Trying to Ease Credit, IRS Eases Loan Regulations

The Internal Revenue Service has taken steps to help ease the credit crisis by allowing corporations to ramp up their use of tax-free loans from overseas subsidiaries.

The program, quietly announced by the I.R.S. late Friday, was devised at the behest of the Treasury Department, which oversees the agency.

It is intended to help ease the credit crisis by luring back into the United States economy a chunk of the estimated hundreds of billions of dollars kept overseas by American corporations through their subsidiaries in low-tax countries. That money could help combat a core problem of the credit crisis: the reluctance by banks to give companies the short-term loans needed for daily business.

In an unusually explicit step into the world of financial policy, the I.R.S. made clear that the credit crisis was behind the action.

“Recently, circumstances affecting liquidity have made it difficult for taxpayers to fund their operations,” the agency said in a notice made public on Monday. The I.R.S. said it was undertaking the program “to facilitate liquidity in the near term.”

Robert Willens, a leading tax and accounting analyst, said Monday that the program could result in “a tremendous amount of money to shore up corporations.” He added that “this is a substitute for commercial paper, and right now companies are having major difficulties rolling over commercial paper” — issuing short-term debt to finance their operations.

Overseas subsidiaries of big American companies, typically Fortune 500 companies, “may now be the lenders of last resort, with credit this tight,” Mr. Willens said. “They will now become a major source of funding, the ones to keep operations going day-to-day in this crisis.”

United States corporations that take loans from their subsidiaries typically pay a tax of 35 percent on the loans, making them akin to taxable distributions. The tax, which also applies to profits repatriated from foreign subsidiaries, is the main reason that many American companies have sent vast sums of money overseas in recent years.

Under an old I.R.S. program, American corporations could receive tax-free loans from foreign subsidiaries but had to repay them within 30 days. The short period meant, among other things, that the parent corporation had to be sure it could repay the money to its subsidiary in time to qualify for the tax break.

A Treasury spokesman said the agency had no data on how extensively the 30-day loan program was used.

Under the new program, parent companies now have 60 days to repay the loans. It also introduces a limit on the amount of time a corporation can spend in such transactions: 180 days each year. Corporations can take as many 60-day loans as they like from their foreign controlled subsidiaries over nearly half a year, a Treasury spokesman said.

But there is a hitch: the new program covers loans made only during the 2008 and 2009 tax years. It does not place any restrictions on how the tax-free loans may be used, however.

The program differs from a one-time tax holiday created in 2004 that allowed American corporations to bring back to the United States profits held in overseas subsidiaries at a greatly reduced tax rate.

More than 840 of the largest corporations repatriated $362 billion in profits, claiming tax deductions worth $265 billion from 2003 through 2006. The profits, part of the American Jobs Creation Act of 2004, were intended by Congress to increase job creation and investment, but some companies used the money to bankroll marketing and legal expenses. A few companies used the money to buy back shares or pay dividends, moves prohibited by the act.