Bank lobbyists are scrambling to preserve a critical $2.2 trillion-a-day short-term funding market that would be disrupted under a provision in the Republican US tax overhaul that aims to crack down on tax-dodging by multinational corporations, banking industry sources said on Friday.
The provision contained in both the Senate and House of Representatives versions of the bill would hurt banks by upending the so-called repurchase agreement – or repo – market used by banks and investors for everyday funding needs.
The provision that banking lobbyists are taking aim at is intended to stamp out practices employed by multinational corporations to reduce US tax obligations by shifting money earned in the United States to less heavily taxed overseas affiliates. Reversing this “base erosion” among US tax-paying companies has been a top priority for Republican lawmakers.
Reuters reported last month that the provision had initially covered derivatives transactions, but such trades were later exempted in the bill passed by the Senate. That exemption does not, however, explicitly include repos or securities lending transactions. The version of the bill passed by the House did not exempt derivatives transactions.
Net profits on repo trades are already taxed. Under the Senate bill, they would continue to be taxed at the proposed 20 percent corporate income tax rate. But the intra-group payments on such deals would also be taxed at 11 percent in the Senate version and 10 percent in the House version. This would make repos uneconomical because the tax on the payments would be higher than the total profit on the deal.
*Finadium note: this goes contrary to SOFR planning and is unlikely to last.