Since the days of the Kennedy administration, U.S. multinational companies have been very successful in deferring taxation by shifting profits offshore. The Internal Revenue Code permits such deferral of taxation so long as you can legitimately take the position that a portion, or maybe even all, of your worldwide profits are earned outside of the U.S. So long as the cash remains outside of the U.S., the profits are not taxable in the U.S.
Marijuana use is on the rise. About 20 million people in the U.S. use marijuana, up from 15 million users ten years ago. Legal for recreational use in four states and legal for medical use in 25 states, eventually, it’s anticipated that pot will be legal everywhere. But, there’s only one problem. It remains illegal for U.S. federal purposes. Marijuana is listed as a Schedule I controlled substance under Federal law, the most tightly restricted category for illegal drugs.
Taxes are necessary. Nations cannot function without tax revenue. Tax systems throughout the world differ widely. Some countries, like the U.S., tax corporations to the hilt. After all, the U.S. is arguably the best place to do business, so why not make corporations pay a higher tax for the privilege of doing business here? Other countries maintain low tax systems in the interest of attracting businesses and jobs.
Online poker is taking off like wildfire. Real money games abound despite their questionable legality. Lots of real money poker sites are located offshore. So, if you’re a U.S. citizen and you fund an offshore poker site, are you maintaining a foreign bank account? Are you required to file a Foreign Bank and Financial Accounts Report (FBAR)? The IRS seems to think so.
Intercompany transactions can be tricky. When a parent company transfers funds to a subsidiary, a variety of questions pop up. Is it an equity contribution? A loan? A combination of the two? For tax purposes, the underlying facts supporting the equity vs. loan position generally prevail. The determination of whether an intercompany transfer is debt or equity can have significant ramifications. Can the subsidiary deduct interest payments? Are the upstream transfers subject to withholding taxes?
Internal Revenue Code Section 338 provides a unique opportunity to treat a stock deal as an asset deal for income tax purposes. Taxpayers generally have 8 ½ months after a stock acquisition to file a “338 election” with the IRS to accomplish this treatment. The election typically results in a “step-up” in the tax basis of the acquired assets for the buyer, allowing for greater depreciation and amortization deductions for years to come.
In existence on and off since 1981, the research tax credit continues to act as an economic stimulus, encouraging investment within the U.S. The credit expired 8 times and has been extended 15 times since its inception in 1981. Finally, with the passage of the Protecting Americans from Tax Hikes of 2015 (the 2015 PATH Act), the research tax credit became permanent. In addition to its permanency, the 2015 PATH Act allows eligible small businesses with gross receipts of $50 million or less to use the credit against the alternative minimum tax (AMT) liability, and smaller “start-up” businesses may use the credit towards the employer’s Social Security portion of the employer’s payroll tax (FICA) liability.
In February 2016, we discussed the tax accounting impact of contingent consideration agreements, otherwise known as earn-outs. It is increasingly common for deals to include earn-out clauses. For example, if the target company performs well, the buyer will pay an additional sum of money at some future time. Sometimes deal-makers get creative, however, causing complications and headaches for the tax advisors involved.
Stock options are commonly used to compensate employees and executives. U.S. GAAP requires that the value of the options must be amortized and recorded as an expense on the income statement over time. U.S. tax law generally disallows a tax deduction for this expense, and sometimes allows a tax deduction when the options are exercised. Whether an option is an incentive stock option (ISO) or a non-qualified stock option (NQSO) is important when determining the tax consequences of the exercise. The tax accounting for stock options is particularly complicated.
Acquisitions often involve contingent consideration agreements (aka earn-outs or claw-backs) which are typically designed to bridge the valuation gap between buyer and seller. U.S. Generally Accepted Accounting Principles (GAAP) usually requires contingent consideration assets and liabilities to be recorded at fair value on the acquisition date and to be revalued at each subsequent reporting period until the final settlement of the obligation. Changes in the fair value of such contingencies are typically recognized as increases or decreases to income for financial reporting purposes. As complicated as book accounting may be, the tax accounting for such contingencies is often more complicated.
In our blog from October 26, 2015 we discussed the Top 5 Tax Accounting Differences Between GAAP and IFRS. The Top 5 differences may be summarized as follows:
- Balance sheet classification (always noncurrent for IFRS);
- Share-based compensation (IFRS requires periodic adjustments due to stock price changes);
- FIN 48 (IFRS employs a less-mechanical approach);
- Tax allocation among continuing ops, discops and OCI (IFRS employs a less-mechanical approach); and
- Inter-company transactions (U.S. GAAP precludes deferred tax asset recognition derived through inter-company transactions).
We live in a competitive world. Companies compete with each other. Nations compete with each other. Governments compete with each other. In the wake of the economic recovery, governments around the world have been doing their best to attract investment. With U.S. corporate tax rates among the highest in the world, multinational companies are incented to move operations outside of the U.S. to places where taxes are lower (e.g. Europe). And, some European nations have been known to negotiate some lucrative “tax deals.” The largest companies tend to get the best deals. Apple, Pfizer, Starbucks, Amazon, Fiat Chrysler etc. have been known to negotiate some doozies with Ireland and Luxembourg, for example. These huge, multinational companies agree to move parts of their business, thus creating jobs, in certain countries in exchange for big tax breaks. It’s a win-win, in theory. Jobs are created, and the large multinationals save taxes.
With the U.S. economy experiencing a growth spurt, borrowing is on the rise. Interest rates remain low and debt covenants continue to be light. Lenders want security from their U.S. borrowers, and oftentimes the security is found overseas. At what point does this security result in an effective repatriation of foreign earnings, resulting in taxable income in the U.S.? Internal Revenue Code Section 956, enacted in 1962 and included within “subpart F,” was intended to curtail deferral of U.S. tax on earnings of domestically controlled foreign corporations (CFCs). The proposal was prompted in part by the rapidly rising use by U.S. businesses of subsidiaries incorporated in tax havens. With the enactment of Code Section 956, Congress sought to tax earnings invested in U.S. property on the grounds that the act of bringing such earnings back to the U.S. was “substantially the equivalent of a dividend” to a U.S. shareholder.
The International Financial Reporting Standards (IFRS) – an accounting standard used in most other countries – has several key differences from the standard used by the Generally Accepted Accounting Principles (GAAP) used in the United States. Many companies in the U.S. are now using both accounting systems. It is important for tax professionals to understand some of the key tax accounting differences between GAAP and IFRS.
Foreign tax credits are designed for fairness. If you’re conducting business in multiple countries, foreign tax credits provide relief from double taxation, such that the same profits are not taxed twice. For example, if you’re a US-based company conducting business outside of the United States, the profits earned outside of the US would typically be subject to foreign income tax. The IRS may also want to tax the profits, however.
Loss corporations which have had a recent change of ownership may need to be concerned about “continuity of business.” Internal Revenue Code Section 382 (“§ 382”) addresses the impact that ownership changes have on corporations that carry a Net Operating Loss (“NOL”). A corporation with a NOL is commonly called a “loss corporation.” If a loss corporation incurs an ownership change under § 382, the utilization of its NOL is limited.
Companies that report interim financial statements need to record an income tax expense or benefit on their quarterly Profit & Loss statement. For interim reporting purposes, such companies must calculate a tax expense or benefit. This is accomplished by projecting an effective tax rate for the entire year, which could be difficult at times. Corporate effective tax rates for U.S. corporations tend to hover around 40 percent. However, if a company’s projected income for the year is relatively low, or close to “break-even,” interesting results could materialize.