While the new tax code was meant to simplify tax compliance, it has introduced more complications and ambiguity, all of which can be exploited. The tax-dodging strategies discussed here with comments from tax experts and lawyers are indicative of how large can potentially minimize their tax profile by careful preparation and presentation of their accounts.
Barely five months after the massive overhaul of the U.S. tax code that was signed into law U.S. President Donald Trump and the Republicans in the U.S. Congress, tax experts from multinational companies have already uncovered tax loopholes and potential tax-dodging gimmickry, ranging from substituting bank loans for internal debt to revising cross-border payments.
According to lawyers and consultants to help MNCs to minimize their tax profiles within the framework of the law, there have emerged multiple strategies that are designed to reduce the impact of the newly incorporated corporate taxes.
Since detailed guidance on the three taxes are expectedly quite complex and is still pending from the Treasury Department and the U.S. Internal Revenue Service, the actual deployment of these fast emerging tax dodging strategies are still to emerge.
However, discussions on the ambiguities in the Republican-led legislation and ways to exploit them is well under way in the tax planning industry.
Case in point: recently panelists from the audit and consulting giant PricewaterhouseCoopers (PwC), and the law firm Caplin & Drysdale, along with members from the IRS discoursed on the inner workings of the new law’s Base Erosion and Anti-Abuse Tax (BEAT) and its interaction with a common accounting entry called cost of goods sold (COGS), which encompasses the expenses of producing goods.
As you might expect, COGS covers raw materials and labor expenses along with less clear-cut expenses. More significantly, for tax planners, COGS is exempt from BEAT. Thus, transferring more expenses into COGS could reduce their exposure to BEAT.
“There are a lot of different opportunities for restructuring or changing who does what to improve your posture” on cost of goods sold for BEAT purposes, said Elizabeth Stevens, an associate at Caplin & Drysdale on the panel. “I’m sure the IRS will be auditing BEAT computations.”
IRS officials on the panel focused on “the rules for cost of goods sold and the legal precedents governing it”.
According to Daniel Shaviro, a noted tax expert and a professor at the New York University School of Law, the COGS exception to BEAT is “certainly going to be a central tax-planning focus.”
Exceptions define the rule
BEAT is only one of the three new taxes imposed on MNCs in the newly introduced tax law. The others are known as Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII).
FDII is a preferential tax “meant to favor U.S. domestic operations”.
Tax experts say, large MNCs face an uphill task from these new taxes due to the exposure that their patents and trademarks bring to their global operations.
“Taken together, the three provisions have injected numerous complexities into the tax code” despite the fact that the original intentions were meant to simplify tax legislation.
“There will be a lot of rough edges, which advisers and taxpayers will exploit,” said Steven Rosenthal, senior fellow at the Washington-based Urban-Brookings Tax Policy Center while adding, “The COGS loophole for BEAT is a straightforward gimmick, but I am unsure how or whether the IRS will stop it”.
BEAT has been designed to potentially block the practice of stripping earnings by MNCs. For example, many MNCs transfer their U.S. earned profits into foreign affiliates located in low-tax countries.
As per tax experts, a way to minimize BEAT impact, for a U.S. company would be to shifts profits abroad through interest payments for future borrowings from banks; third-party interest payments are exempt from BEAT.
“These are just some of the publicly touted ideas. I am sure there are many more being touted privately,” said Rosenthal.
Multinational companies are yet to put in place their tax minimizing strategies partly due to the uncertainties surrounding the details of the new tax code as well as its “political durability”.
On Thursday, 49 organizations, which include public interest groups and labor unions, released a letter which urged the U.S. Congress to back a proposed Democratic legislation that would subject foreign income to the domestic corporate tax rate, thus preventing the transfer of U.S. profits offshore. This proposal would undo a key component of the Republican law.