Insights and Resources
Tax Summit Week 2020 Covered Ground
INSIGHT ARTICLE |
Authored by RSM US LLP
RSM Tax Summit Week 2020 kicked off Monday with an opening presentation about how U.S. election results will affect tax policy in the short- and long-term, in addition to the daylong focus on cash flow and liquidity considerations in response to the pandemic. Here is a roundup of highlights from the four presentations and our favorite interactive moments.
Divided Senate means uncertainty for Joe Biden’s tax plan
The potential for significant changes to U.S. tax policy under a prospective Biden administration will largely hinge on the makeup of the Senate, which will not become clear until a January runoff election for both of Georgia’s seats. That unknown—and the prospect of a Senate split 50-50 between Republicans and Democrats—was a key point Monday during the keynote address of the RSM Tax Summit 2020: Seeking Solid Ground.
“It’s very hard with momentous change to keep 50 senators aligned in favor of a proposition,” RSM National Tax Go-to-Market Leader Jim Alex said. “Because it’s so close, it’s going to be difficult to get sweeping matters done.”
If Republicans keep their majority following the January runoff for Georgia’s seats, it would be difficult for Biden to advance his entire tax plan, which proposes various rate hikes for corporations and high-income earners. Biden, however, might be able to garner support at least for portions of his plan by tying any rate increases to the nation’s response to COVID-19 and the corresponding economic impairment.
“Raising rates on the upper tier and on corporations may hold if he couples it with stimulus spending,” said Alex, who joined RSM in 2019 from the U.S. Treasury. “That might be more likely to get through a very narrowly defined Senate compared to some of the other changes. But given that it’s close, it probably won’t be the broad stroke that we see in the Biden plan.”
The transfer pricing paper trail
Companies seeking to leverage tax rate arbitrage should be steadfast in documenting all types of transactions, including those overseas, across state lines in the United States, and between the United States and Canada, RSM principal Tansy Jeffries said.
“Having a [transfer pricing] study in place with benchmarking is really the first and foremost priority that you should have in terms of looking at how you support and justify that your transactions are arm’s length,” Jeffries said.
Regarding price changes related to the pandemic Jeffries recommends documenting them as they happen throughout the year. “The thought process, the rationale, the intended duration of the arrangement if this is temporary—make sure you have that paper trail in place to support those changes,” Jeffries said. “Again, act now. Retroactive adjustments have consequences.”
RSM partner Charles Britt reiterated the importance of documentation regarding intercompany transactions, as state revenue authorities can sense tax gaps and are increasingly working with transfer pricing consultants to close them.
Q&A: From the transfer pricing session
Q: How recent should a transfer pricing study be, including intercompany agreements?
A: “There’s no perfect answer to this. In general, in countries where you have to submit it each year, then you probably should prepare it each year. But that’s not every country around the world. Many just require that you maintain accurate up-to-date documentation. Sometimes that’s read as updating it each year. Sometimes that’s over a period of years. I certainly don’t recommend getting beyond three years without updating your documentation.” – Sean McNama, RSM Canada senior director
Tax planning and cash flow during the economic crisis
As economic pressure and uncertainty from the pandemic continue, U.S.-based companies facing cash flow challenges should review their income tax returns and audits with an eye toward seeking opportunities for refunds and audit settlements. While interest rates remain low and many states face daunting fiscal problems related to the pandemic, companies might have an opportunity to negotiate favorable near-term assessments.
“States are looking for cash now,” said RSM partner Sherri York. “This is a way for you to generate liquidity for your company, but at the same time, the states are able to settle at some sort of a reduced rate on audits or even other refunds.”
The fact that huge swaths of the workforce have gone virtual since early 2020 also brings opportunities for companies to downsize or eliminate their real estate footprints, as well as explore potential tax savings related to remote workers. It is critically important, however, for business leaders to understand where their virtual employees are working from, in order to get ahead of the employee tax withholding obligations expected to stem from this surge in remote work.
Even amid a recession, companies can take advantage of credits and incentives by, for instance, confirming their good-standing status, capturing missed benefits and focusing on retention. They also should examine net operating loss carryback provisions related to the Coronavirus Aid, Relief and Economic Security Act, and repatriation considerations for controlled foreign corporations.
Canadian budget pain
Canada’s fiscal response to the pandemic has contributed to a federal deficit that is projected to reach $344 billion in fiscal year 2020-21. Provincial budgets are strained, as well, and it remains unclear how the government will fund programs that have helped many Canadians. Neither the federal nor provincial governments have proposed any broad based tax increases; instead they have said they can borrow the necessary funds.
However, potential tax changes include higher taxation of capitals gains, tightened anti-avoidance measures, provincial rate increases, carbon tax increases and a New Democratic Party wealth tax.
“Canada had a very big debt problem back in the 90s,” said Dean Woodward, Alberta tax leader at RSM Canada. “ I don’t think (the federal government) likes the idea of a return to those days, but they’re selling the story that today’s debt is not as serious as the debt that we had back then mostly because we’re in such a low-interest environment. But, of course, there’s no guarantee that will be perpetual.”
Q&A: Canadian wealth tax
Q: How much revenue would be generated by the NDP’s proposal of a 1% tax on personal wealth in excess of $20 million?
A: “The NDP asked the Parliamentary Budget Office to estimate how much revenue that tax would generate, and the response was close to CA$6 billion in Year 1, rising to CA$9B by 2028. So it’s…not a huge dent in CA$350 billion in expenditures, but not insignificant.” – Dean Woodward, Alberta tax leader at RSM Canada.
Tax considerations that shape M&A transactions
While the economy presents M&A opportunities for companies seeking to grow, some tax considerations are crucial to making any transaction a productive one. There’s a significant disparity in the tax treatment depending on the legal entity structure of the target that’s being acquired, RSM senior manager Patrick Phillips explained.
“Some of these are things we would typically see in any deal, but it’s heightened in this case because of the nature of tax attributes,” Phillips said. “Is the target a flow-through or a C corporation for U.S. tax purposes? Is that income blocked? Or do we have some other income flow-through that our buyer might get, might need to think about?”
Also, different tax rules might apply depending on whether a company is within bankruptcy.
“One interesting tidbit that we’re seeing a lot is so-called ‘ABC’ transactions (assignment for the benefit of creditors),” Phillips said. “It’s almost like a pre-packaged bankruptcy, but it’s kind of all-in-one where the assets are transferred to a trustee that understands the industry of the potential debtor to say, ‘How can I maximize these assets and settle off as much of the debt as I can without having the stigma of a bankruptcy on the corporate record?’”
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This article was written by RSM US LLP and originally appeared on 2020-11-09.
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