Author Archive

The Benefits Of Seeking Competent Authority Relief For Proposed Transfer Pricing Adjustments

June 20, 2011

By David L. Bernard

TaxBlawg’s Guest Commentator, David L. Bernard, is the former Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

My last blog post suggested that the best defense against transfer pricing assessments is the adoption of a globally consistent transfer pricing policy supported by appropriate documentation. Near the conclusion of that post, I noted that the Competent Authority (CA) process and Advance Pricing Agreements (“APAs”) were tools that could be employed if your company faced transfer pricing adjustments.

Although the goal of your transfer pricing policy and related documentation is to manage risk and avoid tax assessments, the nature of the beast is such that there is no precise price one can pinpoint in transfer pricing matters that can completely eliminate the risk of a tax authority’s challenge. Rather, there is usually a range of potential prices that may be appropriate. A tax authority may be inclined to pick a price at the end of the range most favorable to its country from a revenue perspective, leaving the Chief Tax Officer (CTO) to consider a menu of potential remedies, including administrative appeals, litigation, APAs, or perhaps a request for CA assistance.

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Transfer Pricing and How to Handle the “Double-Edged Sword”

February 28, 2011

By David L. Bernard

TaxBlawg’s Guest Commentator, David L. Bernard, is the former Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

Transfer pricing among affiliated companies is the classic “double-edged sword”. When carefully designed, transfer pricing practices can cut a company’s effective tax rate (“ETR”) with little risk of interference from tax authorities. When done poorly, transfer pricing can devolve into a mess of  ETR-killing practices.  As quickly as one edge can save a company money, the other edge can cut short a tax professional’s career.

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The Repatriation Dilemma Revisited

December 7, 2010

By David L. Bernard

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

My recent post titled The Repatriation Dilemma: Cash may be King, but is Earnings Per Share the Ace of Trump? discussed how taxes may be one of the reasons why cash is building in the balance sheets of corporate America. Specifically, the U.S. tax cost that may result from repatriating cash earned outside the U.S. in low-tax jurisdictions may simply be too high. While shareholders wonder why cash build-ups are not resulting in increases in share buy-backs and dividends, company executives “doing the math” conclude that spending up to a third of the cash in U.S. taxes to repatriate is not prudent.

The post triggered much interest. There have been phone interviews with both the Wall Street Journal and CFO Magazine regarding potential stories. A former Chief Tax Officer (CTO) recalled similar analyses and decisions during his “in-house” days, but did not take issue with the conclusion. Another reader lamented that it was just another example of how U.S. multinationals choose not to take part in the U.S. economy. (Hmmm, do you wonder if he or she purposely pays more tax than legally obligated?) In any event the level of interest in this topic suggested that a sequel is warranted.

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The Repatriation Dilemma: Cash May Be King, But Is Earnings Per Share Trump?

September 1, 2010

By David L. Bernard

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

The financial press can’t stop talking about the amount of cash on corporate balance sheets. Journalists and arm-chair analysts alike point to the $1.84 trillion in cash on the balance sheets of non-financial U.S. companies as a reason to be bullish on the stock market, figuring that eventually cash-rich companies will splurge on dividends and stock buy-backs, if not on pursuing growth opportunities. There’s probably truth to that, but there is also a good chance that some of the cash will never be spent. Why? Because much of this largesse has been earned outside the United States in low tax jurisdictions, and repatriating this would cost billions in cash taxes and earnings.

The Chief Tax Officer (“CTO”), CFO and Corporate Treasurer have many discussions on the desire to return cash to the U.S. and the amount of the resulting “hit” to income that would result. Some companies may have more of a tolerance for the reduction in earnings per share attendant with repatriation of low taxed earnings than others, but the growth in cash in corporate balance sheets suggests that earnings per share still trumps the desire to return cash to the U.S. when the tax burden is too great.

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LMSB’s Quality Examination Process – Ensuring its Application is “Fair and Balanced”

July 14, 2010

By David L. Bernard

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

In case you missed it, the IRS recently introduced a new approach to its audit management process, called the Quality Examination Process (“QEP”), and is effective for all LMSB corporate tax audits initiated on or after June 1, 2010. This replaces the Joint Audit Planning Process which was developed in partnership with the Tax Executives Institute in 2003. QEP has many of the same features of the 2003 process, but is much more comprehensive and in that respect is an improvement. However, the Joint Audit Planning Process was good in many respects, it was simply never used consistently throughout LMSB.

Surveys of LMSB taxpayers reflected the inconsistent application of the former process, with some reporting that they had never heard of it and others reporting little or no involvement in the development of the audit plan (a primary requirement of the process). This frustrated the leaders within LMSB because they had continuously stressed the importance of the process in their communications to the field. After obtaining input from several constituencies, LMSB decided it was time to come to market with a new and improved process. The question is whether taxpayers will feel that the results are an improvement over their past experiences.

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All Hands on Deck: The Case for Broadening the In-House Discussion of Tax Issues

June 8, 2010

By David L. Bernard

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

As the IRS sifts through dozens of comment letters on the proposed disclosure of uncertain tax positions, in-house tax officers have to wonder what’s next. Over the last decade, CTO’s have been hit with a barrage of new demands and worries. We have seen the rise of FIN 48 (now ASC 740-10), Sarbanes-Oxley and the resulting increased focus on controls, increasingly burdensome quarterly and annual attest firm reviews, listed transactions disclosures, the electronic filing mandate (Everson’s legacy), Schedule M-3, and now the still proposed UTP disclosure.

Notwithstanding the new challenges, the number one performance metric used to judge a tax department’s performance is still the effective tax rate (“ETR”). CTO’s and their staffs continue to be measured by their delivery on the ETR at a time when most at the IRS seem to believe that all tax planning is bad, outside counsel is becoming more cautious, attest firms are insisting to review opinions (thus jeopardizing privilege), budgets and head count have been cut and, oh by the way, “cash is king”.

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Tax Accounting Practices in a UTP Disclosure Environment

May 18, 2010

By David L. Bernard

Tax Blawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation and a past president of the Tax Executives Institute.

It is not too soon for in-house tax professionals to be thinking about how the disclosure of uncertain tax positions (required beginning with 2010 tax returns) will change their lives and perhaps their historical practices.

There are plenty of questions about the new requirement and, not least among them, doubts that it will produce the results the IRS anticipates. The most obvious question is whether the potential over-disclosure of temporary differences and the required disclosure of maximum exposure by issue will bog down the audit process and lead to more unagreed issues going to Appeals or to the courts. Notwithstanding the controversy, tax professionals would be wise to forget arguing about the merits of the new draft requirement and begin thinking about their responses; this is going to happen!

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