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How Better Returns on Short-Term Investments Are Impacting Arbitrage Rebate

    Client Alerts
  • June 08, 2023

A number of our clients have recently inquired as to their responsibilities with respect to arbitrage rebate for their tax-exempt borrowings. The dramatic increase in the return on short-term investments is raising the prospect of the need to make a rebate payment to the federal government, which has not been a practical concern in recent years given very low short-term rates and the fact that most issuers spend bond proceeds relatively quickly.

Under Section 148 of the Internal Revenue Code and the related Treasury regulations, an issuer of tax-exempt obligations is generally required to pay (i.e., rebate) to the federal government the difference between the yield on a tax-exempt borrowing and the blended investment yield earned on the proceeds of the borrowing. For example, if the yield on an issuer’s tax-exempt obligations is 3% and the issuer invests the proceeds of such borrowing at a blended rate of 4.5%, absent an exception to the arbitrage rebate rules, the issuer must pay the federal government the difference (i.e., the arbitrage).

In some instances it may be possible to avoid an arbitrage rebate payment by qualifying for an exception tied to when the proceeds are spent. Those exceptions are usually detailed in the tax certificate prepared in connection with the closing of a tax-exempt borrowing.

For more information, please contact any member of the Parker Poe Public Finance Group or your regular Parker Poe contact. You can subscribe to our latest articles and insights here.