Federal Tax Panel Dallas Chapter TEI April 22, 2014 Question 1 – Corporate Tax Reform Our last presenter has provided some much needed insight into US Tax Reform proposals before Congress. • Russ Hamilton: What steps do you think tax directors should be taking to prepare their companies for any changes that might result? • [NOTE: If this question is addressed by the prior presenter, we will skip to Question 2] Question 2: New Trend in Role of Tax Professionals Earlier this month, a Senate Subcommittee grilled executives from Caterpillar, Inc. regarding its tax affairs claiming they had avoided paying $2.4 billion in taxes. Europe, not be out done, has publically castigated large corporations such as Starbucks, Google and Amazon and branded them as ‘immoral’. • David Northcut: Are these one-off events, or does this signal the beginning of a new trend, where minimizing taxes in no longer our role as corporate tax professionals? Question 3: Spreadsheet errors Everyone in the room uses a lot of spreadsheets to provide support for tax provisions and filings. There has been recent attention in the media about high-profile mistakes made as a result of spreadsheets, for example – – Kodak restates income downward by $11m due to spreadsheet error in severance payments – “too many zeros added to the employee’s accrued severance” – AstraZenneca was forced to restate an earnings forecast due to a spreadsheet error – Share of RedEnvelope fell by more than 25% due to a spreadsheet error where COS was understated. The CFO resigned. – Fannie Mae reported in an SEC filing that a billion dollar spreadsheet error resulted in an overstatement of gains on securities, accumulated other comprehensive income and total shareholder equity • David Northcut: What steps has your firm or client base taken to reduce the risk of spreadsheet errors? Question 4: APB 23 Abuse In the US Senate’s Permanent Subcommittee on Investigations hearings Offshore Profit Shifting and the US Tax Code, it was noted there were ambiguities in accounting standard APB 23 that created the potential for companies to manage their earnings by avoiding reporting US tax liabilities for foreign profits, thereby improving financial results. They recommended FASB to reevaluate the indefinite reversal exception to APB 23 and issue additional guidance or restrictions to clarify how the stand should be applied. • Russ Hamilton: From SEC Comment letters and PCAOB audits, have you noted increased scrutiny of a company’s APB 23 assertions? What should we be doing to better document our assertion to avoid any allegation that earnings are being manipulated? Question 5: Impact of Country-by-Country Base Erosion and Profit Shifting Action Plan In July of 2013, the OECD released an Action Plan on Base Erosion and Profit Shifting (BEPS). This Action Plan addresses the concerns that multi-national enterprises (MNE) are taking advantage of national tax laws that have not kept pace with global corporate structures, relocation of core business functions, and the digital economy, allowing gaps which push activities to low or no tax jurisdictions. The Action Plan concludes that certain practices of MNEs artificially segregate taxable income from the activities that generate it. • Sean Johnson: Are your clients seeing any impact of the County-byCountry BEPS Report [e.g. more audits, audits scrutinizing areas considered abusive by the OECD]? Are their action items we should be taking to shore up their transfer-pricing strategy and documentation or other documentation which better support the legitimacy of tax planning strategies? Question 6: FACTA The Foreign Account Tax Compliance Act (FACTA) The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to combat tax evasion by U.S. persons holding investments in offshore accounts by requiring foreign financial institutions to report information on their US account holders. The law also requires certain US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return. Two set of final and temporary FACTA regulations were released by the Treasury on February 20, 2014 which had numerous changes. Those of us in the room that are not financial business may have thought these rules do not apply to their organizations. • Russ Hamilton: What key actions should Tax Departments of Multi-national companies be taking now to ensure FACTA compliance? Explain how the Form 8938 requirement is different than the reporting of foreign financial accounts to the IRS on Form TD F90-22.1? Note to panel: Many in the room might not be aware that certain entities within their consolidated group may be subject to FACTA. Briefly explain how to identify a foreign financial institution with a company’s expanded affiliated group that may be subject to registration and reporting. Once you identify a company that qualifies as a foreign financial institution, describe briefly that there are registration, withholding and reporting requirements. Question 7: Tax Basis Balance Sheets The PCAOB has been critical of audit firms for not adequately auditing accounting for income taxes. One area of particular concern is that there are inadequate audit procedures applied and insufficient testing of deferred income taxes. One of the recommendations is for clients to prepare and maintain tax basis balances sheets. • Sean Johnson: What are the benefits of preparing a tax basis balance sheet? Is this practice becoming a “best practice”? Can you provide insight on how to efficiently build tax-basis balance sheets? Note to panel: Below is a list of the benefits of maintaining a tax basis balance sheet which I found in my research. I think our group would be interested in understanding the concrete benefits of implementing a tax basis balance sheet based on experiences with your client base – Review of tax basis of assets and liabilities and a reconciliation of the activity in the income tax accounts (accounts can get “out-of-whack” due to transactions, divestures or internal errors (including spreadsheet errors!) – Presentation of a tax basis balance sheet will assist auditors and increase the efficiency of the audit – Increased efficiency in tax department, for example, compliance group would update the tax basis balance sheet to the returns filed – Implementation and continual review of tax basis balance sheet is a process support several internal control objectives – Tax basis balance sheets allow the company to be better prepared for divestures, acquisitions and mergers – Implementation of tax basis balance sheet will necessarily require more analysis of the balance sheet which may reveal book-to-tax differences that have not be previously identified – Implementation of a tax basis balance sheet may also result in identifying tax planning opportunities or potential tax accounting method changes
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