An Exclusive Q&A On Corporate Tax With J. Leonard Teti II

1) Are there any regulatory changes or litigation trends which need to be monitored carefully in 2015?

Certainly the biggest US tax trend to watch is statutory: the possibility of tax reform, especially corporate tax reform.  The rise of inversion transactions over the past several years (and the limited success of regulatory responses) has made clear to policymakers that the US corporate tax system needs to be reworked; that said, the two political parties have different views on how to reform the system.  Most reformers would like to reduce the headline corporate tax rate from 35% to something more like 25%, but in order to do that the tax base will have to be broadened.  The key political question will be whether the benefits of the new system will attract enough support to overcome the opposition from those whose prized tax breaks will be eliminated. 
 
2) Against the backdrop of increasingly complex regulatory and tax compliance requirements, how can companies ensure they meet their tax obligations and manage their risk assessment status?

There is an old sports adage, “The best defense is a good offense.”  In the world of tax planning and compliance, the best companies are the ones that execute transactions carefully and document their legal analyses thoroughly and professionally at the time of the transaction.  IRS audits for income taxes tend to occur many years after transactions close, and so it is critical to be prepared for difficult questions by anticipating them.  Taking the extra time “on offense” allows companies to be in the best position to succeed “on defense” years later. 
 
3) How can you determine whether something is considered to be acceptable tax planning, avoidance, aggressive tax avoidance or evasion?

I try to ask myself how I would feel if my tax analysis were to make its way to the front page of the newspaper.  If any part of me is concerned, not just about the quality of the analysis, but about whether others would view my thinking as too “cute” or “clever” for its own good, I would be worried that I had crossed the line from acceptable tax planning to unacceptable tax avoidance. 
 
Even for acceptable tax planning, though, an important part of advising clients properly on many tax issues involves not just getting the legal analysis correct but also advising about the way the issues are likely to be discussed publicly.  Even a structure that clearly “works” from a purely legal  perspective could present clients with public relations or other non-financial issues that make it undesirably commercially. 
 
4) What advice would you give to a company being investigated for their tax practices?

I often tell my clients, “Let’s make our arguments passionately but evaluate them dispassionately.”  So my first piece of advice would be to conduct a thorough self-audit of the positions that have been taken: be at least as tough on yourself as the taxing authorities could be on you.  Only then can you have a fair sense of what risks the company is facing.  Second, I would generally advise transparency and engagement with the taxing authorities, rather than obfuscation and feigned ignorance.  For complicated tax matters, you always want to explain yourself carefully and thoughtfully so that the investigators understand the facts and legal analysis from your perspective. 
 
5) What are the main tax risks and challenges when conducting cross-border M&A?

Certainly the legal issues are challenging—analyzing various treaties, analyzing the tax treatment of the transaction itself, anticipating future tax planning, etc.  But in many cases the process of simply getting the deal done—lawyering—can pose the greatest challenges.  Coordinating large teams of tax and corporate counsel, not to mention financial accountants, in various jurisdictions and making sure they all understand the client’s business objectives and the deal’s various structural elements takes much more time than one might expect.  And in many transactions, the clients themselves know they want to do a deal, but they are not prepared for life after the deal and how certain tax rules may affect the way they manage the company.  I have learned that it is important to recognize these issues early and make sure my clients are aware not just of the challenges in getting the deal closed, but in making the deal successful afterwards.
 
6) Who will be the biggest winners and losers in the crackdown on tax inversions in the United States?

It’s difficult to know at this stage, but it seems like the biggest losers will be US companies that failed to invert before the rules changed to make it more difficult.  Next will be companies that inverted after 22 September 2014, which is the date the IRS issued Notice 2014-52, which changed various rules in a way that makes inversions less attractive from a financial perspective.  Big winners will include foreign companies (including companies that previously acquired US companies in inversion transactions) seeking to acquire US companies.  They will almost always have a lower effective tax rate than US bidders and so will generally be able to bid higher prices to acquire US targets. 
 
 
J. Leonard Teti II is a tax partner at Cravath, Swaine & Moore LLP in New York City.  Len's practice focuses on advising clients on the tax aspects of complex mergers and acquisitions, spin-offs, private equity transactions and bank financings.

Len can be contacted via phone on +1 212 474 1896 or alternatively by email at lteti@cravath.com