Hot topics in internal
restructuring transactions
John Simon, Ernst & Young LLP
Brian Reed, Ernst & Young LLP
Your presenters
John Simon:
► Partner, Transaction Tax
► Email: jfsimon@ey.com
► Phone: +1 404 817 5265
Brian Reed:
► Senior Manager, Transaction Tax
► Email: brian.reed@ey.com
► Phone: +1 202 327 7889
Page 2
Hot topics in internal restructuring transactions
Disclaimer
This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not
provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts
and circumstances.
These slides are for educational purposes only and are not intended, and should not be relied upon, as
accounting advice.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young
Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member
firm of Ernst & Young Global Limited located in the US.
This presentation is © 2015 Ernst & Young LLP. All rights reserved. No part of this document may be
reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical,
including by photocopying, facsimile transmission, recording, rekeying, or using any information storage
and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission
or distribution of this form or any of the material herein is prohibited and is in violation of US and
international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this
presentation or its contents by any third party.
Views expressed in this presentation are not necessarily those of Ernst & Young LLP.
Page 3
Hot topics in internal restructuring transactions
Agenda
► Common
internal restructuring steps
► Domestic restructuring
► Cross-border restructuring
Page 4
Hot topics in internal restructuring transactions
Common internal restructuring steps
Page 5
Hot topics in internal restructuring transactions
Leveraged distributions
Page 6
Hot topics in internal restructuring transactions
Leveraged distributions: example
Step 1: FinCo loans $100 to Foreign HoldCo
USP
$100
Basis = $100
Step 2: Foreign HoldCo distributes $100 to USP.
$100
E&P = $0
Foreign
HoldCo
Note
FinCo
E&P = $100
Current law – Tax-free return of basis
(Section 301(c)(2))
Foreign
Sub 1
Foreign
Sub 2
Page 7
Hot topics in internal restructuring transactions
Leveraged distributions
Reasons for change:
►
Earnings and profits (E&P) of a foreign corporation can be repatriated without
being characterized as a dividend if corporation funds a distribution from a
second, related corporation that does not have E&P, but in which the
distributee shareholder has sufficient tax basis to characterized the distribution
as a return of stock basis.
Proposal:
►
To the extent a corporation (funding corporation) funds a second, related
corporation (distributing corporation) with a principal purpose of avoiding
dividend treatment on distributions to a US shareholder, the US shareholder’s
basis in the stock of the distributing corporation will not be taken into account
for purposes of determining the treatment of the distribution under Section 301.
►
Funding transactions include capital contributions, loans or distributions to the
distributing corporation, whether the funding occurs before or after the
distribution.
Page 8
Hot topics in internal restructuring transactions
All cash D reorganizations
Page 9
Hot topics in internal restructuring transactions
All cash D reorganization – example
►
Parent
Parent owns 100% of (foreign) Target and
(foreign) Acquiring:
►
FMV and basis in Target stock $100
1
$100
Target
stock
v: $100
b: $100
Target
Acquiring
E&P: $80
E&P: $30
►
►
2
Target
Page 10
Transaction:
Step 1: Parent sells Target to Acquiring for
$100.
Step 2: Target checks the box to be
disregarded from Acquiring.
Target CTB
Intended to be an “all cash” D
reorganization
Parent to recognize $0 of income
because it has $0 of gain in its Target
stock
Hot topics in internal restructuring transactions
Section 356 – boot within gain rule
► Section
356(a) provides that if “boot” is received in a
reorganization, then the gain, if any, to the recipient shall
be recognized, but in an amount not in excess of the sum
of such money and the fair market value of such other
property:
► Gain
may be characterized as a dividend depending
on facts.
► Referred
to as the “boot within gain” limitation, limits
income to a target shareholder to the gain in the share, not
the amount of boot received.
Page 11
Hot topics in internal restructuring transactions
Previously proposed amendments to
Section 356
► Past
proposals would have eliminated the boot within gain
limitation in any reorganization (i.e., domestic or crossborder), in which the US shareholder’s exchange has the
effect of the distribution of a dividend, pursuant to section
356(a)(2).
► Proposals
also adopt E&P sourcing rules similar to the
E&E sourcing rules of Sections 304(b)(2) and (5).
Page 12
Hot topics in internal restructuring transactions
E&P elimination through
stock distributions
Page 13
Hot topics in internal restructuring transactions
E&P elimination transaction
Example steps
Pre-transaction:
Pre-transaction
Step 1:
USP
USP
►
FS1 owns 100 shares of FS2
stock; each share has a $1
value and $1 basis.
►
FS2 has $100 of E&P.
Step 1: FS2 redeems 90 shares
of its stock held by FS1:
FS1
E&P = $0
▲= 100
V = 100
FS2
Page 14
FS1
$90
E&P = $100
Redemption is treated as a
dividend under Section
302(d).
►
FS1’s basis in the its
remaining FS2 stock is
increased by its basis in the
redeemed shares.
E&P = $0+$90=$90
▲= 100
V = 100-$90 = $10
FS2
►
E&P=$100-$90=$10
Hot topics in internal restructuring transactions
E&P elimination transaction
Example steps
Step 2: FS1 distributes its 10
shares of FS2 stock:
Step 2:
►
Fair market value (FMV): $10
►
Basis: $100
USP
Current law – Under Section
312(a)(3), FS1’s E&P is reduced
(but not below zero) by the
basis of the FS2 stock
distributed ($100).
FS2 stock
FS1
E&P = $90—$90 = $0
▲= 100
V = 100-$90 = $10
FS2
Page 15
E&P=$100-$90=$10
Hot topics in internal restructuring transactions
Prevent elimination of E&P through
distributions of stock
Reasons for change:
►
There has been a proliferation of transactions in which corporations distribute stock in
subsidiaries having artificially high bases but minimal value in an effort to reduce E&P
prior to making large distributions in the subsequent taxable period.
►
These transactions do not result in an economic loss and thus no diminution of dividendpaying capacity.
Proposal:
►
A corporation’s distribution of stock of another corporation would reduce the distributing
corporation’s E&P in any taxable year by the greater of the stock’s fair market value or
the corporation’s basis in the stock.
►
For this purpose, the distributing corporation’s basis in the distributed stock would be
determined without regard to any adjustments as a result of actual or deemed
dividend-equivalent redemptions by the corporation whose stock is distributed and
without regard to any series of distributions or transactions undertaken with a view to
create and distribute high-basis stock of any corporation.
Page 16
Hot topics in internal restructuring transactions
Domestic restructuring
Page 17
Hot topics in internal restructuring transactions
Overview
►
Taxability of interest income to FinCo:
► State nexus of FinCo
►
Separate company state interest
expense deduction for OpCo?
► Consider add-back provisions?
►
Combined/unitary state interest
expense deduction for OpCo?
► Can FinCo be excluded from
combined/unitary group?
► 80/20 company
► Controlled foreign corporation
(CFC)
Parent
OpCo
FinCo
$2,000 note @ 5%
Operating income:
$ 500
Interest income:
Less: Interest expense:
($100)
Less: Interest expense:
($0)
Taxable income:
$400
Taxable income:
$100
Page 18
$ 100
Hot topics in internal restructuring transactions
Intercompany leverage – all cash D
reorganization
Parent
3
FMV: $100
1
FinCo
1
Basis: $100
OpCo 1
OpCo 2
E&P: $100
E&P: $100
(unitary)
(pre-unitary)
OpCo 2 2
Transaction steps:
Step 1: OpCo 1 buys the stock of OpCo 2
from Parent in exchange for a $100
note (OpCo 1 Note).
Step 2: OpCo 2 converts to an LLC.
Step 3: Parent contributes the OpCo1 Note
to FinCo.
Final structure
Parent
FinCo
OpCo 1
OpCo 1
Note
OpCo 2
Page 19
Hot topics in internal restructuring transactions
Intercompany leverage – all cash D
reorganization
Parent
3
FMV: $100
1
FinCo
1
OpCo 1
Final structure
Parent
OpCo 1
OpCo 1
Note
OpCo 2
Page 20
OpCo 2
E&P: $100
E&P: $100
(unitary)
(pre-unitary)
OpCo 2 2
FinCo
Basis: $100
Separate company federal treatment:
► Parent income recognition limited to gain in
its shares of OpCo 2 stock:
► FMV=basis, thus no gain
► Parent’s basis in its OpCo 2 stock is
effectively converted into basis in the OpCo
1 Note.
Federal consolidated
(Treas. Reg. §1.1502-13(f)(3)):
► OpCo 1 treated as acquiring OpCo 2 solely
for OpCo 1 stock, followed by a deemed
redemption of the OpCo 1 stock in exchange
for the OpCo 1 Note.
► Redemption treated as a dividend from
OpCo 1 to Parent.
► Consider whether OpCo 2’s E&P inherited by
OpCo 1 at time of redemption.
► Relevant for states that conform to
consolidated (e.g., California)
Hot topics in internal restructuring transactions
Intercompany leverage – forward merger
Parent
3
2
FMV: $100
Transaction steps:
Basis: $100
Step 1: HoldCo contributes (at least) $40 of
its stock to OpCo 1.
FinCo
HoldCo
OpCo 2
E&P: $0
E&P: $100
1
(pre-unitary)
OpCo 1
E&P: $100
(unitary)
Final structure
2
Step 2: OpCo 2 merges into OpCo 1, with
Parent receiving $40 of HoldCo
stock and a $60 note owing from
OpCo 1 (OpCo 1 Note):
►
State law merger is required;
merger could be into an LLC
under OpCo 1.
Parent
FinCo
HoldCo
Step 3: Parent contributes the OpCo1 Note
to FinCo.
OpCo 1
Note
Page 21
OpCo 1
Hot topics in internal restructuring transactions
Intercompany leverage – forward merger
Parent
3
2
FMV: $100
Basis: $100
FinCo
HoldCo
OpCo 2
E&P: $0
E&P: $100
1
(pre-unitary)
OpCo 1
E&P: $100
(unitary)
Final structure
Parent
FinCo
Separate company federal treatment:
► There is no gain/loss to Parent because
OpCo 2 stock has FMV=basis.
► Parent’s $100 basis in OpCo 2 stock is
effectively converted into $40 of basis in
HoldCo stock and $60 basis in OpCo 1 Note.
HoldCo
2
Federal consolidated
(Treas. Reg. §1.1502-13(f)(3)):
► OpCo 1 is treated as acquiring OpCo 2
solely for HoldCo stock, followed by a
deemed redemption of the HoldCo stock in
exchange for the OpCo 1 Note.
► Redemption is likely treated as a dividend
from HoldCo to Parent.
► HoldCo does not inherit OpCo 2’s E&P.
OpCo 1
Note
Page 22
OpCo 1
Hot topics in internal restructuring transactions
Intercompany leverage – “killer” triangular
reorganization
Parent
2
FMV: $100
Transaction steps:
Basis: $100
3
FinCo
HoldCo
OpCo 2
E&P: $0
E&P: $100
(pre-unitary)
1
OpCo 1
E&P: $100
(unitary)
Final structure
Step 1: OpCo 1 buys $100 of HoldCo stock
from HoldCo in exchange for a $100
note (OpCo 1 Note).
2
Step 2: OpCo 2 merges into OpCo 1, with
Parent receiving $100 of HoldCo
stock:
►
Alternatively, OpCo 2 could be
contributed to OpCo 1 and convert
to an LLC.
Parent
HoldCo
FinCo
OpCo 1
Step 3: HoldCo transfers the OpCo 1 Note to
FinCo in exchange for FinCo stock.
OpCo 1
Note
Page 23
Hot topics in internal restructuring transactions
Intercompany leverage – “killer” triangular
reorganization
Parent
2
FMV: $100
Basis: $100
3
FinCo
HoldCo
OpCo 2
E&P: $0
E&P: $100
(pre-unitary)
1
OpCo 1
E&P: $100
(unitary)
Final structure
Parent
2
Separate company federal treatment:
► There is no gain/loss to Parent (Parent
receives solely HoldCo stock; no boot).
► Parent’s $100 basis in OpCo 2 stock is
converted into $100 of basis in
HoldCo stock.
► No gain/loss to HoldCo or OpCo 1 on
purchase/use of HoldCo 1 stock.
Federal consolidated
(Treas. Reg. §1.1502-13(f)(3)):
► No deemed redemption because no boot
issued in reorganization
HoldCo
FinCo
OpCo 1
OpCo 1
Note
Page 24
Hot topics in internal restructuring transactions
Cross-border restructuring
Page 25
Hot topics in internal restructuring transactions
Section 267 transactions
Page 26
Hot topics in internal restructuring transactions
Section 267 example–facts
►
CFC 1 has a built-in loss asset
(Asset).
►
Potential opportunities for US tax
benefit of loss asset?
► Basis step-down upon inbound
liquidation or reorganization.
► See Sections 334(b)(1)(B) and
362(e)(1)(B)
USP
CFC 1
V: $80
B: $200
Asset
Page 27
V: $1,000
B: $1,000
Subs
Subs
Subs
Hot topics in internal restructuring transactions
Section 267(f) planning
►
Step 1: CFC 1 sells Asset to CFC
2 for $80:
► Asset is not “sub all” of CFC 1’s
assets.
► CFC 1’s $120 loss is deferred
under Section 267(f).
►
Step 2: CFC 1 checks the box.
►
If CFC 2 later sells Asset to an
unrelated party, does USP
recognize the $120 deferred loss?
► Separate return limitation year
(SRLY) limit?
USP
1
CFC 2
Asset
CFC 1
$80
2
Asset
Page 28
CTB
Subs
Subs
Subs
Hot topics in internal restructuring transactions
Triangular reorganizations
Page 29
Hot topics in internal restructuring transactions
Cross-border triangular reorganization –
common fact pattern
USP
1
Property
USP
stock
2
USP
stock
FS
USS
FT
stock
FT
►
FS acquires USP stock for property (e.g., cash, note), then uses the USP stock to
acquire FT in a triangular reorganization.
►
Historically viewed as allowing for inappropriate repatriation, IRS attacked through
various notices, and ultimately through a regulation – Treas. Reg. §1.367(b)-10.
Page 30
Hot topics in internal restructuring transactions
Final regulations – deemed distribution
and contribution rules
►
In the case of a triangular reorganization to which Treas. Reg. §1.367(b)-10 applies,
adjustments must be made that are consistent with the adjustments that would have
been made if S had distributed property to P under Section 301(c) in an amount equal to
the sum of the money and the fair market value of other property used to acquire the P
stock (the Deemed Distribution Rule)
►
In addition, adjustments must be made that are consistent with the adjustments that
would have been made if P had contributed the same property to S (the Deemed
Contribution Rule)
►
This deemed contribution has the effect of increasing P’s basis in its S stock by the
amount of the deemed distribution.
Page 31
Hot topics in internal restructuring transactions
Example based on final regulations
USP
USP
1
$70
USP stock
(FV = $70)
FV = $100
AB = $30
2
FS
E&P = $80
FV = $100
AB = $30 $100
USP
stock
FT
stock
USS
FV = $70
AB = $10
FT
FS
E&P = $10
USS
FV = $70
AB = $10
FT
Transaction steps:
Step 1: FS purchases $70 worth of USP’s stock from USP for cash.
Step 2: FS exchanges the USP stock acquired in step 1 for all FT’s stock in a triangular B reorganization subject to
Treas. Reg. §1.367(b)-10.
Adjustments to USP’s basis in FS:
► Deemed dividend of $70 from FS to USP
► Deemed contribution of $70 from USP to FS; thus USP increases its basis in FS by $70, from $30 to $100
► Compare to result if FS had distributed $70 of cash to USP as a dividend
Page 32
Hot topics in internal restructuring transactions
IRS issues Notice 2014-32
on 25 April 2014
► The
Internal Revenue Service (IRS) and the Treasury
Department intend to revise the regulations under
Treas. Reg. §1.367(b)-10 to:
►
►
►
►
Eliminate the deemed contribution rule
Clarify the no-US-tax exception to Treas. Reg. §1.367(b)-10
Modify the Section 367(a) and Section 367(b) priority rules by
adjusting the amount of income or gain that is considered
Section 367(b) income for this purpose
Clarify the scope of the anti-abuse rule of
Treas. Reg. §1.367(b)-10(d)
► In
general, the regulations will apply to a triangular
reorganization completed on or after 25 April 2014.
Page 33
Hot topics in internal restructuring transactions
Elimination of the deemed contribution
rule under the notice
►
►
►
“The IRS and the Treasury Department are aware that taxpayers are
engaging in transactions designed to avoid US tax by exploiting the
deemed contribution provided under the final regulations. The IRS and
the Treasury Department believe that the deemed contribution is
inconsistent with the purpose of §1.367(b)-10…”
The IRS and the Treasury Department intend to revise the final
regulations to eliminate the deemed contribution rule
In addition, the rule in §1.367(b)-10(b)(4) will be modified to provide
that “P’s adjustment to the basis of its S stock under §1.358-6 will be
determined as if P provided the P stock or pursuant to the plan of
reorganization, notwithstanding that S in fact acquired the P stock or
securities in exchange for property.”
Page 34
Hot topics in internal restructuring transactions
Example based on the notice
USP
1
$70
USP stock
(FV = $70)
USP
FV = $100
AB = $30
FV = $100
AB = $30 $40
2
FS
USP stock
FT stock
E&P = $80
USS
FS
FV = $70
AB = $10
FT
USS
FV = $70
AB = $10
E&P
= $10
FT
Transaction steps:
Step 1: FS purchases $70 worth of USP’s stock from USP for cash.
Step 2: FS exchanges the USP stock acquired in step 1 for all FT’s stock in a triangular B reorganization subject to
Treas. Reg. §1.367(b)-10.
Adjustments to USP’s basis in FS:
►
Deemed dividend of $70 transfers from FS to USP.
►
USP’s adjustment to the basis of its FS stock under Treas. Reg. §1.358-6 are determined as if USP provided the USP stock
pursuant to the plan of reorganization. Thus, USP’s basis in FS is increased by $10 (the basis of the FT stock in USS’s hands),
from $30 to $40.
Page 35
Hot topics in internal restructuring transactions
Final regulations – anti-abuse rule
► The
final regulations provide that appropriate adjustments
shall be made if, in connection with a triangular
reorganization, a transaction is engaged in with a view to
avoid the purpose of Treas. Reg. §1.367(b)-10.
► For example, the E&P of S will be deemed to include the
E&P of a corporation related to P or S for purposes of
determining the consequences of the adjustments
provided in the final regulations, if S is created,
organized or funded to avoid the application of
Treas. Reg. §1.367(b)-10 with respect to the E&P of a
related corporation.
Page 36
Hot topics in internal restructuring transactions
Anti-abuse rule
The notice
► “The
IRS and the Treasury are concerned that some
taxpayers may be interpreting the anti-abuse rule
too narrowly.”
► The anti-abuse rule will be clarified to provide that:
►
►
►
►
Page 37
S’s acquisition of P stock or securities in exchange for a note may invoke
the anti-abuse rule.
The E&P of a corporation (or a successor corporation) may be taken into
account for purposes of determining the consequences of the adjustments
provided in the final regulations.
A funding of S may occur after the triangular reorganization.
A funding of S includes capital contributions, loans and distributions.
Hot topics in internal restructuring transactions
Thank you
Page 38
Hot topics in internal restructuring transactions
The future of tax analytics
Tony Ferrante, Ernst & Young, LLP
Tax technology and data analytics services
Any US tax advice contained herein was not intended or written to
be used, and cannot be used, for the purpose of avoiding penalties
that may be imposed under the Internal Revenue Code or applicable
state or local tax law provisions.
These slides are for educational purposes only and are not intended,
and should not be relied upon, as accounting advice.
Page 40
The future of tax analytics
EY refers to the global organization, and may refer to one or more, of the member firms of
Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US
This presentation is © 2015 Ernst & Young LLP. All rights reserved. No part of this document may be
reproduced, transmitted or otherwise distributed in any form or by any means, electronic or
mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any
information storage and retrieval system, without written permission from Ernst & Young LLP. Any
reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in
violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection
with use of this presentation or its contents by any third party.
Views expressed in this presentation are those of the speakers and do not necessarily represent the
views of Ernst & Young LLP.
This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not
provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts
and circumstances
These slides are for educational purposes only and are not intended, and should not be relied upon, as
accounting advice.
Page 41
The future of tax analytics
Data analytics for tax
?
Analytics:
why and what?
Page 42
Current state
of tax analytics
The future of tax analytics
Designing the
path forward
Benefits of analytics
Significant economic returns and competitive advantage
Financial performance of companies
good with analytics
28%
Ahead
49%
Somewhat ahead
23%
On par
Somewhat behind
None
Substantially behind
None
Over three-quarters (77%)
of companies good with
analytics are also ahead
in year-over-year (YOY)
growth compared to
peers.
*Source: Economic Intelligence Unit. Survey conducted with
530 senior executive across industries (Feb 2013)
Over two-thirds (67%) of
companies gained a significant
competitive advantage from using
analytics .
(15% increase from last year and
80% increase from two years ago)
Page 43
The future of tax analytics
% of companies indicating a competitive
advantage with analytics
58%
67%
37%
2010
2011
2012
*Source: MIT Sloan Management Review Survey conducted with
more than 2,500 executives across industries (Mar 2013)
Reason #1: The confluence of electronic
data, processing power and software
Then
Now
JANUAR
Y
1
Transactions
Transactions
Summarize
Summarize
Tax
Summarize
Summarize
Tax
Page 44
The future of tax analytics
Reason #2: Taxing authorities are
using analytics
Taxing authorities around the world are requesting or mandating taxpayers to
provide greater detail than previously required. The taxing authorities are using
analytics to understand the data, improving audit selection and tax compliance.
United States
Netherlands
China
Mexico
Brazil
Australia
Page 45
The future of tax analytics
Reason #3: Unlocking value for the tax
department
►
►
►
►
Control/risk management
Efficiency and cost
reduction
Tax-affected business
decisions
Better stakeholder
communication
Page 46
The future of tax analytics
Analytics components and capabilities
Page 47
The future of tax analytics
Analytics components and capabilities
Overview
►
Interactive presentation
►
Statistical analysis/modeling
►
Large datasets
Visualization
Data science
Big data
Page 48
The future of tax analytics
Analytics components and capabilities
Big data
►
Growth of digital information
Big data
►
►
Not so big data
Volume
Terabytes/petabytes/zettabytes
Variety
Unstructured (text, voice, video) structured/relational
Velocity
Data in motion (streaming)
data at rest
Veracity
Untrusted/uncleansed
trusted/cleansed
megabytes/gigabytes
Internet of things
Falling data storage and processing costs
Page 49
The future of tax analytics
Analytics components and capabilities
Data sciences
►
Overwhelmed with data
——————
——————————
——————
——————————
►
Signal in the noise
►
Automated analysis for scale
►
Rich statistical tools
►
10
1010
010
Predictive models
Page 50
The future of tax analytics
Analytics components and capabilities
Interactive visualizations
Spot the trend
Page 51
The future of tax analytics
Analytics components and capabilities
Interactive visualizations
Spot the trend
Page 52
The future of tax analytics
Analytics components and capabilities
Interactive visualizations
Page 53
The future of tax analytics
Analytics components and capabilities
Interactive visualizations
Page 54
The future of tax analytics
Analytics components and capabilities
New skills required
Tax
Stats
Tech
Page 55
The future of tax analytics
Data analytics applied for tax
Page 56
The future of tax analytics
Analytics ascendency model
Prescriptive
How can we make it
happen?
Predictive
What will happen?
Diagnostic
Why did it happen?
Descriptive
What happened?
Page 57
The future of tax analytics
Case study
Unlocking the value of the compliance and reporting data
►
►
►
►
Proactively identify and
manage compliance and
reporting risk through
improved visibility and control
Deliver greater value from the
global tax function while
managing risk
Facilitate integration of the
record-to-report to achieve
efficiency and cost reduction
Enhance business decisionmaking capability
Page 58
Compliance
Analytics
The future of tax analytics
Control
Tax agenda
A strategic discussion of your tax function
Tax life cycle
►
Internal
influences
►
►
►
Strategy
Strategic alignment with
business
Help to improve value
Alignment with
risk profile
Cash flow and
financial impact
►
Integrated global
process
►
Accurate, supportable
tax accounts
►
Tools and technology
►
End-to-end reporting
Regulatory
Economic
Enterprise
►
►
Governance
►
►
Page 59
External
influences
Risk
management
Audit-ready
documentation
Integrated with
compliance
Binding rulings and
voluntary disclosures
►
►
►
►
The future of tax analytics
Leverage provision
data
Consistent global
process
Timely visibility and
status reporting
Real-time submission
of transaction data
Industry
Case study
Connecting the phases of the tax life cycle
Leveraging analytics to gain insights and enable decisions to support all phases of the tax life cycle
Tax
performance management
Page 60
The future of tax analytics
Case study
Unlocking the value of the compliance and reporting data
►
Lessons learned:
► Don’t take data for granted
► Plan to educate stakeholders
► Solicit broad input
► Iterate rapidly
Page 61
The future of tax analytics
Case study
Shift from compliance to value
Securities trading
Page 62
The future of tax analytics
Case study
New visibility into global mobility
Program costs
Short-term business traveler
Page 63
The future of tax analytics
Case study
Identifying risk
Risk matrix
Calculation layer
Page 64
The future of tax analytics
Case study
Keep designing to find value
Compliance key performance indicators
(KPIs)
Thresholds and trends
Page 65
The future of tax analytics
Analytics future applications across tax
Risk analysis and
monitoring
Transactional analytics
Tax reporting
► Accounts payable/
receivable transactional
line level analysis
► Tax coding and posting
error detection
► One-off or embedded
solution
► Interactive visualizations
instead of spread sheets
► Automated control checks
and tests
► Data-triggered notification
Targeted analytics
Supply chain analysis
Transfer pricing
analytics
► Pricing/margin modeling
for indirect taxes
► Transactional keyword
analysis
► Credits and incentives
modeling
► Supply chain mapping
using transactional line
level data
► Analysis of actual tax
treatment against
expected
► Customs sourcing
considerations
► Variance from forecast
alerts
► Transactional keyword
analysis
► Automated comparable
matching algorithms
► Policy execution
monitoring
Page 66
The future of tax analytics
► Risk analysis and heat
maps
► Transaction profile trend
monitoring
► Automated transaction
risk escalation
EY insight
If I were in your shoes, what would I be doing?
►
►
►
►
Establish what the analytics landscape looks like within your
organization
Assign responsibility for owning analytics within tax
Consider how analytics can support and grow your tax function
Encourage innovation
Growth drivers:
► Increased awareness of benefits
► New analytics tools and
capabilities
► Availability of data
Page 67
Adoption barriers:
► Lack of analytics specialists
► Resistance to replace gut instinct
decision-making
► Lack of best practices
The future of tax analytics
Thank you
The future of tax analytics
Tony Ferrante
Tax Technology and Data Analytic Services
tony.ferrante@ey.com
Page 68
The future of tax analytics
Global tax in a BEPS world
Steve Stoffel , Ernst & Young, LLP
Graham Shaw, Ernst & Young, LLP
Patty Burleson, Ernst & Young, LLP
Patti Iribarren, Ernst & Young, LLP
Agenda
►
►
►
►
►
►
Update on the latest developments in the Organisation for Economic
Co-operation and Development (OECD) base erosion and profit
shifting (BEPS) Action Plan
Holding and financing
IP ownership
European Union (EU) state aid
Country review – UK diverted profits tax
Summary/closing thoughts
Page 70
Global tax in a BEPS world
An update on the latest developments in the
OECD’s BEPS Action Plans
Page 71
Global tax in a BEPS world
Snapshot of OECD’s BEPS Action Plan
Action 1: Tax challenges of
digital economy
Action 2: Hybrid mismatch
arrangements
Action 7: Permanent
establishment (PE) status
Action 3: Strengthening CFC rules
BEPS
Action
Plan
Action 4: Limiting interest
deductibility
Action 6: Preventing treaty abuse
Action 8: Intangibles
Action 9: Risks and capital
Action 5: Harmful tax practices
Action 10: Other high-risk
transactions
Page 72
Action 11: Economic analysis of
BEPS activities and measures
Action 14: Dispute resolution
Action 12: Disclosure of aggressive
tax planning
Action 15: Multilateral instrument
Action 13: TP documentation
Global tax in a BEPS world
OECD BEPS action plan
1) Tax challenges of digital economy –
September 2014
9) TP for risks and capital –
September 2015
2) Hybrid mismatch arrangements –
September 2014
10) TP for other high-risk
transactions – September 2015
3) Strengthening CFC – September 2015
11) Economic analysis of BEPS activities and
measures – September 2015
4) Limiting interest deductibility –
September/December 2015
5) Harmful tax practices – September
2014/September 2015/December 2015
12) Disclosure of aggressive tax planning –
September 2015
13) TP documentation – September 2014
6) Preventing treaty abuse –
September 2014
14) Effectiveness of treaty dispute resolution
mechanisms – September 2015
7) PE status – September 2015
15) Multilateral instrument –
September 2014/December 2015
8) TP for intangibles – September 2014/
September 2015
Page 73
Global tax in a BEPS world
View from the US
►
►
►
US Treasury is an active participant in the BEPS project and is:
► Strongly supportive of elements of the BEPS project
► Skeptical of other elements of the BEPS project
► Seeking to forge consensus in the BEPS project
Many of the international tax provisions included in the Obama
Administration’s fiscal year 2016 budget proposals are focused in the
same areas as the BEPS actions and reflect ideas that are similar or
identical to options proposed in BEPS discussion drafts.
Congressional international tax reform proposals also reflect a focus
on addressing base erosion concerns.
Page 74
Global tax in a BEPS world
Proposals that include BEPS-related concepts
►
Addressing BEPS has become element of fundamental international tax reform
discussions.
► Former House Ways and Means Committee Chairman Camp’s comprehensive tax
reform discussion draft contains BEPS-related proposals as part of international tax
reform, including:
► Restrictions on interest expense deductions (Action 4)
► Limitation on treaty benefits (Action 6)
► Expansion of CFC rules (Action 3)
► Former Senate Finance Committee Chairman Wyden’s earlier bipartisan tax reform
bill contained proposals with a BEPS flavor, including:
► Restrictions on interest expense deductions (Action 4)
► Very broad expansion of CFC rules (effectively repeal deferral) (Action 3)
► Administration’s budgets and tax reform proposals contain proposals with BEPS
overtones, including:
► Restrictions or deferral of interest expense deductions (Action 4)
► Expansion of CFC rules (Action 3)
► Restrictions on use of hybrids (Action 2)
Page 75
Global tax in a BEPS world
EU perspective on BEPS
► Governments
are balancing public opinion with need to
remain competitive.
► Tax remains high on Board of Governors agenda due to
media and public interest in the taxation of corporates.
► European countries and EU are actively involved in
OECD BEPS project.
► EU led developments and state aid investigations.
Page 76
Global tax in a BEPS world
Different stakeholders, different views
► Source
►
►
countries:
Source countries are jurisdictions typically paying into jurisdictions
(destination countries) where a holding, financing, intellectual property (IP)
or principal company is located.
Source countries are in favor of accelerating the BEPS process. No waitand-see approach, but various unilateral actions have and are taking place.
► Destination
►
►
Page 77
countries:
Most destination countries fully embrace the OECD’s work on the BEPS
project and will actively participate at the OECD level in developing
international solutions tackling BEPS.
The general view is that the issues can effectively be addressed only by
coordinated international action.
Global tax in a BEPS world
Action 13 and its implication
for taxpayers
►
Taxpayers will need to address global transfer pricing in anticipation of Action
13 of the OECD’s BEPS project that will be effective on tax years beginning on
or after 1 January 2016.
►
Of 15 actions to address global concerns around BEPS, Action 13 focuses on
TP documentation and mandates a global masterfile, local files for all country
and the country-by-country (CbC) report.
►
For companies that do not have a robust, defensible and consistent global
transfer pricing framework, Action 13 will highlight inconsistent transfer pricing
policies and likely result in increased controversy.
►
Action 13 will require data gathering that today appears difficult due to inability
to reconcile consolidated and statutory profits and losses (P&Ls),
intercompany accounts and intercompany segmented P&Ls.
Page 78
Global
in a BEPS
Draft for tax
Discussion
Only world
CbC reporting
►
The CbC reporting template will require multinational corporations (MNCs) to
report the following items annually for each country where they have an entity
or permanent establishment:
► Revenue, related and unrelated party
► Profits
► Income tax paid and taxes accrued
► Stated capital and retained earnings
► Employees
► Tangible assets
► Also identification of each entity in the country and the business activities
of each
Page 79
Global tax in a BEPS world
Key points on implementation
►
First CbC reports to cover fiscal years beginning on or after 1 January 2016
and to be filed within 12 months after end of year
►
Revenue threshold of €750m (MNC group annual consolidated revenue in
preceding year) for requirement to prepare and file a CbC report
►
No more/no less information than in the template in the September 2014
OECD report
►
CbC report generally to be filed with tax authority in home country of MNC
group’s parent company and automatically shared with tax authorities in other
relevant countries under government information exchange mechanisms
►
Implementation of master file and local file elements of transfer pricing
documentation to be done by countries, with taxpayers providing files to tax
authorities in each country
►
Next Action 13 guidance by April 2015
►
Keep watch for unilateral action from countries (e.g., Spain) who put in place
additional regulatory requirements
Page 80
Draft for Discussion Only
Global tax in a BEPS world
Unilateral activity around Action 13 – Spain
►
►
Amendments have been introduced into the transfer pricing provisions, effective 1 January 2015, to
include transfer pricing documentation requirements modified in very similar terms to the revised
standards included in the report on Action 13 released by the OECD on 16 September 2014.
Spanish rules also establish that the CbC report will have to include the following information per
country on an aggregate basis:
► Group’s revenue, distinguishing between that derived from related and unrelated parties
► Accounting result before corporate income tax (CIT) or a tax of similar or analogous nature
► CIT (or tax of similar or analogous nature) effectively paid, including withholding taxes
► CIT (or tax of similar or analogous nature) accrued, including withholding taxes
► Share capital and equity at the end of the fiscal year
► Average number of employees
► Tangible assets and real estate investments, different to treasury and receivables
► List of resident entities, including permanent establishments, and the main activities these are
engaged in
► Other information that is considered relevant and, if applicable, an explanation on the data
included in such information
Page 81
Draft for Discussion Only
Global tax in a BEPS world
Holding and financing
Page 82
Global tax in a BEPS world
Recent unilateral activity on BEPS
► New
►
►
►
►
Page 83
anti-hybrid measures
All European Union (EU) Member States agreed on a proposal to
implement anti-hybrid loan rules in the EU Parent Subsidiary Directive
(linking rule). EU Member States are obliged to adopt such rules in their
domestic legislation per 31 December 2015.
A growing number of European countries have rules denying participation
exemption on inbound hybrid payments (already in place for several years
in Denmark, Germany, Hungary, UK; adopted in 2014 in France, Poland
and Spain).
France, Spain and Mexico introduced “subject to tax” requirements for
certain deductions; similar draft legislation was tabled in Austria. Further
proposals have been made, or are expected to be tabled, in Germany, the
US and the UK.
Ireland legislated to prevent certain Irish incorporated companies being
“stateless” in terms of their tax residence.
Global tax in a BEPS world
Recent unilateral activity on BEPS
► Tightened
►
►
►
►
►
Page 84
limits on interest deductibility:
Canada and France recently introduced rules against foreign affiliate
dumping or leveraged acquisitions.
Canada introduced rules for back-to-back financing arrangements that
mitigate thin capitalization.
France introduced a net interest cap.
Japan introduced and Finland tightened earnings-stripping rules.
Several countries tightened thin-cap legislation (Australia, Korea, Poland).
Global tax in a BEPS world
BEPS: What should you do to be ready?
►
►
►
►
Review intragroup holding and financing structures:
► Are the financing entities in the group structure (reverse) hybrid entities or tax haven
entities?
► Are there hybrid loans in the structure?
► What is the substance of the holding and/or financing entity?
► In your CbC reporting assessment, how are the financing entities reflected in the CbC
template?
Monitor (developments around) local country interest deduction limitation rules,
withholding tax, beneficial ownership and anti-treaty-shopping rules
Identify alternatives that can be considered to reduce risks (in the short term and in the
long term)
In a BEPS world, there are still opportunities for financing:
► Use of company with net operating losses as financing entity
► Use of no-tax jurisdiction to finance countries that do not have domestic interest
withholding tax
► Use of low- or medium-tax jurisdiction (e.g., Ireland) with tax treaty network to finance
treaty countries
► Use of companies with relevant substance, e.g., treasury center or existing operating
companies
Page 85
Global tax in a BEPS world
IP ownership
Page 86
Global tax in a BEPS world
Trends in IP ownership
Implications as a result of OECD BEPS and legislative developments
Principal companies:
►
Principal’s remuneration needs to be in line with its functions, assets and risks. Two-sided analysis is needed to justify
principal’s profits.
►
Implications of Action 2 on deductible hybrid royalty/interest payments to IP owner.
►
Concerns about reduced withholding or withholding tax exemption on royalty and interest payments under Action 2
►
Operating models where activities undertaken in a local territory without a taxable presence (e.g., through
commissionaire arrangements, commission agents, service providers and marketing support companies)
Ownership of inventory in a regional distribution center or tolling site
Tax haven/low tax IP structures:
►
►
Greater scrutiny expected – IP owner to deploy (developing, enhancing, maintaining, protecting and exploiting)
functions to be entitled to the residual IP profits
►
Remuneration of IP owner should be in line with functions, assets and risk profile
►
Funders to receive funding return, legal owners to receive return for legal administrative functions
Concerns about reduced withholding or withholding tax exemption on royalty and interest payments
Intercompany TP:
►
►
Profit split analyses: review of value-creating activities, which leads to method, which leads to price.
►
Transparency of company operations
►
Assess potential impact of country-by-country reporting now
Page
87
Page 87
Global tax in a BEPS world
IP ownership in a BEPS world
►
►
There are still opportunities for efficient IP ownership.
► US MNCs can still consider setting up an offshore IP Co (e.g., a CV, a UK LLP or low-tax
jurisdiction) for existing, newly migrated or funded IP as an incubator structure for future onshoring
of IP.
► IP committees can be established to drive control over DEMPE functions in the short/medium
term – recognizing full-time DEMPE functions will ultimately be needed under BEPS.
In the medium or longer term, consider onshoring IP to align value chain profits associated with the IP
with the DEMPE functions as well as:
► Intangible and other R&D regimes in IP/principal location
► Local country planning in IP/principal location:
► Amortization of IP acquired at fair market value, e.g., move IP currently owned in Irish
NRI/CV/UK LP onshore to entity with appropriate functionality with step up for fair
market value
► Use of debt to acquire IP
► Accounting implications from shifting IP from a low- or zero-tax jurisdiction
► Effective tax rate and book impact of IP movement
► IP exit strategy
► Changes to the operating model to minimize PE risks for principal companies
Page 88
Global tax in a BEPS world
Trends in IP ownership
Onshore IP ownership
Overview:
US
Parent
Cost sharing
IP development
►
Principal acts as onshore IP owner.
►
Principal owns non-US rights to IP.
►
Principal is responsible for sales of
products/services outside of US.
►
Residual profit associated with non-US
business flows back to Principal.
►
Principal’s effective tax rate determined
by:
Principal
Intercompany
services
Sale of goods
Contract
Manufacturer
Page 89
Local Distributors
R&D Providers
►
Application of patent box regime
►
Tax credit/deduction for R&D
activities
►
Amortization of intangible property
►
Arm’s-length transfer pricing for
services and HQ recharges
(e.g., marketing intangibles)
►
Tax deductions for financing costs
Global tax in a BEPS world
Trends in IP ownership
Offshore IP ownership
Overview:
US
Parent
e.g.
(i) Sale
(ii) License, or
(iii) Cost sharing
IP Owner
Sub-license
►
IP ownership is offshore.
►
IP owner could purchase, license or cost
share IP with US Parent.
►
IP owner licenses the IP to Master Distributor
in return for an arm’s-length return
►
Activity of Master Distributor depends
on business.
►
Key drivers of effective tax rate (ETR) of IP
owner and Master Distributor:
Master Distributor
►
Pricing of royalty paid by Master
Distributor and split of functionality
between it and IP owner
►
Withholding tax, if any, on royalties paid
by to IP owner
Intercompany
services
Sale of goods
Contract
Manufacturer
Page 90
Local Distributors
R&D Providers
Other technical considerations:
►
Exit of IP out of foreign parent
►
Anti-avoidance measures
►
PE analysis for IP owner
Global tax in a BEPS world
BEPS: What should you do to be ready?
►
►
Review IP ownership structure
► Is the IP (economically) owned in a reverse-hybrid entity or low-tax
jurisdiction?
► What kind of governance and substance are in place at the level of
the IP entity?
► Are the contracts consistent with how an arm’s-length contract
would look given DEMPE functions?
► When you model CbC reporting and identify likely audit risks, how is
the IP owner reflected in the CbC template?
Identify alternatives that can be considered to reduce risks (in the short
term and the long term)
Page 91
Global tax in a BEPS world
EU state aid
Page 92
Global tax in a BEPS world
EU state aid
What is it?
► Included
in Article 107(1) of the Treaty on the Functioning
of the European Union:
“Any aid granted by a Member State or through State resources in any form
whatsoever which distorts or threatens to distort competition by favouring
certain undertakings or the production of certain goods shall, in so far as it
affects trade between Member States, be incompatible with the common
market”
Page 93
Global tax in a BEPS world
EU state aid
Why do we care?
► Illegal
state aid can give
rise to recovery of
received benefits and
interest.
► Recovery period of 10
years starts on the day on
which the state aid was
awarded.
Are your EU entities at risk
of being challenged?
Page 94
Global tax in a BEPS world
Country review – UK diverted profits tax
Page 95
Global tax in a BEPS world
UK – General approach to BEPS
►
UK government’s approach to BEPS project:
► An international issue that cannot be solved by the UK alone
► Best solved globally through the mediums of the G8, G20, the EU and
the OECD
►
While the UK supports the BEPS initiative, any changes being proposed by the
OECD should be compatible with the government’s two objectives:
► Ensuring that the UK remains “open for business”
► Working with international partners to prevent unfair tax
avoidance/aggressive tax planning by multinationals
► “Low taxes, but taxes that will be paid”
► George Osborne, Chancellor of the Exchequer
Page 96
Global tax in a BEPS world
UK – Recent BEPS initiatives
►
►
►
UK/Germany joint proposal on new rules for all preferential IP regimes.
► Seeks to achieve a balance between ability to offer tax benefits for
IP-related investment and preventing the misuse of such benefits
Consultation released regarding changes to the UK anti-hybrid rules in line
with the OECD recommendations in respect of Action 2:
► New law predicted to apply from 1 January 2017
Legislation enabling the implementation of annual country-by-country
reporting; report must include:
► Revenue; profit before tax; income tax paid and accrued
► Total employment; capital, retained earnings; tangible assets
► Identity of each entity in a particular tax jurisdiction and provide an
indication of their business activities
► Introduction of UK diverted profits tax from 1 April 2015
Page 97
Global tax in a BEPS world
Overview of diverted profits tax (DPT)
►
►
►
►
►
A new tax to deal with “aggressive avoidance” by multinational companies
making sales in the UK
A response to political and public pressure in the UK, aligned to the wider
BEPS agenda
DPT is a new tax:
► Not covered by existing double tax treaties
► Cannot offset existing corporation tax losses, e.g., stock option deductions
Requires taxpayer, in many situations, to notify Her Majesty's Revenue and
Customs (HMRC) of potential DPT liability
HMRC to then issue charging notice if appropriate
Page 98
Global tax in a BEPS world
UK diverted profits tax (DPT)
►
►
►
►
►
►
25% tax on profits diverted from UK to a low substance entity (“section 80
charge”) or of an avoided PE (“section 86 charge”)
Companies at risk from 1 April 2015 where entity or transaction with
“insufficient economic substance”
No formal clearance mechanism other than advance pricing agreement (APA):
► APA will not be agreed without full visibility on supply chain.
► Law allows for informal agreement of no DPT notification by ‘‘an officer of
HMRC,’’ i.e., customer relationship manager.
Could base initial tax charge on disallowance of 30% of payment made by
UK/deemed PE expenses
Tax payable within 30 days of charging notice, no TP defense
Tax not recoverable until DPT profits agreed
Page 99
Global tax in a BEPS world
Charging provisions
►
Section 80 – Lack of economic
substance
►
►
►
►
►
►
►
►
Section 86 – avoidance of a PE
►
A UK resident company (C)
A provision between C and another
person (P)
C and P connected
Results of provision – an effective tax
mismatch outcome
The insufficient economic substance
condition met
C and P not both small or medium-sized
enterprises (SMEs)
The provision not an excepted loan
relationship
►
►
►
►
►
►
Page 100
A non-UK resident company carrying on a
trade (or part of it)
A person carrying on activity in the UK in
connection with the supplies of goods,
services or other property as part of trade
Reasonable to assume activity designed to
ensure no UK PE (ignoring other
commercial benefits)
Meets either tax mismatch or tax avoidance
conditions (or both)
Person and non-UK resident company
not SMEs
Exemption for independent agents
Exemption for limited sales (<£10m) and
expenses (<£1m)
Global tax in a BEPS world
Assessment process
Duty to notify
Company must notify if potentially within DPT scope within three
months after end of accounting period (six months during
transitional period, i.e. periods ending prior to 31 March 2016).
HMRC issues
preliminary notice
HMRC may issue preliminary notice of chargeability within two
years after end of accounting period (four years if no notification).
Company makes
representations
Company has 30 days from receipt of notice to make
representations.
HMRC issues
charging notice
HMRC will either issue charging notice or confirm no charging
notice to be issued, within 30 days from end of representation
period.
HMRC reviews/
considers the
charging notice
Twelve-month period begins from relevant payment date for HMRC
to review charging notice and may issue supplementary/amending
notice increasing or reducing the DPT.
Page 101
Global tax in a BEPS world
Company may be liable to
penalty if it does not make
notification.
HMRC may consider
representations on threshold
conditions and factual matters.
DPT must be paid within 30 days
from issue of charging notice and no
right to appeal at this stage or
postpone.
Company has 30 days from end of
review period to appeal or DPT
becomes final.
What next?
► DPT
to apply from 1 April 2015; need to determine if it may
apply
► Need to consider impact on ETR from Q1 2015?
► Determine approach to notification
► Determine approach to HMRC engagement
Page 102
Global tax in a BEPS world
Short-term actions
►
►
Assess whether DPT is likely to apply and need for notification:
► Estimate of exposure
► 30% disallowance?
► Rule of thumb profit split?
Develop strategy for dealing with DPT and notification requirement:
► HMRC engagement?
► APA program?
► Composite risk management (CRM) risk assessment?
► Defense strategy:
► Transfer pricing methodology
► Substance vs. profitability assessment
► Operational and TP documentation
Page 103
Global tax in a BEPS world
Summary/closing thoughts
Page 104
Global tax in a BEPS world
Preparation will help you ride the
wave of change
Page 105
Global tax in a BEPS world
Thank you!
Page 106
Global tax in a BEPS world
Tax accounting insights
and challenge areas
Nate English, Ernst & Young, LLP
Jon Schneider, Ernst & Young, LLP
Agenda
►
Developments:
►
►
►
►
►
►
Tax provision challenges and practice issues:
►
►
Common causes of tax restatements
Best practice responses:
►
►
Accounting Standards Updates
Financial Accounting Standards Board (FASB) project status
Internal control over financial reporting (ICFR)
Public Company Accounting Oversight Board (PCAOB)
focus areas
Securities and Exchange Commission (SEC) focus areas
Reduce risk in tax accounting calculations
Tax provision recommendations
Page 108
Tax accounting insights and challenge areas
Accounting Standards Updates
Page 109
Tax accounting insights and challenge areas
Accounting standards effective in 2015
►
Accounting Standards Update (ASU) 2014-01, Accounting for
Investments in Qualified Affordable Housing Projects:
►
►
►
►
►
For public business entities, effective for annual periods, and interim periods within those
annual periods, beginning after 15 December 2014
For non-public business entities, one year deferral
Early adoption permitted
Retrospective application
ASU 2014-08, Reporting Discontinued Operations and Disclosures of
Disposals of Components of an Entity:
►
►
►
►
Page 110
For public business entities and certain not-for-profit entities, effective for disposals (or
classifications as held for sale) occurring in annual periods, and interim periods within those
annual periods, beginning on or after 15 December 2014
For all other entities:
►
Same effective date for annual periods
►
One year deferral for interim periods only
Early adoption permitted
Prospective transition for disposals (or classifications as held for sale) on or after effective date
Tax accounting insights and challenge areas
Accounting standards that can be
early adopted in 2015
►
ASU 2015-01, Simplifying Income Statement Presentation by
Eliminating the Concept of Extraordinary Items:
►
►
►
Page 111
For all entities, effective for annual periods, and interim periods within those annual
periods, beginning after 15 December 2015
Early adoption permitted; however, must occur at the beginning of an annual period
Prospective or retrospective transition
Tax accounting insights and challenge areas
Revenue recognition standard
Overview
►
Revenue recognition accounting standard issued on 28 May 2014:
►
►
Supersedes virtually all industry and interpretive guidance
Requires more estimates and judgments than current guidance
US generally accepted accounting principles (GAAP)
effective dates for calendar year-ends*
Transition method
Public
Retrospective or
Q1 2017
modified retrospective
Nonpublic Early adoption?
2018
No**
* FASB decided on 1 April 2015 to propose a one-year deferral of the effective date for its new revenue standard for
public and nonpublic entities reporting under US GAAP. The proposal also would permit both public and nonpublic
entities to adopt the standard as early as the original public entity effective date (i.e., annual reporting periods
beginning after 15 December 2016 and interim periods therein). An exposure draft on the proposal with a 30-day
comment period is expected.
** Nonpublic companies may early adopt as of public company effective date
Page 112
Tax accounting insights and challenge areas
Revenue recognition standard
A converged standard?
The FASB and International Accounting Standards Board
(IASB) each issued new standards:
►
The standards are consistent except for five areas:
►
►
►
►
►
Page 113
FASB establishes a higher collectibility threshold when assessing
whether a contract exists (based on existing definitions of
“probable” under US GAAP and IFRS).
FASB requires more interim disclosures than IASB.
IASB allows early adoption.
IASB allows an entity to reverse impairment losses on assets
recognized.
FASB provides relief for nonpublic entities relating to specific
disclosure requirements, effective date and transition.
Tax accounting insights and challenge areas
Revenue recognition final standard
The five-step model
►
Core principle – recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services
Step 1:
Identify the contract(s) with the customer
Step 2:
Identify separate performance obligations
Step 3:
Determine the transaction price
Step 4:
Allocate transaction price to separate performance
obligations
Step 5:
Recognize revenue when (or as) each performance
obligation is satisfied
Page 114
Tax accounting insights and challenge areas
Revenue recognition
Considerations for public companies
►
►
Public entities that choose the full retrospective approach may elect
not to push the effects back further than 2015 for their selected
financial data tables.
Staff Accounting Bulletin (SAB) Topic 11.M requires disclosure of the
effects of recently issued accounting standards.
►
Disclosures are expected to evolve as more information about the effects
are known (including the chosen transition method).
SEC five-year table?
Prior periods presented
Effective
SAB Topic 11.M (SAB 74)
2013
Final revenue
standard
Page 115
2014
2015
2016
Retrospective application
date
Modified retrospective
application date (public entity)
Tax accounting insights and challenge areas
2017
2018
Modified
retrospective
application date
(nonpublic entity)
Revenue recognition
Effective dates
►
Effective for annual periods beginning after:
►
►
15 December 2016 for public US GAAP entities and IFRS filers
15 December 2017 for non-public US GAAP entities.
►
►
Early adoption:
►
►
►
►
►
Standard includes an expanded definition of a public entity.
Prohibited for public US GAAP entities
Permitted for US GAAP nonpublic entities
Permitted for IFRS preparers
With two years until the effective date, it may appear that companies
have ample time to prepare; however, the potential changes to
revenue recognition for some companies may be significant.
Take advantage of the time you currently have.
Page 116
Tax accounting insights and challenge areas
Revenue recognition
Drivers of complexity
Nature of
arrangements
Diversity of
products and
services
Control
environment
Financial
reporting
systems
Revenue cycle
Location(s) of
business
functions
Page 117
Change
management
Tax accounting insights and challenge areas
Implementation
effort
Revenue recognition
Tax technical considerations
►
Taxpayers will need to determine when and how any change in revenue
recognition for financial reporting purposes is recognized for tax purposes:
►
►
►
For taxpayers applying a deferral method for advance payments, the amounts deferred
for tax purposes are determined by reference to the amounts deferred for financial
statement purposes.
A change in revenue recognition for financial statement purposes may be a permissible
method for tax purposes.
In certain jurisdictions, local tax liability is based upon statutory financial statements:
►
►
►
►
When local statutory financial statements are prepared under IFRS, the statutory financial
statements may change with adoption of the standard.
Evaluate whether a foreign subsidiary’s E&P or local tax change the amount by
which a distribution is taxable as a dividend, the amount of Subpart F inclusion or
deemed paid foreign tax credits
Evaluate intercompany prices and transfer pricing policies where adoption
changes revenue, profits or third-party comparables are used in determining
transfer pricing
May require companies to review the methodology for compiling sales
apportionment data
Page 118
Tax accounting insights and challenge areas
Revenue recognition
Income tax accounting considerations
►
New temporary differences may arise or existing temporary differences may be
computed differently:
►
►
Valuation allowance considerations may change:
►
►
Jurisdiction-by-jurisdiction analysis necessary to assess whether the change in revenue
recognition for financial reporting results in temporary differences due to differences in timing
and amount of revenue recognized for financial reporting and tax purposes
Current and deferred tax consequences of the cumulative effect adjustment reported in
the period of adoption:
►
►
Change in deferred tax assets, temporary difference reversals or expected future taxable
income may affect judgments regarding the realizability of deferred tax assets.
Multinational companies will need to consider the effects of changes in revenue
recognition for financial reporting purposes at foreign subsidiaries:
►
►
Companies may need to revise their processes and data collection tools.
Requires careful consideration of the income tax accounting effect of individual items included
in the cumulative effect adjustment
A change in an accounting method for tax purposes requires careful consideration of
the period the change in method is considered for financial reporting purposes
Page 119
Tax accounting insights and challenge areas
FASB project status
Page 120
Tax accounting insights and challenge areas
Selected FASB projects
Current status
Project
Leases
Status
Drafting final standard
Financial instruments:
Classification and measurement*
Drafting final standard
Impairment
Re-deliberations
Hedging
Initial deliberations
Clarifying the definition of a business
Goodwill for public business entities (PBEs)
and not-for-profits (NFPs)
Initial deliberations
Intangible assets in business combination
for PBEs and NFPs
* Amendments to Accounting Standards Codification (ASC) 740, Income Taxes, are expected in
final standard.
Page 121
Tax accounting insights and challenge areas
FASB simplification initiatives
Current status
Simplification project
Measurement date: defined benefit plan assets
Customer’s accounting for fees in a cloud computing
arrangement
Status
Drafting final
standard
Presentation of debt issuance costs
Subsequent measurement of inventory
Income taxes – intra-entity asset transfers and
balance sheet classification of deferred taxes
Employee share-based payment accounting
improvements*
Balance sheet classification of debt
* Amendments to ASC 740 are expected in the proposal.
Page 122
Tax accounting insights and challenge areas
Re-deliberations
Comment period
Drafting exposure
draft
Initial
deliberations
FASB income taxes simplification
►
Eliminate exception that requires deferral of the income tax effects of
intercompany sales/transfers of assets:
►
►
►
►
Recognize income tax expense in the period of the sale/transfer
Modified retrospective transition approach
Recognize deferred tax effects of difference between the tax basis in the
buyer’s jurisdiction and the book basis after elimination of the
intercompany profit
FASB expectations:
►
►
►
For public business entities, proposed amendments effective for annual
periods, and interim periods within those annual periods, beginning after 15
December 2016
For non-public business entities, proposed amendments effective for annual
periods beginning after 15 December 2017 and interim periods in annual
periods beginning after 15 December 2018
Early adoption permitted, but not before the effective date for public business
entities
Comment letters due 29 May 2015
Page 123
Tax accounting insights and challenge areas
FASB income taxes simplification
►
Require the classification of all deferred tax assets and liabilities as
noncurrent:
►
►
►
►
Companies no longer required to allocate valuation allowances between
current and noncurrent
No change to jurisdictional offsetting requirements
Prospective transition approach
FASB expectations:
►
►
►
For public business entities, proposed amendments effective for annual
periods, and interim periods within those annual periods, beginning after
15 December 2016
For non-public business entities, proposed amendments effective for
annual periods beginning after 15 December 2017 and interim periods in
annual periods beginning after 15 December 2018
Early adoption permitted, but not before the effective date for public
business entities
Comment letters due 29 May 2015
Page 124
Tax accounting insights and challenge areas
FASB share-based payment project
►
FASB voted to propose that all excess tax benefits and
tax deficiencies be recognized in the income statement:
►
►
FASB voted to propose elimination of the requirement that
excess tax benefits not be recognized until they are
realized:
►
►
Prospective transition
Modified retrospective transition with a cumulative catch-up
adjustment to retained earnings
An Exposure Draft will be issued for public comment
soon.
Page 125
Tax accounting insights and challenge areas
FASB income taxes disclosure project
►
FASB tentatively decided to require additional disclosures related to
foreign earnings and indefinite reinvestment assertions:
►
►
►
►
Page 126
Pretax income disaggregated between domestic and foreign earnings,
with foreign earnings disaggregated for any country that is significant to
total earnings
Domestic tax expense recognized on foreign earnings
Undistributed foreign earnings that are no longer indefinitely reinvested
with an explanation of the circumstances that caused the company to
change its assertion and separate disclosure for any country that
represents a significant portion of the disclosed amount
Foreign earnings that are indefinitely reinvested for any country that
represents at least 10% of the company’s total foreign earnings that are
indefinitely reinvested
Tax accounting insights and challenge areas
FASB income taxes disclosure project
►
FASB decided not to require disclosure of:
►
►
►
►
►
Deferred tax liabilities recorded for unremitted foreign earnings by
country
Estimates of unrecognized deferred tax liabilities on the basis of
simplified assumptions for companies that have made indefinite
reinvestment assertions
Past events or current conditions that have changed
management’s plans with respect to undistributed foreign earnings
FASB indicated that it will discuss income tax disclosures
related to uncertain tax positions and other income tax
topics at a later date.
An exposure draft is not expected in the near term.
Page 127
Tax accounting insights and challenge areas
Internal control over financial reporting
(ICFR)
Page 128
Tax accounting insights and challenge areas
Tax ICFR
Precision and evidence of review controls
►
Precision (the nature or level at which the review control operates):
►
►
►
►
Is the control capable of identifying errors?
Would the control identify errors or fraud that could be material to the
financial statements?
Does the control address the relevant risks?
Does the control identify errors?
►
►
►
►
►
Nature of the errors? Examples?
If not, why?
Nature of the questions identified: follow-up, outcome?
Is there contradictory evidence indicating the control is not suitably
designed?
What evidence of the control exists?
►
►
Page 129
Is evidence sufficient to support the assessment?
A signature is not sufficient.
Tax accounting insights and challenge areas
Attributes of a review control
Who
►
Who performs the control? Do they
possess competence and authority?
When
►
When or how often is the control
performed (timeliness)?
►
What procedures are performed?
What info or data is used?
What does the reviewer evaluate?
What precision is encompassed?
What types of errors are identified?
What actions are taken or result?
►
What
►
►
►
►
Page 130
Tax accounting insights and challenge areas
Tax ICFR
Design example
Poor example
Better example
Appropriate personnel
review the return to
provision true-up
calculation.
On an annual basis, in the period in which the
federal income tax return is filed (when), the
chief accounting officer (who) reviews the return
to provision calculation ensuring all positions
taken on the income tax return were
appropriately considered in the prior year
income tax provision (what, why). All return to
provision items $250k or greater (net of tax) are
evaluated for the effect on the current year or
prior year income tax provision (what).
Considerations are documented within the return
to provision workpaper file and supported with
supplemental evidence, if necessary (how).
Page 131
Tax accounting insights and challenge areas
Tax ICFR
Considerations
►
Review control design:
►
►
►
Data – understand and document effectiveness of controls related to
source data and inputs to tax provision calculations:
►
►
►
►
►
Control owner has appropriate authority and competency.
Precision considerations can be qualitative and/or quantitative thresholds.
Completeness and accuracy
Integrity of underlying reports
Appropriate evidential support to document both the design and
operating effectiveness of controls (required for all controls, but can
be challenging for review controls)
Evaluate effectiveness of internal controls design and operation based
on current business and procedures
Perform assessment of control execution and testing of control design
Page 132
Tax accounting insights and challenge areas
PCAOB focus areas
Page 133
Tax accounting insights and challenge areas
AICPA National Conference – December 2014
PCAOB staff remarks on tax
►
PCAOB staff stated that inspections will likely focus on the
following areas of emerging risks in 2015:
►
►
►
►
►
Page 134
Risks associated with mergers and acquisitions
Income taxes, specifically matters related to a company’s
assertions related to undistributed cash held in overseas
subsidiaries
The effect of falling oil prices on the audits of affected companies
Audit procedures related to a company’s cash flow statement
Auditing of hard-to-value investments and cybersecurity risks
Tax accounting insights and challenge areas
SEC focus areas
Page 135
Tax accounting insights and challenge areas
AICPA National Conference – December 2014
SEC staff remarks on income tax
►
►
Focus on quality and clarity of management discussion and analysis
(MD&A) disclosures, including those related to income tax rate
reconciliations, valuation allowances and earnings that have not
been repatriated
Enhance disclosures in MD&A when:
►
►
►
►
Income tax expense is material to financial statements – both recorded
expense and expense based on statutory tax rate.
There are material fluctuations or lack of fluctuations that were expected in
the ETR.
There are risks and uncertainties.
Provide transparent disclosure in MD&A of significant foreign earnings,
including earnings and tax rates within specific jurisdictions and
jurisdictions’ effects on the ETR
Page 136
Tax accounting insights and challenge areas
Regulatory focus – income taxes
►
Foreign earnings
►
Realizability of deferred tax assets
►
Effective tax rate reconciliation
Page 137
Tax accounting insights and challenge areas
Foreign earnings
►
Indefinite reinvestment:
►
►
Not an all-or-nothing assertion
Positive assertion requiring specific documentation and evidence
of plans each reporting period
►
Consider financial reporting implications of tax planning
►
SEC comments:
“Please explain to us how you evaluated the criteria for the exception to
recognition of a deferred tax liability in accordance with ASC 740-30-25-17
and 18 for undistributed earnings that are intended to be indefinitely
reinvested. Describe the type of evidence and your specific plans for
reinvestment for these undistributed earnings that sufficiently demonstrates
that remittance of earnings will be postponed indefinitely.”
Page 138
Tax accounting insights and challenge areas
Current disclosure requirements
Indefinite reinvestment of foreign earnings
►
Certain disclosures required when the deferred tax liability
is not recognized (ASC 740-30-50-2):
►
►
►
►
The cumulative amount of the temporary difference (i.e., outside
basis difference in which the book basis of the investment exceeds
its tax basis before application of a tax rate) (ASC 740-30-50-2(b))
The amount of the unrecognized deferred tax liability related to the
difference or statement that it is not practicable to determine
(ASC 740-30-50-2(c))
Types of events that would cause the temporary difference to
become taxable (ASC 740-30-50-2(a))
Notably, there is no practicability exception for disclosing
the temporary difference required by ASC 740-30-50-2(b).
Page 139
Tax accounting insights and challenge areas
Realizability of deferred tax assets
►
►
►
►
►
►
►
How evidence was weighted
Cumulative losses
Consideration of the four sources of taxable income, including the prominence
of each source and the material uncertainties, assumptions or limitations
associated with each source
Timing and reason for changes in valuation allowance
Consistency of assumptions
Consistency of accounting with MD&A disclosures
SEC comments:
►
►
Page 140
“Please substantially revise your disclosure in future filings to provide investors with
quantitative and qualitative information of the material positive and negative factors
that you considered when arriving at your conclusion that it is more likely than not
that the deferred tax assets will be realized.
Please discuss the significant estimates and assumptions used in your analysis,
including the specific factors that changed during fiscal 2012 and led you to
determine the reversal was appropriate at this time.”
Tax accounting insights and challenge areas
Realizability of deferred tax assets
►
SEC comments (cont.):
►
►
►
►
Page 141
“Please discuss how you determined the amount of valuation allowance to reverse.
Please disclose the amount of pre-tax income you need to generate to realize
these deferred tax assets. Include an explanation of the anticipated future trends
included in your projections of future taxable income. Confirm to us that the
anticipated future trends included in your assessment of the realizability of your
deferred tax assets are the same anticipated future trends used in estimating the
fair value of your reporting units for purposes of testing goodwill for impairment and
any other assessment of your tangible and intangible assets for impairment.
If you are also relying on tax-planning strategies, please disclose the nature of your
tax planning strategies, how each strategy supports the realization of deferred tax
assets, the amount of the shortfall that each strategy covers, and any uncertainties,
risks, or assumptions related to these tax-planning strategies.
Please show us in your supplemental response what your revisions to future filings
will look like.”
Tax accounting insights and challenge areas
Effective tax rate reconciliation
►
►
►
►
Clearly label items in the income tax rate reconciliation
For material rate reconciling items associated with foreign
jurisdictions, disclose the specific jurisdictions that materially affect the
effective tax rate, their tax rates and information about the effects of
such foreign jurisdictions (e.g., magnitude and mix) on the effective
tax rate
May question whether large “provision to return” or “true-up”
adjustments reflect prior year errors rather than changes in estimates
Registrants required to determine that rate reconciliation information
is consistent with other disclosures in MD&A or footnotes
Page 142
Tax accounting insights and challenge areas
Tax provision challenges and practice issues
Page 143
Tax accounting insights and challenge areas
Tax provision challenges
Restatements
►
General causes:
►
Application of tax technical rules:
►
►
Intra-period tax allocation:
►
►
►
Interim periods
Accounting for outside basis differences
Realizability of deferred tax assets (DTAs):
►
►
Page 144
Tax basis
Income tax
errors are a
leading cause of
restatements.
Tax planning strategies
Deferred tax liabilities (DTLs) as source of income
Tax accounting insights and challenge areas
Appropriate application of tax basis
►
Essential starting point – maintaining a detailed and
accurate record of the tax basis of all assets and liabilities,
including those without a book basis:
►
►
A fluctuation analysis of tax basis supporting the deferred tax
balances may not provide sufficient audit evidence
Common pitfall – not properly identifying a tax basis or
attribute or not appropriately recording and tracking the
tax basis or attribute in subsequent periods:
►
Requires technical understanding of tax law:
►
►
Often for multiple taxing jurisdictions
May be simple or complex
How is the tax basis evaluated?
Page 145
Tax accounting insights and challenge areas
Intra-period allocation
►
Be mindful of the complexity of the intra-period allocation rules
►
Common pitfalls:
►
►
►
►
Failure to apply the exception (losses from continuing operations and
income from other sources)
Failure to consider interaction of exception with the interim reporting rules
Inappropriate “backwards tracing”
Failure to follow two step process when income from discontinued
operations is recognized in an interim period and losses from continuing
operations are expected for the year
Are there losses from continuing operations and income from
another source?
Does the financial reporting reflect the exception to
the intra-period allocation rules?
Page 146
Tax accounting insights and challenge areas
Intra-period allocation
►
Exceptions to the general rule apply in all situations where there is:
► A loss from continuing operations
► Cumulative income from all other sources
►
Exception also applicable to interim periods when company
anticipates an ordinary loss from continuing operations for the year
►
Applicable even to periods of a full valuation allowance
►
Does not change overall annual tax provision (benefit)
►
However, may change tax provision (benefit) between interim periods
The result of this computation (as well as the need to do the
computation) is often counterintuitive.
Page 147
Tax accounting insights and challenge areas
Accounting for outside basis differences
►
Outside basis differences may not be recognized if certain
exceptions are applicable:
►
►
Section 14.1.2 of income taxes FRD, Exceptions to deferred tax
accounting for outside basis differences: summary of application of
exceptions and common entity types
Common pitfalls:
►
►
Not providing taxes for outside basis difference related to
investments in partnerships or equity method investments
No longer qualifying for exception with changes in investment
ownership
Are the exceptions to outside basis differences appropriately applied?
Page 148
Tax accounting insights and challenge areas
Realizability of DTAs
►
Same framework:
►
►
►
Establishing a valuation allowance for the first time
Determining whether a valuation allowance continues to
be necessary
Have all four sources of taxable income been considered?
Page 149
Tax accounting insights and challenge areas
Realizability of DTAs
►
Taxable income in prior carryback years:
►
►
Consider character – capital losses may only be available to offset
capital gains.
Consider limits – the number of years and amount of losses that
may be carried back may be limited by jurisdiction.
Do you know if a carryback is limited?
Page 150
Tax accounting insights and challenge areas
?
Realizability of DTAs
►
Future reversals of existing taxable temporary differences:
►
►
►
►
Evaluate DTAs on a gross basis
Consider the timing of reversal of existing taxable temporary
differences
Common pitfall – DTAs evaluated on a net basis
Common pitfall – naked credits used as a source of taxable
income
Will the deferred tax liabilities result in taxable income in
the appropriate period?
Are there deferred tax liabilities associated with book balances
that do not have a known period when they may affect the income
statement?
Page 151
Tax accounting insights and challenge areas
Best practice responses
Page 152
Tax accounting insights and challenge areas
Best practice responses
Reduce risk in accounting calculations
►
Uncertain tax positions:
►
►
Fixed assets:
►
►
►
Support balances for deferred tax assets, additional paid-in capital (APIC) pool, Section 162(m)
adjustments and unrecognized tax benefits by entity; consider deductibility of payments to
foreign employees
Tax basis balance sheets:
►
►
Improve reporting of tax return deductions and deferred taxes
Reconcile sub-ledgers and general ledgers to source data and tax systems to uncover areas for
improvement
Share-based payments:
►
►
Automate unrecognized tax benefit calculations and rollforwards, including interaction with other
tax attributes, interest and penalty calculations, and cumulative translation adjustments
Support cumulative temporary differences by entity with book and tax basis balance sheets that
agree to tax returns and general ledgers; automate inputs and calculations
Legal entity calculations:
►
Page 153
Improve legal entity data and engage finance for items outside tax department’s direct control
(e.g., forecasts, legal entity reporting, intercompany profit elimination)
Tax accounting insights and challenge areas
Best practice responses
Reduce risk in accounting calculations
►
Intercompany transactions:
►
►
Improve spreadsheets and tools to minimize risk of errors, reduce hours and manage
risk; consider implementing a standardized process and/or tool for:
►
►
►
►
►
►
►
►
Review intercompany transactions for compliance with tax accounting rules
Tax basis balance sheets to validate deferred taxes
Unrecognized tax benefit computations and tracking
Net operating loss (NOL) tracking
Indefinite reinvestment assertion documentation and outside basis difference calculations
Share-based payment tax accounting, APIC pools and deferred tax proofs
Section 162(m)(6) deferred tax computations
Fixed asset deferred tax reconciliations
Greater than 50% of Fortune 1000 companies use Excel spreadsheets to compute
global income tax provision:
►
Page 154
Consider third party to test and improve Excel spreadsheets for enhanced efficiency, accuracy
and controls
Tax accounting insights and challenge areas
Tax provision recommendations
Page 155
Tax accounting insights and challenge areas
Tax provision recommendations
►
►
►
►
►
Refresh internal controls for income taxes (consider adopting 2013 framework)
Develop work plan for enhancements and remediation items and assign tasks
Review work plan and timeline with auditor
Assign technical tax accounting white papers for issues and judgments
Accelerate work during quarters and interim to avoid surprises:
►
►
Evaluate and record return-to-provision adjustments
Prove out deferred tax assets/liabilities, current taxes payable/receivable:
►
►
►
►
►
Document/analyze state tax rates, including apportionment changes and the impact on deferred
taxes, and foreign tax rates for changes
Document outside basis differences, including indefinite reinvestment assertions, and prepare
outside basis difference calculations (consider previously taxed income and un-recaptured
Subpart F income)
Document valuation allowance considerations (four sources of taxable income) and prepare
position paper
Document uncertain tax positions.
►
Page 156
Leverage tax provision-to-return process for completed tax returns
Consider tool to improve efficiency and accuracy of computations
Tax accounting insights and challenge areas
Tax provision recommendations
►
►
►
►
Analyze and document unique transactions and events and effects on tax
provision, unremitted earnings assertions, uncertain tax positions and
valuation allowances (acquisitions, dispositions, financing, internal
restructuring, cash flow forecasts, etc.)
Evaluate intercompany transactions and tax provision effects
Ensure tax accounting judgments align with business results and disclosures
and update disclosures of factors that influenced judgments
Review for consistency with tax and nontax disclosures:
►
►
►
►
►
►
►
Page 157
Liquidity (foreign reinvestment and parent or domestic cash requirements)
Commitments and contingencies
Acquisitions/dispositions
Cash flow
Equity movements
Share-based payments
MD&A
Tax accounting insights and challenge areas
Tax provision recommendations
►
►
►
►
►
►
►
►
Institute regular meetings with external auditors regarding contemporaneous
issues (significant transactions, changes in business, etc.)
Challenge annually prior year processes to identify areas for improvement
Simplify and standardize existing Excel templates
Address technical issues early and prepare white papers for consideration by
management and external audit
Implement standardized global procedures
Consider the tax provision process a year-round area of continued focus
Identify a third party to assist with preparation or review the provision (preaudit review) or co-source/outsource to free up internal time for review
Obtain assistance researching and documenting issues or preparing white
papers on tax accounting positions
Page 158
Tax accounting insights and challenge areas
Thank you!
Page 159
Tax accounting insights and challenge areas
Evolving IRS paradigm
Mark Mesler, Ernst & Young, LLP
Agenda
►
►
►
►
►
►
IRS resource constraints
Large Business and International (LB&I) Division
organization changes
New LB&I exam process update
LB&I Coordinated Industry Case (CIC) pilot
Appeals Judicial Approach and Culture (AJAC) Project
Questions
Page 161
Evolving IRS paradigm
IRS resource constraints
Page 162
Evolving IRS paradigm
IRS resource constraints
►
Budget:
►
►
►
►
FY2015: $10.9 billion; cut by 1.2 billion or 10% since FY2010
Reduction of approx. 3,000 employees this year and 13,000
employees since FY2010
Training and travel reduced by $248 million or 74% percent since
FY2010
Cutbacks and impact:
►
►
►
Page 163
Decline in call service:
► Less than 50% of calls get answered – down from 64%
in FY2014.
► Average wait time is over 30 minutes per call and more than 45
days to answer most letters.
Less audits/rulings/advice
More automated notices, especially international information
return penalties
Evolving IRS paradigm
LB&I organization changes
Page 164
Evolving IRS paradigm
LB&I organizational chart
LB&I commissioner
Heather C. Maloy
Deputy commissioner
(domestic)
Deputy commissioner
(international)
Shared support
Pre-filing and technical
guidance
Sergio Arellano (A)
Douglas O’Donnell
Susan Latham, Dir.
Tina Meaux, Dir.
Communications,
technology and
media
Cheryl Claybough, Dir.
Scott Ballint, DFO NW (A)
Rosemary Daley, DFO SW
Financial services
Catherine Jones, Dir. (A)
Jo McGready, DFO Fin
Prod
Barbara Harris, DFO NY
Global high
wealth
Cheryl Claybough, Dir. (A)
Lavena Williams, Dir. (A)
Heavy
Dennis Figg, DFO NE (A)
manufacturing and Donald Sniezek, DFO SE
pharmaceutical
(A)
Natural resources
and construction
Kathy Robbins, Dir.
Khin Chow, DFO W (A)
Kimberly Edwards, DFO E
Steve Whitaker, DFO Eng.
Retailers, food,
transportation
and health care
Lori Nichols, Dir. (A)
Elise Gardner, DFO E (A)
Lori Caskey, DFO W
Paul Curtis, DFO CAS
Page 165
Assistant deputy
commissioner,
international
John Hinding (A)
International
business
compliance
Sharon Porter, Dir. (A)
Jolanta Sanders, DFO E
Margie Maxwell, DFO W
(A)
William Holmes, Dir. IDM
Theodore Setzer, Dir., FPP
International
Individual
compliance
David Horton, Dir.
Clifford Scherwinski, DFO
Transfer pricing
operations
David Varley, Dir. (A)
Hareesh Dhawale, Dir.
APMA
Business systems
planning
Dean Wilkerson, Dir. (A)
Management and
finance
Keith Walker, Dir.
Planning,
analysis,
inventory and
research
Christopher Larsen, Dir.
Equity, diversity
and inclusion
Rona Evans, Dir.
Division planning,
oversight
reporting and
liaison
Michael Boccarossa, Dir.
Evolving IRS paradigm
Deputy director
Pam Drenthe (A)
Holly Paz
(A) = Acting
LB&I update
►
Organizational leadership changes:
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►
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Budget effect on exam resources:
►
►
►
Significant headcount reduction and limited attrition hiring
Rumor of pending LB&I organization structure
Impact to taxpayers:
►
►
►
►
Page 166
Five top executives departures including deputy commissioner
(international, transfer pricing director, director APMA, director
international strategy, acting deputy commissioner (domestic)
Departures due to retirements and departures
New cadre of LB&I executive appointments
Greater management instability on examinations
Potential for delays on audit activity and completion dates
Uncertainty in decision-making authorities and accountability
Uncertainty on roles/responsibilities for domestic and
international examiners
Evolving IRS paradigm
New LB&I exam process update
Page 167
Evolving IRS paradigm
Proposed new LB&I exam process
Publication 5125
►
Replaces current Quality Exam Process incorporating
recent changes:
►
►
►
►
►
►
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New Information Document Request (IDR) Directive
Appeals Judicial Approach and Culture Project
Establishment of Issue Practice Groups & International Issue
Networks to promote knowledge sharing vision for focused issue
examinations
Establishes process for centralized issue identification and
selection
Exam teams to limit audit to pre-identified issues
Issues to be managed and audited by “issue teams”
Implementation in Spring 2015 with internal revenue
manual revisions; however, teams have received training.
Page 168
Evolving IRS paradigm
LB&I examination process – roles and
responsibilities
►
LB&I expectations:
►
►
►
►
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Exam teams and taxpayers working transparently
Engage each other in development of examination plan
Follow information document request procedures
Resolve issues at lowest level using appropriate resolution tools
Taxpayers and representatives:
►
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Page 169
Identify personnel for each issue with significant knowledge
Collaborate with the exam team to arrive at an:
► Acknowledgment of the facts
► Provide support for any additional facts
► If facts remain in dispute, documenting the dispute
Evolving IRS paradigm
LB&I examination process – planning phase
►
Initial planning meeting:
►
►
►
►
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Page 170
Exam team and taxpayer will work together to define the scope of the
examination and process.
Exam team will explain why each issue is being considered.
Taxpayer should provide input on how each issue can be examined.
Issue team approach:
► Comprised of both LB&I and taxpayer personnel responsible for
examining each issue
► Collaborate transparently to develop exam procedures for each
issue
► Establish relevant facts and ensure each party’s position is fully
understood
Examination plan:
► Issue-focused and jointly reviewed
► Timelines, audit steps, risk analysis and methods of monitoring
progress
Evolving IRS paradigm
LB&I examination process – execution phase
►
Issue development:
►
►
►
►
Identify and document all relevant facts
Present legal positions
Communicate both parties’ positions:
► Identifying areas of disagreement
► Resolution strategies
► Attempting to resolve at lowest possible level
Facts:
►
►
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Page 171
LB&I teams to seek taxpayer’s concurrence
Resolve any facts in dispute
Consistent with AJAC Project:
► Requires 365 days remain on statute of limitation when received
by Appeals
Evolving IRS paradigm
LB&I examination process – resolution phase
►
Issue resolution tools:
►
►
►
Taxpayer responsibility:
►
►
►
Consistently encourages available issue resolution tools
Requires consideration of Fast Track Settlement with Appeals
Ensuring all relevant facts and legal arguments provided during
examination
Prevent case being referred back to LB&I by Appeals
Exit strategy
►
►
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Page 172
Requires that discussions include efforts to resolve tax controversy
for certainty
Joint critique of the exam process to recommend improvements
Address future tax treatment of issues to eliminate
carryover/recurring issues
Evolving IRS paradigm
LB&I examination process – expectations with
respect to claims
►
Informal claims for refund:
►
►
►
Provided to the exam team within 30 days of the opening conference
After 30 days, must file formal claims
Treas. Reg. §301.6402.2 standards:
►
►
►
►
Page 173
Set forth in detail each ground upon which a credit or refund is
claimed
Present facts sufficient to apprise the IRS of the exact basis for the
claim, and
Contain a written declaration that it is made under penalties of perjury
Claims disallowed if these standards are not met
Evolving IRS paradigm
LB&I examination process – expectations with
respect to claims
►
Risk assessment:
►
►
►
►
Page 174
Claims will be risk assessed similar to other issues.
Fully documented and factually supported claims may permit exam team
to make tax determination without use of IDRs.
Fully documented claims enable a quick assessment to accept or
examine claim.
If the claim warrants examination, then:
► Both the exam team and taxpayer discuss resources and timeline.
► LB&I could decide that the claim will be worked separately from the
current examination.
Evolving IRS paradigm
LB&I Coordinated Industry Case (CIC) pilot
Page 175
Evolving IRS paradigm
LB&I Coordinated Industry Cases (CIC) pilot
►
LB&I initiated a new CIC pilot on 30 April 2014:
►
►
Currently, CIC cases:
►
►
►
►
Pilot will run for 18 months.
Front-end staffed into the LB&I compliance plan
Limits flexibility to allocate resources to other compliance activities
Under the new process, all CIC cases would undergo a
consistent classification process to determine tax return
compliance risk and to identify issues for examination.
New classification process will include issue identification
and written explanations on compliance risks, and
documentation to support compliance risk conclusions
(pre-classification):
►
Page 176
All information will be included in case file for use during
an examination.
Evolving IRS paradigm
Appeals Judicial Approach and Culture
(AJAC) Project
Page 177
Evolving IRS paradigm
Appeals Judicial Approach and Culture
(AJAC) Project
►
►
►
18 July 2013 – interim guidance memo for Appeals employees
Applies AJAC to examination and collection cases
AJAC themes:
► This is a quasi-judicial approach to Appeals hearing based on
case file.
► No new issues are raised by Appeals.
► Appeals will attempt to settle a case on factual hazards when the
case submitted by Compliance is not fully developed and the
taxpayer has presented no new information or evidence.
► If a taxpayer provides Appeals with new information, Appeals will
return the case to LB&I. If a taxpayer raises new arguments at
Appeals, LB&I will be given the opportunity to review and
comment on the arguments, but Appeals will maintain jurisdiction.
Page 178
Evolving IRS paradigm
Appeals Judicial Approach and Culture
(AJAC) Project
►
3 July 2014 – second phase of AJAC released by Appeals
►
Statute of limitations – one year remaining prior to
acceptance
►
Providing Exam with opportunity to comment (specific
time frame, 45 days) or return case to Exam (Appeals
releases jurisdiction to Exam)
►
Premature referral of case to Appeals or new information
presented by taxpayer during Appeals hearing
Page 179
Evolving IRS paradigm
Questions?
Page 180
Evolving IRS paradigm
Thank you
Page 181
Evolving IRS paradigm
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All Rights Reserved.
Any US tax advice contained herein was not intended or written to be
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These slides are for educational purposes only and are not intended, and
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