Bank lobbyists in fresh push on U.S. tax bill 'repo' provision - sources

By Michelle Price

WASHINGTON (Reuters) - 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 U.S. 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 House and Senate this week voted to begin talks to iron out the differences in their rival tax bills, giving lobbyists a last window of opportunity to advocate to lawmakers for changes to the final text ahead of a self-imposed Republican Dec. 22 deadline.

Wall Street is seen as one of the major winners in the Republican effort, backed by President Donald Trump, to rework the U.S. tax code.

The provision that banking lobbyists are taking aim at is intended to stamp out practices employed by multinational corporations to reduce U.S. tax obligations by shifting money earned in the United States to less heavily taxed overseas affiliates. Reversing this "base erosion" among U.S. tax-paying companies has been a top priority for Republican lawmakers.

The bill passed by the Senate aimed to do this by imposing a tax of up to 10 percent on payments made by a U.S. company to its related foreign company. For banks and securities dealers, the figure would be 11 percent.

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.

Bank lobbyists are particularly concerned about the implications of the tax for the repo market because it is a critical source of bank funding, two industry sources told Reuters. It is also used by investors and companies as a way to invest their spare cash.

A repo deal involves one party selling assets, such as a portfolio of bonds, in return for cash with a promise to repurchase the assets in future, typically the following business day. Repos require global banks to make trades and payments between their U.S. and overseas entities to help manage their risk exposure.

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.

Bank lobbyists hope the current House-Senate negotiations will offer another opportunity for them to push lawmakers for an explicit exemption for repos and securities lending deals, the industry sources said.

Although the House bill's base erosion language is more damaging for banks, lobbyists are focusing on the Senate version, which they believe is most likely to be included in the final bill that would be put to a vote in the Republican-led Congress before going to Trump to sign into law.

(Reporting by Michelle Price; Editing by Will Dunham)