significantly more important. Reissue issues are generally raised for "multimodal" tax exempt bonds that allow conversions at different interest rates. In certain situations, the conversion of tax-exempt bonds into a new interest rate after the effective date of the repeal could result in the loss of the tax status. 39, tax exemption. Specific reissue issues were raised with respect to "direct purchase" obligations. Accordingly, a reasonable approach might be to consider whether tax-exempt bonds held by "direct purchasers" entail particular reissue risks.
Special Risks for "draw-down" Obligations, Commercial Paper and Similar Tax-Exempt Financing Structures
The relevant effective dates of the Tax and Employment Reduction Act are based on the timing of the issuance of "bonds". This is in line with previous legislation regarding tax-exempt bonds, but presents particular risks for open-ended bonds, commercial paper and similar exempt financing structures.
The IRS has issued guidelines that generally treat an "obligation" as it is issued when the money is actually paid for the obligation. This directive also distinguishes between the date of issuance of a "bond" and the date of issuance of an "issue" of bonds. For example, consider a tax-exempt "draw-down" financing that allows an issuer to draw $ 100 million of tax-exempt bonds over a two-year period; the issuer collects the first $ 10 million on December 1, 2017 and expects to draw the balance of $ 190 million after December 31, 2017. Currently, only the $ 10 million actually withdrawn in 2017 would be treated as «émis» en 2017. Le reste serait sujet à tout changement de loi survenu après 2017.
Cela signifie que les obligations à tirage échu, les effets de commerce et les obligations analogues exonérées d'impôt sont assujetties à des risques de changement de droit particuliers qui peuvent ne pas être immédiatement évidents.
Stratégies et limites «Rush to Market»
La dernière promulgation de la réforme fondamentale (c'est-à-dire la promulgation de la Loi de 1986 sur la réforme fiscale) a été immédiatement précédée d'une émission énorme d'obligations exonérées d'impôt. Cette «ruée vers le marché» comprenait l'émission d'un volume élevé d'obligations de financement regroupées et d'obligations émises plus tôt que d'habitude avant la date d'entrée en vigueur de nouvelles règles restrictives. L'IRS a contesté le caractère abusif d'un nombre limité de ces obligations «Rush to Market», ce qui souligne la nécessité d'une structuration et d'un examen minutieux dans de telles circonstances. Par exemple, dans une décision historique d'un tribunal, l'IRS a affirmé avec succès que les obligations de logement multifamilial émises par la Housing Authority du comté de Riverside n'étaient pas traitées comme il se doit avant la date d'entrée en vigueur pertinente. La grande majorité de ces émissions obligataires n'ont cependant pas été contestées.
L'imposition de nouvelles règles restrictives dans la Loi sur les réductions d'effectifs et les emplois pourrait entraîner une ruée similaire vers le marché.
En raison des changements apportés à la législation fiscale depuis 1986, bon nombre des stratégies et des méthodes utilisées en 1985 ne seront plus disponibles. Dans la mesure où un émetteur ou un emprunteur peut chercher à émettre des obligations plus tôt que d'habitude avant la date d'entrée en vigueur de la nouvelle loi, les limites de «l'obligation de couverture» de l'alinéa 149g) du Code seront un facteur important. Bien qu'un certain nombre de dispositions de la réglementation fiscale limitent l'émission anticipée d'obligations exonérées d'impôt, la restriction la plus importante est énoncée dans les règles sur les obligations de couverture. Ces règles exigent que, dans tous les cas, un émetteur doive raisonnablement s'attendre à ce qu'il dépense le «produit dépensable» de l'émission d'obligations au cours de certaines périodes. L'une des façons de respecter les règles relatives aux «hedge bonds» est de prévoir que l'émetteur dépensera au moins 85% du produit dépensé dans les trois ans suivant la date d'émission et que l'émetteur n'investit pas plus de 50% du produit dans un investissement ayant un rendement substantiellement garanti pour quatre ans ou plus. L'émetteur peut aussi raisonnablement s'attendre à ce que le produit soit dépensé au plus tard à l'échéance suivante:
Exigences de "lien de couverture"
Période après la date de délivrance
Besoins raisonnables en dépenses prévues
Pour les émetteurs qui cherchent à maximiser l'émission d'obligations avant une date restrictive, le calendrier ci-dessus établit les limites externes, et on peut s'attendre à ce qu'il soit un facteur important dans toute situation de «course au marché». À des fins de planification, il peut être prudent que les émetteurs évaluent le nombre de projets pouvant être financés dans ces délais.
Les obligations de financement groupées peuvent également constituer une stratégie importante pour émettre des obligations avant la date d'entrée en vigueur de nouvelles règles restrictives. Cette stratégie sera limitée par les restrictions sur les "obligations de financement groupées" énoncées à l'article 149 (f) du Code, mais pourrait néanmoins être viable dans certaines circonstances.
Exigences relatives aux «obligations de financement groupées»
Période après la date de délivrance
Exigences relatives à l'exigence d'un remboursement anticipé raisonnable / base de remboursement pour certaines questions
Les risques pour les obligations en circulation et les futures obligations ne sont pas nécessairement les mêmes et doivent être considérés séparément
Tout comme les risques fiscaux pour les émetteurs sont différents des risques fiscaux pour les porteurs, les risques pour les obligations exonérées d'impôt en circulation sont différents des risques pour les financements futurs exonérés d'impôt. Par exemple, comme indiqué plus haut, si le Congrès annule le pouvoir d'émettre des obligations exonérées d'impôt après la promulgation de la nouvelle législation, un émetteur pourrait bénéficier d'une émission obligataire en cours, en particulier si les obligations en circulation taux d'intérêt variables. Si le volume des obligations exonérées d'impôt était limité à l'avenir, il est raisonnable de supposer que le prix des obligations exonérées d'impôt restantes sur le marché en bénéficierait. Une telle législation, cependant, désavantagerait manifestement les émetteurs pour de futurs financements.
Pour ces raisons, la meilleure approche pour évaluer les effets possibles de la réforme fiscale consiste à examiner séparément les effets possibles sur les émissions d'obligations en circulation et les futurs plans de financement.
La cotation actuelle des obligations exonérées d'impôt n'est pas nécessairement un bon indicateur des risques pour les émetteurs
Le risque de réforme fiscale défavorable aux émetteurs d'obligations exonérées d'impôt et aux emprunteurs sera-t-il reflété sur les marchés obligataires? Une grande partie de la réponse à cette question est que les risques pour les détenteurs d'obligations exonérées d'impôt en circulation ne sont pas les mêmes que les risques pour les émetteurs et les emprunteurs d'obligations exonérées d'impôt. De plus, l'analyse de la façon dont les différentes modifications proposées au Code toucheraient les porteurs d'obligations exonérées d'impôt en circulation est complexe, car certaines modifications pourraient être favorables, et d'autres défavorables, aux porteurs d'obligations exonérées d'impôt en circulation.
Dans l'exemple le plus simple, supposons que le Congrès abroge le pouvoir d'émettre certains types d'obligations exonérées d'impôt après la date de promulgation de la nouvelle loi, mais "grand-père" le statut exonéré d'intérêt sur les obligations émises avant la date de promulgation. Ce changement serait manifestement défavorable aux émetteurs et aux emprunteurs d'obligations exonérées d'impôt, mais serait probablement favorable aux porteurs d'obligations exonérées d'impôt en circulation, du moins en ce qui concerne ce changement pris isolément.
L'analyse de la façon dont les modifications de la législation fiscale peuvent affecter les détenteurs d'obligations exonérées d'impôt est nécessairement complexe et nécessite une prise en compte des effets des changements de taux d'imposition, des effets sur l'offre d'obligations exonérées la mesure dans laquelle d'autres investissements bénéficiant d'avantages fiscaux sont autorisés, ainsi que d'autres facteurs. L'important est que nombre de ces facteurs ne sont pas directement pertinents pour évaluer les risques que le pouvoir d'émettre des obligations exonérées d'impôt soit annulé ou restreint. En raison de ces facteurs complexes, les taux d'intérêt du marché peuvent ne pas fournir d'informations significatives sur les risques d'une abrogation future.
Effect on Tax-Exempt Financing of Other Tax Law Changes
The Tax Cuts and Jobs Act would make a number of other changes to the Code that would not expressly refer to tax-exempt bonds, but which could have a fundamental effect on certain types of tax-exempt financing. For example, the Tax Cuts and Jobs Act would reduce the maximum federal corporate income tax rate from 35% to 20%. Among other things, this reduction might have the effect of significantly reducing the role of banks and other financial institutions and direct purchasers of tax-exempt bonds, because such purchasers would receive a lesser tax benefit.
Such a rate reduction would also trigger interest rate increases for many issuers and borrowers of “direct purchase” bonds, because many “direct purchase” bonds include provisions providing for an increase in interest rate if the tax benefit to the holder is reduced.
Anticipating Capital Raising Structures that May Replace Tax-Exempt Financing – Not Just Taxable Bonds
A final point is that, if the authority to issue certain types of tax-exempt bonds is repealed, taxable bonds may not be the only replacement financing vehicle. Particularly for 501(c)(3) organizations, the future unavailability of tax-exempt financing likely will lead to a reconsideration of a number of different types of possible financing structures, including possible greater use of joint ventures and similar structures. One view is that the use of such structures may have been impeded in the past because of the relative benefits of tax-exempt financing.