Posted tagged ‘effective tax rate’

Apple’s Double Irish With A Dutch Sandwich Goes Down Easy with SEC

October 9, 2013

By Phil Karter

Senator Carl Levin (D-Mich.) may have tried to take a bite out of Apple (AAPL) in congressional hearings last May examining the company’s overseas tax structure, calling it “the holy grail of tax avoidance.” However, it appears that more than just Irish eyes are smiling on the company these days, for in the eyes of the SEC, Apple’s efforts to minimize its tax burden are just fine thank you.  See e.g., O’Brian, Chris, “SEC reveals review of Apple’s Irish tax disclosures.” Los Angeles Times, 3 Oct. 2013, LATimes.com, 9 Oct. 2013.

But is that the happy end of the story for Apple and the many other companies such as Google (GOOG), Facebook (FB), Microsoft (MSFT) and Oracle (ORCL) that have replicated the Double Irish structure in one form or another?  Not necessarily given the continuing threat posed by a sweeping application of the economic substance doctrine.  For example, does the creation of foreign subsidiaries for the primary purpose and intent of minimizing tax liabilities meet either or both prongs of the infamous two-prong test examining objective non-tax profitability and subjective non-tax intent?

It very well should if cases like IES v. Comm’r. 253 F. 3d 350 (8th Cir. 2001) and Compaq Computer Corp. v. U.S., 277 F.3d 778 (5th Cir. 2001) continue to represent the state of the economic substance law.  IES’s and Compaq’s transactions were pure tax arbitrage plays whose profitability was derived solely from the monetization of foreign tax credits.  Is anything conceptually different really happening here? Yes, all the fuss over the Double Irish centers around keeping profits abroad beyond the reach of U.S. tax collectors but at bottom, each situation involves ways to reduce ETR and increase after-tax net profits (presumably along with shareholder value) through effective tax structuring.  At this point, the Supreme Court’s pronouncement in Gregory, v. Helvering, 293 U.S. 465 (1935), comes to mind: “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”

The problem is that there remains considerable uncertainty about the potential reach of the economic substance doctrine based on the plethora of less taxpayer-friendly decisions, particularly recent ones.  Moreover, uncertainty about how and when the ESD could apply – along with the new strict liability penalty under § 6662(b)(6) – has only been heightened by the enactment of a statute, § 7701(o), containing far too many undefined terms.  For example, left open under the codified doctrine are such critical questions as when the doctrine is relevant and what the threshold is for non-tax profits to be substantial relative to tax benefits.

Finally, as reflected by taxpayers’ unsuccessful litigation of leveraged lease (LILO and SILO) transactions, the imprimatur by a government agency blessing the transaction is no assurance that it will thereafter be respected by the IRS.

During his illustrious career, the legendary Steve Jobs was renowned for his prescience.  Such talents would have come in handy in foreseeing the end to this story.  For the legion of companies employing these tax strategies, the hope is for a happy ending rather than a  Tofflerian “Future Shock.”

Squib Note: Clarifying the 2013 Capital Gains Rates

January 2, 2013

It has been universally reported that under the newly passed American Taxpayer Relief Act of 2012, net capital gain tax rates have risen to 20% for taxpayers with taxable income greater than $400,000 for single filers and $450,000 for joint filers.  To clarify this broad statement, under section 102 of the new law, the higher capital gains rate applies only to the gain that, when added to other taxable income, exceeds the threshold amounts.  Taxpayers below the 39.6% taxable income threshold before capital gains are taken into account will have their capital gains taxed at 15% up to the taxable income threshold and 20% on the excess.  The following two examples illustrate how the net capital gain tax rate is calculated:

In Example 1, joint taxpayers earn $400,000 of ordinary income and another $200,000 in net capital gains.  Under the new law, the first $50,000 of net capital gains is taxed at the lower rate, with the remaining $150,000 taxed at the higher rate.  The effective rate of 18.75% reflects the blending of the 15% and 20% rates.

2013 Capital Gain Rate Example 1

In Example 2, joint taxpayers now earn $200,000 of ordinary income and another $400,000 in net capital gains.  Because a greater portion of the taxpayers’ taxable income has shifted from ordinary income to net capital gain, the effective net capital gain rate is lower than the previous example because a greater portion of the taxpayer’s below-the-threshold income is taxed at the 15% rate, leaving a smaller remainder subject to the 20% tax.

2013 Capital Gain Rate Example 2

The above examples do not take into account the new 3.8 % medicare surtax on capital gains (and other net investment income) imposed by section 1411 of the Internal Revenue Code. Because the income threshold under that section is lower than the 39.6% tax rate threshold ($200,000 for single filers and $250,000 for joint filers), the surtax would apply to the entire net capital gain amounts in both examples, resulting in an effective rate of 22.55% and 20.68% respectively.

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.

(more…)

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.

(more…)

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.

(more…)

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”.

(more…)


Follow

Get every new post delivered to your Inbox.

Join 101 other followers

%d bloggers like this: