Selected Issues for Boards of Directors in 2018: Taxation
January 9, 2018
Significant Regulation and Reform Under the Trump Administration
After the results of the November 2016 elections, focus turned to which areas would be most impacted by the Trump Administration and the dynamics in Congress. Two areas that received significant attention in 2017 were taxes and antitrust, although other areas have seen significant other developments and will be important to watch in 2018.
2017 saw a significant amount of change and uncertainty related to the enforcement of existing tax laws as well as major changes to the tax law, most notably the U.S. tax reform bill that ripped through Congress like a major snow storm culminating in its enactment on December 22, 2017. These developments will have significant implications for companies and may create new risks in the coming year, as discussed below.
1. U.S. tax reform enacted into law. The new U.S. tax law has made major changes to the U.S. tax rules applicable to all types of businesses and to individuals. The new rules include major benefits for businesses, such as dramatic rate reductions for corporations and many pass-through businesses, immediate expensing for the cost of certain newly-purchased property, and a shift to a territorial system of international taxation in which U.S. companies are not taxed on the repatriation to the United States of business profits earned outside the United States. These opportunities are balanced by many unfavorable new rules, including new limits on deductions for interest expense and net operating losses, new taxes on certain types of income from international businesses (affectionately labeled the “GILTI” and “BEAT” taxes), and a one-time tax on U.S. companies’ offshore profits. These new rules are intended, in part, to prevent businesses from using international structures and transactions to reduce their U.S. tax obligations, although there is significant disagreement as to the actual impact these new rules will have and whether they will spur retaliatory changes by other countries. Even though the exact operation of some of these rules is still unclear, companies are actively assessing the impact on their financial statements, cash tax obligations and business projections. Companies should also be considering possible steps to optimize their position going forward. Meanwhile, Treasury and the IRS are trying to develop and publish regulatory interpretations and guidance and deal with the ambiguities, inconsistencies and conundrums created by the speedily-enacted legislation. You may wish to provide comments or otherwise participate in efforts to assist Treasury and the IRS in this process. Our U.S. Tax Reform website has more information and analysis of the U.S. tax reform legislation and its implications for different types of businesses and structures, and can be accessed here1.
2. New tax laws around the globe. The United States is not alone in efforts to prevent companies from eroding the local tax base and shifting profits to lower-taxed jurisdictions. The Organisation for Economic Co-operation and Development’s (OECD) base erosion and profits shifting (BEPS) project (which began in 2012 and hit a crescendo in 2014 and 2015) and other developments have energized non-U.S. tax authorities to push for changes in laws and in enforcement policies, aimed primarily at multinational businesses and transactions involving intangible property. Structures and transactions that were put in place prior to these developments should be looked at in light of these and other potential future changes. Multinationals should also be on the look-out for additional developments and should realistically assess their exposures in this evolving environment.
3. The European Commission’s Continued Efforts to Find and Reverse “State aid” Given to Multinationals. The European Commission’s investigations into State aid have, so far, resulted in several formal decisions ordering the relevant corporate taxpayer to pay enormous sums to the specific foreign tax authority which had previously issued a favorable tax ruling to that taxpayer. Examples include Fiat (ordered to return €20 to €30 million to Luxembourg), Starbucks (ordered to return €20 to €30 million to the Netherlands), Apple (ordered to return more than €13 billion to Ireland) and Amazon (expected to be ordered to return nearly €250 million to Luxembourg). The taxpayers are contesting these judgments, and there is likely to be years of litigation before we have a conclusive determination of whether the European Commission’s expansive interpretation of “State aid” is correct. In the meantime, investigations can be expected to continue (two that have been made public are Engie and McDonald’s), especially considering that the Paradise Papers leak has triggered increased scrutiny of European tax rulings, revealing Dutch rulings granted to Nike and Procter & Gamble that have prompted the Dutch authorities to investigate thousands of previously granted tax rulings. Multinationals that have received private rulings from any European tax authority should review those rulings and assess whether they are at risk and what steps they might take to reduce or mitigate their risks.
4. Increased disclosure and multinational cooperation. One of the significant changes coming out of the OECD’s BEPS project is the new mandatory reporting by multinationals of country-by-country tax information, which is then shared with all the countries in which the multinational has operations. Tax authorities are increasing their cooperation and information sharing generally and we have seen, and expect to continue to see, an increase in “joint audits” where two or more countries audit transfer pricing or other practices jointly or in tandem. We also anticipate an increase in treaty-based mutual agreement procedures (or “MAP”) wherein two or more taxing authorities mutually agree on how much should be reported by a specific multinational in each jurisdiction. MAP is usually initiated by the taxpayer and multinationals should be considering whether MAP would be beneficial in obtaining certainty and preventing conflicting claims resulting in double taxation.
5. Use of criminal charges and procedures, whistleblowers, data leaks and other types of unwanted publicity. Another troubling recent phenomenon has been the leaking of massive amounts of confidential information by non-governmental actors (e.g., Paradise Papers, Panama Papers, Luxembourg and Swiss leaks). Whistleblowers seeking bounties under various government programs have brought companies’ allegedly questionable tax practices to the attention of regulators, prompting securities, tax and other investigations, including under state “false claims” laws (with potentially substantial penalties). Also, in Europe, tax authorities have resorted to highly publicized “midnight raids” and criminal proceedings. Management needs to be prepared to respond to these challenges and the public relations complications that they present.
6. Tax-related shareholder litigation. Shareholder litigation is not a new development, but we have seen a recent increase in tax-related shareholder litigation against multinational companies. Several of these suits have concerned the adequacy of disclosure about pending tax audits and/or the tax consequences of contemplated transactions. Examples include Caterpillar, Eaton, AbbVie and First Marblehead. Companies should be diligent in ensuring that public filings fully and fairly disclose all ongoing audits and other tax issues and be prepared to respond to assertions that the disclosures were inadequate.
7. Taxpayers on the attack using procedural rules as weapons. Up until a few years ago, when the IRS asserted that a taxpayer had underpaid its U.S. taxes, the IRS and the taxpayer duked it out over the substantive law and how it applied to the taxpayer’s facts. But recently, taxpayers have found significantly more success in defending against IRS requests for additional taxes by arguing that the IRS has failed to comply with the U.S. Administrative Procedures Act or some other procedural rule (for example, a statutory rule that an IRS supervisor has formally approved the assertion of penalties before they are asserted). Courts have invalidated significant Treasury Regulations based upon procedural failings and applied the Administrative Procedures Act in other ways that have emboldened taxpayers to raise procedural challenges that would have been unheard of years ago. In light of these developments, companies confronted with unfavorable Treasury Regulations or other IRS determinations should consider whether they have any procedural claims that should be pursued via a court challenge or otherwise.