Exclusive Q&A on Corporate Tax with Peter Barnes
Posted: 4th July 2017 08:22What implications will the Presidential Election results have on the tax landscape in the United States?
The implications of the presidential election on US tax reform and US tax administration are huge – and already evident.
Prior to the election, there was a lot of work on tax reform by both the Obama Administration and the House Ways and Means Committee under former chairman Camp. Those proposals – and others circulating in the Senate and outside of government – had a lot of similarities, even though there were also important differences. With the election, those proposals have all taken a deep back seat to the House Republican “Blueprint” and to whatever the Trump Administration proposes in the next month or so.
The new Trump Administration has already slowed down or reversed several important tax regulation projects. It is unclear where pending projects on corporate inversions and debt-equity will end up. If Hillary Clinton had won, those projects would likely have proceeded to closure quickly.
One other important note: President Trump’s budget will likely cut funding for the IRS significantly. That will make it tougher for the IRS to audit taxpayers and provide services.
Elections matter. The United States is in a very different place with a Trump Administration than if Hillary Clinton had won.
Can you outline how your jurisdiction’s tax market is composed?
There are at least two ways to think about the “tax market” in the United States: where are the taxes imposed, and how are tax advisory services provided?
In the United States, too many taxpayers focus almost exclusively on federal income taxes. That is unfortunate, because taxes imposed by the 50 states and the District of Columbia – and non-income taxes, such as sales taxes – are a major financial cost to taxpayers. There is a lot of tax planning and tax compliance that is required for taxpayers at the state levels, and that work is often given too little attention.
In terms of day-to-day support to taxpayers, the accountants certainly have a big edge over the tax lawyers. The lawyers, too often, resist getting their hands dirty with the facts and the data. That’s unfortunate, because getting into the details of how a taxpayer earns its money is both fun and important. I love to walk through a factory and talk to a business team about their industry and what matters in giving a company a competitive advantage.
In the United States, the lawyers generally focus on the tax law and leave the nitty-gritty details of how businesses earn their money to accountants and economists. We need to change that dynamic.
Are there any compliance issues or potential pitfalls that firms need to be cautious about?
Tax compliance is hugely important. You can do the best tax planning in the world, and if you don’t translate that planning into compliance and proper reporting on the tax return, the planning is all wasted.
Let me highlight two pitfalls:
- First, tax planners outline a strategy and talk with the finance and business teams. But, the tax professionals fail to follow up and partner with their colleagues in implementing the strategy. So, you have great tax memos and opinion letters, but the facts on the ground don’t match the assumptions you made in the planning. That can be fatal. You lose credibility with the tax examiners and you often face big tax adjustments.
- Second, tax compliance teams fail to question the data they receive. A lot of essential tax compliance information comes from finance teams and other groups within the company. Tax professionals must be close to the business teams and understand the business operations, so that they can review data with a critical eye. You have to give a sanity check to all your information, or else you will have garbage-in, garbage-out when you prepare the tax return.
Have there been any recent regulatory changes or interesting developments?
For the United States, there is just one message: stay tuned.
With the arrival of the Trump Administration, there is a lot of uncertainty on what will happen with big picture items, like tax reform, and smaller but still important issues, like regulatory guidance. The key tax officials in the executive branch have not even been selected or put in place.
Predictions at this point are only that: predictions. By the end of 2017 we will have a much clearer picture of what the US tax landscape looks like. Until that time, it is all just speculation.
What role does tax – and effective tax planning – play in merger & acquisition transactions?
Over the past 15 years, almost every company has realised that tax planning at early stages in transactions is essential. The days are over when the M&A teams would strike a deal and then tell the tax team to make sure everything is compliant.
While there are lots of tax issues that can arise, a few big concerns arise every time:
- Which legal entity will be the acquirer?
- Is the transaction treated as a purchase/sale of stock, or of assets?
- What is the funding (debt/equity) and which legal entities will supply the funding (which may not be the acquirer)?
The M&A teams generally know that they cannot give answers to these questions to the other party until the tax teams have weighed in. And that is a positive development from the way many deals were handled 20 years ago.
Once the broad parameters of the deal are agreed, the tax professionals can then dive into the details. If there is cooperation between the buyer and seller, the tax planning can benefit both parties.
How is transfer pricing regulated in your jurisdiction and do local transfer pricing rules differ from methods available for inbound transactions?
Transfer pricing is a big issue for tax professionals and tax administrators in the United States, just as it is in almost every jurisdiction. At the federal level, every audit begins with a request for any transfer pricing documentation that exists, so transfer pricing is considered in essentially every audit.
One interesting development has been the growth of transfer pricing enforcement at the state level. I teach a one-week transfer pricing workshop each year at Duke University, and we have had several US states send tax officials to our program. They are looking at whether companies are properly reporting an arm’s-length compensation for all of the activities occurring within the state. This mirrors domestic transfer pricing rules that we are seeing in Mexico, China and other countries.
How can Advanced Pricing Agreements and Mutual Agreement Procedures for transfer pricing purposes minimise the risk of double taxation?
I am a big fan of APAs and mutual agreement procedures – everyone is. But, I want to caution against believing that APAs and mutual agreement will solve our problems. They won’t.
Securing an APA is very expensive and time consuming. Taxpayers cannot expect to get APAs for all of their important flows of goods and services. And governments do not have the resources to give APAs to every taxpayer.
So, while an occasional APA is worthwhile for a taxpayer, and the availability of the mutual agreement procedure is important protection against double tax, the vast majority of transfer pricing issues (98% or more) are going to be resolved at the level of the field agent.
This means taxpayers must do their homework, looking closely at the functions, assets and risks of each party in the chain of supply, and making sure they can explain the value chain to a tax examiner.
Do you expect tax authorities to collaborate more frequently in cross-jurisdictional transfer pricing audits?
Yes, there will be more collaboration on cross-jurisdictional audits in the future, but only because the level today is very, very low.
We have talked about joint audits for 30 years, but the number of these audits can be counted on the fingers of one hand. Or maybe two hands.
A joint audit takes enormous resources by the governments involved. Joint audits will never be a frequently used tool. It is not an efficient approach, except where the tax involved is extremely high.
I believe joint audits are a positive development and can benefit both taxpayers and the government tax examiners. But, we are fooling ourselves if we think joint audits will become a frequently used tool.
In what way could you defend a tax authority challenge to transfer pricing arrangements, and how can you resolve a dispute that involves two or more countries?
Every transfer pricing audit – and every taxpayer planning for an audit – focuses on the same key question: how does this taxpayer create value and make money, as goods and services are moved among companies and countries in the supply chain?
The common catch-phrase of “functions, assets and risks” really sums up the issue. But the burden is on the taxpayer to build a story – a true story – of how the functions, assets and risks are combined to create value. Transfer pricing professionals need to be journalists, and that is part of why the job is so fun. You dig into the facts of your own business to learn how the business operates. And then you tell the story in a clear, convincing manner.
I spent three years as a journalist before turning to law. The skills and the daily work are very similar. The way you defend a transfer pricing challenge is to explain, explain and explain the way in which the company creates value for its customers.
How can you determine whether something is considered to be acceptable tax planning, avoidance, aggressive tax avoidance or evasion?
While the lines between acceptable tax planning and improper evasion are occasionally murky, that is rarely the case. The simple question to ask yourself is whether this planning is something I can transparently explain to the tax authorities in all of the countries involved and say convincingly, to each of the authorities, you are getting the amount of tax you should be getting.
I worked for a multinational company for more than 22 years, and we assumed – correctly – that every decision we made would be audited. That’s a great working situation for a tax professional. Always assume your work will be exposed to daylight and that you will have to explain the decision to a tax examiner.
With that guidance, most ethics questions are easy to resolve.
What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
The United States faces potentially significant tax changes over the next year and more, because of the change in the presidential administration. A key uncertainty is whether the Internal Revenue Service will be given the funding it needs to provide proper guidance and enforcement.
In an ideal world, the IRS would be given gradually increasing funding, so that it can modernise its IT systems, train new service personnel and examiners, and increase both guidance and enforcement. Almost every tax professional in the US agrees that increased funding for the IRS is essential. We will watch whether Congress and the President recognise the importance of good tax administration.
After over 20 years as Senior International Tax Counsel for General Electric, Peter Barnes joined Caplin & Drysdale as Of Counsel to the firm's International Tax Group. His 30+ years of experience in the international tax arena brings a wealth of knowledge to the firm and its clients. In 2015, Mr. Barnes was elected as the U.S. delegate to the Permanent Scientific Committee of the International Fiscal Association where he supervises the planning and implementation of IFA’s scientific work. Mr. Barnes also serves as Senior Fellow at Duke Center for International Development at Duke University where he teaches in Duke's International Tax Program.
Peter can be contacted on +1 202 862-5027 or by email at firstname.lastname@example.org