Last week, Haruhiko Kato, daimyo of clan Jas-Dec threatened to unleash an army of samurai warriors against the IRS.

Not really.

But Mr. Haruhiko, head of the Japan Securities Depository Center (JASDEC), did issue a February 28 letter to Commissioner Shulman, urging the Service to promptly issue guidance for the so-called Samurai bond market in the face of the looming expiration of the TEFRA “D” rules:

The repeal of the TEFRA D rules to take effect on March 18, 2012 would halt significant sources of Yen funding for U.S. issuers. As the central securities depository of Japan, we, JASDEC, are extremely concerned about the lack of guidance from the IRS at this point. Accordingly, we would like to request your immediate release of guidance regarding this matter.  In anticipation of such potential chaos in the financial markets, recently some major U.S. firms opted to issue Samurai bonds at less-than-satisfactory terms.

What exactly is the esteemed Haruhiko-sama talking about?

A Samurai Bond is a yen-dominated bond issued in Japan, available for purchase by non-Japanese residents.

The Tax Equity and Fiscal Responsibility Act (“TEFRA”) is a law dating back to 1982, meant to prevent U.S. investors from using bearer debt instruments to avoid U.S. taxes.  TEFRA imposes sanctions on issuers of bearer debt instruments unless certain measures are adopted to prevent purchases by U.S. investors.  To allow the issuance of bearer instruments to bona fide non-US investors, TEFRA does permit issuance outside the U.S. where the issuer undertakes “reasonable arrangements” to prevent such instruments from being sold to United States persons.

TEFRA D is a “safe harbor” measure that allows issuers to be treated as having made such “reasonable arrangements.”  U.S. issuers that comply with the TEFRA D safe harbor can therefore issue bearer bonds to non-U.S. investors free of U.S. withholding tax (under the portfolio interest exemption) without the need to collect withholding certificates from each individual investor. The U.S. issuer will also then be entitled to a tax deduction for the interest it pays on such qualified issuance.

Until March 18, that is.

Unless prompt action is taken, on that date, the TEFRA D rule will expire, and U.S. borrowers will not be able to treat interest payments as tax-deductible expenses, while investors will have U.S. tax withheld from any interest income.

But that’s only one reason Mr. Haruhiko is concerned.  The other is that U.S. issuers are presenting some stiff competition in the run up to the TEFRA D expiration.  In the last month, U.S. issuers rush-issued qualifying Samurai Bonds with yields that double those of competing Japanese corporate and government bonds.  JP Morgan and Goldman Sachs are just two such issuers looking to borrow before the March 18 deadline.

Or, in verse:

Samurai bond exemption to expire                                                                                                                                                                         Hurried issuers gobble yen with favorable returns                                                                                                                                             Service fails to honorably address.