Professional Documents
Culture Documents
1
Notwithstanding the stampede by other countries to territoriality. See Patrick Driessen, 4 More Reasons to Question U.S.
Territorial Tax Adoption, Tax Notes, Dec. 22, 2014, p. 1377.
2
See, e.g., Jeremy Scott, Obamas Foreign Earnings Tax: 19
Percent Minimum DOA but Deemed Repatriations Key, Tax
Analysts Blog (Feb. 2, 2015).
3
The Financial Accounting Standards Boards recent proposed adjustments, described in Thomas Jaworski, FASB Develops Disclosure Rules for Foreign Earnings, Tax Notes, Feb.
16, 2015, p. 876, dont address the financial reporting distortion
that conflates constrained and unconstrained earnings. In light
of the significant number of companies that have reneged on
APB 23 designations, its ironic that some company reports
continue under APB 23 to refer to permanently reinvested
earnings rather than IRE.
4
See Martin A. Sullivan, Time to Shop for a Different
Approach to Tax Reform? Tax Notes, Feb. 23, 2015, p. 948.
5
The Camp and Obama proposals are retroactive because
they are mandatory in changing the way taxpayers were led to
believe historical deferrals would be treated. However, the
alternative section 965-like voluntary tax holidays have no tax
policy rationale and are windfalls by definition. See appendix.
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POLICY PERSPECTIVE
6
R. Harold Schroeder, a FASB official, recently suggested that
investors primarily see APB 23 as a signal that companies are tax
frugal, and that some added geographic information but
nothing further about potential residual U.S. taxation should
be sufficient. See Jaworski, FASB Reviews Proposals for Foreign
Earnings Disclosure, Tax Notes, Jan. 12, 2015, p. 207.
7
Its not clear how extraordinary an event must be to justify
reneging on an IRE designation. For example, in 2009 Pfizer was
able to renege on more than $30 billion of IRE in conjunction
with its acquisition of Wyeth (the reversals occurred within both
companies). With due respect for FASBs many other good
works, there is a hint of accountant capture with APB 23.
8
See, e.g., Roy Clemons, Kirsten Cook, and Michael R.
Kinney, U.S. Corporate Tax Reform and Financial Reporting
Incentives, Tax Notes, Oct. 7, 2013, p. 92; and Richard Molina,
An Old Accounting Standard Needs to Tie Into a New Tax
Policy, Tax Notes, Apr. 1, 2013, p. 65. SEC queries seem to focus
on the quality of information that companies provide to auditors regarding the IRE designation, rather than the general
degrading of earnings supported by APB 23. See Amanda
Athanasiou, SEC Scrutinizing Claims of Indefinite Reinvestment Overseas, Tax Notes, June 9, 2014, p. 1107.
9
Legislators have played a major role in expanding deferral
by demanding that the check-the-box regulation cover foreign
entities as well as legislatively adding the active financing
exception and a look-through rule for payments between related
foreign parties. But those changes were knowingly (although
inadvisably in my view) adopted, unlike the stealthy effect APB
23 has had on investor information and taxpayer choices.
10
See sections 472(c) and 1059A, respectively.
11
Procedurally, even a weak complaint about retroactive
taxation should be taken seriously.
12
E.g., professor Reuven S. Avi-Yonah asserts that 35 percent
is the appropriate rate on old capital whose tax avoidance was
enabled by check-the-box. See Kristen A. Parillo and Andrew
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tax or ending deferral altogether). And yes, conformity might actually raise revenue. The two-part
proposal in this article addresses future IRE designations and historical IRE designations outstanding
at the time of the legislations enactment.
16
Notwithstanding that Congress in 2004 said it wouldnt
repeat the holiday, the continuing discussion of another tax
holiday over the last 10 years clearly has affected taxpayer
behavior.
17
Calculated as (0.35-0.085) x 110/40. This expense charge for
financial reporting would be reduced for any actual repatriations of the cumulative IRE that GE makes in later years and
would change as the top U.S. corporate tax rate changes. There
should be no reason for an auditor to object to GEs prorated
reneging on its IRE election, because this would be a taxpayer
furthering transparency for investors. If for some reason there
was an objection by auditors, as a backstop subpart F income
inclusion would be required in lieu, so that any retroactive
taxation in this event would not be the fault of the tax code but
would be attributable to auditor resistance. Companies should
have no difficulty calculating the amortizable tax expense
inclusion for financial reporting purposes because they already
make that calculation for non-IRE deferral and for the required
filing of IRS Form 5471.
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Conclusion
Having worked on many repatriation proposals
for 10 years as a government revenue estimator, Im
reluctant to add to the stockpile of boutique tax
holiday ideas. But this conformity proposal addresses in an equitable way19 a distortion that
affects MNC and investor decisions. In contrast, the
typical repatriation holiday (for example, the BoxerPaul proposal) seeks temporary repatriation and
quick revenue at the expense of later revenue, tax
policy, and inequities among companies and across
various tax deferral provisions. Even the mandatory repatriation provisions embedded in the
broader Camp and Obama plans violate the important principle of tax nonretroactivity. Conformity is
a beneficial change needed on its own, but if APB 23
negation as a secondary matter increases revenue,
repatriation, and domestic income base protection,
then fine.20
If after a reasonable trial period conformity isnt
found to ameliorate the problems of international
income shifting and lockout, something like the
sweeping Obama or Camp reforms or something
even more radical like a formulary method21 could
18
Jaworski, supra note 3. FASBs proposed solution is inadequate more information on foreign-versus-domestic earnings and more geographic breakdown of IRE designations as
well as further explanation of designations would be required,
but none of these changes would address the top-line earnings
distortion that APB 23 creates inferior earnings. Perhaps it
would have been preferable for accounting authorities to have
developed a concept of long deferred taxes (maybe call it
indefinitely deferred tax liability?) in APB 23 at the outset to
deal with open-ended deferral a way to distinguish timelimited deferred tax liabilities from open-ended deferral tax
liabilities but it seems politically (e.g., companies now are
infatuated with APB 23) and technically too late to make
amends (more than $2 trillion is already out there).
19
This plan doesnt eliminate the potential for a tax windfall
because some companies will find the 14.75 percent toll charge
on historical IRE attractive, but this relatively high toll charge
combined with the elimination of the financial reporting benefit
of APB 23 reduces the scope of tax windfall relative to other
voluntary plans.
20
Regarding a revenue estimate, this deferral conformity
idea doesnt have the signaling problems of repatriation holidays and reduces the incentive to defer by taking away the
financial reporting benefit.
21
See Michael Udell and Aditi Vashist, Sales-Factor Apportionment of Profits to Broaden the Tax Base, Tax Notes, July 14,
2014, p. 155.
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be considered. Negating APB 23 right now is necessary to inform about the potential need for these
broader policy choices.
Appendix: Windfall vs. Retroactivity
The intent here isnt to turn new ground on tax
windfalls or tax retroactivity (the ambiguity of
which rivals competitiveness), but to focus on
equity considerations for proposals to induce voluntary termination of historical open-ended deferral or mandate the termination of such deferral.
Regarding historical open-ended deferral, a
windfall involves the selective legislative lowering
of the tax rate applicable to a taxpayers ending of
deferral. If the taxpayer voluntarily elects to end
deferral because of the lower tax rate offered, thats
a windfall. There also may be windfall if the end of
deferral is mandated legislatively, but in that event
we cant determine which taxpayers receive a windfall and which are burdened retroactively (see below on retroactivity). By this definition, companies
that availed themselves of the 2004 voluntary repatriation tax holiday received a windfall. Some
MNCs were fortuitously positioned for the reduced
toll tax of 5.25 percent, but others werent positioned for a tax holiday that no company reasonably should have expected in the decades before
2004 as decisions were being made about foreign
investment and deferral.22
Because open-ended deferral allows for taxpayer
discretion and requires the consideration of the time
value of money, defining retroactivity is tricky.23
Open-ended deferral by definition empowers taxpayers to avail deferral as long as they meet specific
conditions. The working definition of tax retroactivity used here is whether the government selectively
changes the condition of deferral in a way that is
adverse to any taxpayer. So legislation that raises
the general income tax rate is not retroactive taxation for historical deferral because that kind of
policy change is not narrowly targeted at historical
deferral. But legislation that ends historical deferral
contrary to the terms under which the deferral was
initially granted is a retroactive tax, exemplified by
proposals to repeal mandatorily historical deferral
22
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24
taxpayer should also be acknowledged by policymakers: If prior law is now deemed to have been
overly generous (for example, regarding foreign
deferral), the antidote shouldnt be tax retroactivity.
Some policymakers interested in infrastructure
funding for transportation may not care much
about issues like retroactivity and windfalls. Perhaps the only tax policy some of these legislators
care about is that suitable funding options a gas
tax increase and perhaps a carbon tax are not
feasible. Even tax policymakers who should know
better have failed to avoid or acknowledge windfalls and retroactivity, for example, the voluntary
2004 repatriation holiday, which was a windfall that
permitted the best of both worldwide and territorial
systems with simultaneous exemption and fullthrottled cross-crediting28 and, more recently, the
mandatory Camp and Obama repatriation proposals that gloss over retroactivity.
But retroactivity, although apparently permitted
by courts, should be avoided in tax policy as a first
principle even when the taxpayer benefits involved
arent viewed sympathetically or the revenue from
repeal is being used to finance whats believed to be
a more favorable system for some taxpayers.29
Windfall should also be avoided as a first principle.
As a practical necessity, its probably better to err on
the side of creating windfall (but not so much as to
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totally trash equitable tax policy) rather than retroactivity. Unlike other proposals involving historical
IRE, the deferral conformity proposal detailed
above with its two-pronged election for historical
deferral avoids tax retroactivity and minimizes tax
windfall at the same time and is attached to unequivocally better tax and financial policy because
of the proposals negation of APB 23.