Are Peruvian Chickens Cash?


The Tax Cuts and Jobs Act (TCJA) is plagued by a recurrent problem: Many parts of the law tax similar income or assets at different rates. That tendency has created an enormous mess with the tax treatment of pass-through businesses, where certain income from certain taxpayers enjoys a 20 percent individual income tax deduction while similar income from other taxpayers does not.

And then there are the Peruvian chickens.

To shift the tax treatment of US-based multinational firms from a worldwide system to territorial regime—and to raise some short-term revenue--the TCJA created a transition tax on accumulated earnings that these firms had not yet repatriated to the US. But the law created two different tax rates: 15.5 percent for cash and cash equivalents and 8 percent for non-cash assets. Which is which?

Here is what the law says:

  Cash position.--For purposes of this paragraph, the cash position of any specified foreign corporation is the sum of—

                            ``(i) cash held by such foreign corporation,

                            ``(ii) the net accounts receivable of such foreign corporation, plus

                            ``(iii) the fair market value of the following assets held by such corporation:

                                    ``(I) Personal property which is of a type that is actively traded and for which there is an established financial market.

                                    ``(II) Commercial paper, certificates of deposit, the securities of the Federal government and of any State or foreign government.

                                    ``(III) Any foreign currency.

                                    ``(IV) Any obligation with a term of less than one year.

                                    ``(V) Any asset which the Secretary identifies as being economically equivalent to any asset described in this subparagraph.

For months, high-priced tax lawyers have been trying to figure what is cash and what is not. For us non-lawyers, this seems simple enough. But we would be wrong. It may be a truism of tax law that if something walks like a duck and quacks like a duck, it is a duck. This apparently is not so clear when it comes to other fowl.

Getting the rules eggactly right

The other day, according to a report by the Wall Street Journal’s Richard Rubin (paywall), Deputy Assistant Secretary of the Treasury for International Tax Affairs  Chip Harter described his efforts to learn about business concerns with the TCJA. Harter's listening tour has resulted in some highly technical squawking, including, according to Rich, a question about “whether live chickens in Peru are equivalent to cash because liquid markets exist for them.”

It is easy to imagine a hard-working Treasury lawyer writing a memo explaining why those chickens are not just Rhode Island Reds but, also, cash equivalents subject to the higher tax rate. She’s working overtime to get the rule eggactly right.

Running afowl of the law  

And it is just as easy to imagine some US-based chicken importer trying to convince Treasury that those birds are a non-cash asset, and thus subject to the lower transition tax rate. You laugh, but that firm wants to minimize its tax liability without running afowl of the new tax law.

So the lawyers and their corporate firms are waiting for Treasury to hatch regulations describing what “cash and economically equivalent” mean—without, they hope, ruffling too many feathers.

Bad puns aside, there is a serious message in all this: Tax law that creates a split rate for different forms of income begs for trouble. Taxpayers will do whatever they can to recategorize income to take advantage of the lower rate. It is happening with pass-through businesses owners who are looking for ways to benefit from the 20 percent deduction. It’s been going on for years with hedge fund managers who have converted ordinary compensation into tax-preferred capital gains. And now it is happening with multinationals, whose lobbyists are working Treasury to get the best deal they can from the transition tax.      

Thus, we soon may get a definitive answer from Treasury to the age-old question: Why did the chicken cross the road? To create a less liquid market and thus become taxable at a lower rate.