bti e 11-5-b-tax-risk-management-tax-governance

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OECD• Views of Organisation for Economic Cooperation and Development – Board oversight, transparency, disclosure– Tax administrations must ensure that corporate boards understand they are ultimately responsible

– CEOs and Boards increasingly consider tax risk management part of overall corporate governance

– Countries are introducing legislation, standards requiring business to provide greater transparency

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United Kingdom• UK is proposing to introduce three measures

– Legislation, all large businesses to publish their tax strategy, enabling public scrutiny of their approach towards tax planning and tax compliance

– Voluntary ‘Code of Practice on Taxation for Large Business’, which sets out the behaviors which HMRC expects from its large business customers

– Narrowly targeted ‘Special Measures’ regime to tackle bad actors

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United Kingdom• Areas that could be covered when publishing tax strategy:– Overview of internal governance– Approach to risk management– Attitude to tax planning and appetite for risk in tax planning

– Attitude to their relationship with HMRC– Whether there is a target ETR, what it is, measures being taken to reach or maintain it

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Australia• New model ‐ divide all large businesses in Australia into four groups, and this classification now determines how the ATO engages with the company and what sort of compliance measures may be put in place

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Australia• Companies must demonstrate that they have a sound tax corporate governance system in order to improve their risk rating with the ATO

• ATO may request the company to agree to a pre‐lodgement compliance review meaning the ATO and the company will be discussing the company's tax affairs before the company lodges the return

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Australia• ATO may ask the company to audit itself and to identify its own uncertain tax positions and then lodge that with its tax return

• ATO expects board members to be more involved with companies’ tax affairs and the courts have been saying that board members should be more hands‐on regarding financial affairs of the company

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IRS, LB&I• IRS Advisory Committee (IRSAC) recommendations to IRS, LB&I division

• IRSAC advises IRS division Commissioners– There is a subcommittee for each division – LB&I, SBSE, W&I, etc.

– IRSAC provides oversight of IRS, initiates advice or responds to division commissioners’ requests for research or advice

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IRS, LB&I• IRSAC recent reports highlighted governance• Recommendations re Board oversight, transparency and disclosure– Adding risk assessment “yes or no” questions to Schedule UTP that would be required for ALLtaxpayers, not just those meeting current Schedule UTP filing criteria

– Based on the responses to the initial questions, the IRS could make further inquiries of taxpayer

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IRS, LB&I• IRSAC suggested 17 risk assessment factors or questions for Schedule UTP —many of which speak to the oversight of companies’ tax function by their board of directors

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IRS, LB&I• IRSAC ‐ The amount of guidance and oversight provided by the board of directors should be a key factor. For example: – Does Chief Tax Officer make periodic presentations to the board of directors or one of its designated committees?

– Has the board provided guidance to management and the tax department as to the level of tax risk that should be taken by the company?

– Is there in place appropriate review and sign‐off procedures for material transactions, thereby ensuring that significant tax risks are elevated to the board?

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Overall Governance & Board Oversight

• How should acceptable tax risk be established?– Formal documentation, Written policy, Communication, Board Approval?

– Risk organization input– Comfort level needed– Final “say” when disagreement over risk level

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• Should the chief tax officer present to the Board periodically?– Frequency– Entire board or a committee– Content

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• Evaluating tax risk and reserves– Tax reserve committee and members– Documenting rationale & discussions

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Tax Risks Perhaps Outside Corporate Tax Department Responsibility

• Information Reporting– Document validation – how robust?– Correct withholding– 1099 & 1042‐S – amounts correct?– Significant penalties

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• Trust tax (individual and corporate)– May have limited experience in tax risk management

• Compensation and benefits– Pension, 401(k) plan, VEBA UBTI – Form 990‐T

• Partnership investments• Missed disclosures ‐ $100,000 penalty per miss• Separately managed accounts

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Tricks & Traps – Common Tax Risk Areas To Consider

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Mergers & Acquisitions• Mergers & Acquisitions – Due Diligence Inquiries

– Federal Inquiries• Inquire regarding the management of Target's tax functions

• Inquire regarding open tax years• Changes in recent accounting methods• Inquire as to Target's analysis of uncertain tax positions and listed or reportable transactions

• Consider whether material federal income tax liabilities or receivables have been recorded

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Mergers & Acquisitions

• Mergers & Acquisitions – Due Diligence Inquiries– Sales & Use– Employment Tax– Property Tax– Abandoned and Unclaimed Property

• Known or potential sales/use tax exposure areas in jurisdictions Target does not file returns

• Appropriate 1099 reporting (penalties for improper filings increase as of 12/31/15)

• Employment tax reporting procedures• Nature and amount of unclaimed property/OREO

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• Success Based Fees (Investment Banker Fees)– Revenue Procedure 2011‐29

• IRS provided a safe harbor election for allocating success‐based fees in business acquisitions or reorganizations

o Facilitative vs non facilitative in a covered transactiono If covered transaction 70% deductible 30% capitalized


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• Success Based Fees – Covered Transaction– Regulation §1.263(a)‐5(e)(3)


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• Tax Risk Area – Milestone Payments– Payment upon an event occurring in the course of a covered transaction (letter of intent/exclusivity agreement/etc.)

– Milestone payment does not relate to the successful closing of a transaction

– Accounting firms have varying opinions as to whether Revenue Proc. 2011‐29 and the safe harbor can be applied to a milestone payment


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• Tax Risk Area – Milestone Payments– LB&I Directive Control No: LB&I‐04‐0413‐002 "Examination of Milestone Payments in the Acquisition of Businesses"

– LB&I directives are not pronouncements of law and cannot be used, cited or relied upon


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• Tax Risk Area – Milestone DefinitionExcerpt From LB&I Directive Control No: LB&I‐04‐0413‐002

– The term “milestone” means an event occurring in the course of a covered transaction (whether the transaction is ultimately completed or not), provided that the event is (i) the execution of an agreement described in § 1.263(a)‐5(e)(1)(i) (i.e., a letter of intent, exclusivity agreement or similar written communication (other than a confidentiality agreement)), (ii) an event described in § 1.263(a)‐5(e)(1)(ii) (the authorization or approval of a transaction (as tentatively agreed to by representatives of the acquirer and the target) by the taxpayer's board of directors (or committee of the board of directors)), or (iii) some other specified event (other than the successful closing of the transaction), provided that the event does not occur prior to the first occurrence of an event described in § 1.263(a)‐5(e)(1)(i) or (ii).Accounting firms are not all in agreement with treatment of milestone payments


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• Tax Risk Area – Milestone Payment Definition

Excerpt From LB&I Directive Control No: LB&I‐04‐0413‐002 – The term “milestone payment” means a non‐refundable amount that

is contingent on the achievement of a milestone. Any amount that would be paid or incurred even if the milestone is not achieved is not contingent on the achievement of a milestone and is, therefore, not includable in a milestone payment, notwithstanding that the parties’ agreement may provide that such amount is creditable against or otherwise offsets the amount due on the milestone payment


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• Tax Risk Area – Eligible Milestone Payment Definition

Excerpt From LB&I Directive Control No: LB&I‐04‐0413‐002 – The term “eligible milestone payment” means a milestone payment

paid for investment banking services that is creditable against a success‐based fee


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• Tax Risk Area – LB&I Discussion– Directive advises that application of Revenue Proc. 2011‐29 safe harbor will not be contested as long as taxpayer qualified for the election

– Directive advises that application of Rev Proc. 2011‐29 safe harbor to an eligible milestone payment will not be contested as long as taxpayer qualified for the election, did not deduct more than 70% of any eligible milestone payment incurred in connection with the success based fee on its original tax return and is not contesting its liability for the eligible milestone payment accrued


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Corporate Distributions• Non Liquidating Distributions

– Sec. 311 Taxability of Corporation on Distribution• §311(a) Except as provided in subsection (b), no gain or loss shall

be recognized to a corporation on the distribution (not in complete liquidation) with respect to its stock of‐

o 311(a)(1) its stock (or rights to acquire its stock), oro 311(a)(2) property

• The bank can permanently lose a built in loss by distributing built in loss assets from sub to parent in a non‐liquidating distribution

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Corporate Distributions

• Non Liquidating Distributions– Sec. 311 Taxability of Corporation on Distribution

• §311(b) Distributions of Appreciated Propertyo 311(b)(1) In General

⁻ 311(b)(1)(A) a corporation distributes property (other than an obligation of such corporation) to a shareholder in a distribution to which subpart A applies, and

⁻ 311(b)(1)(B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value

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Corporate Distributions

• Liquidating Distributions– Banks can jeopardize carry over basis on a complete liquidation by not having a plan of liquidation

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351 Transfers

• Sec. 351 Transfer to Corporation Controlled by Transferor

– §351(a) General Rule‐No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in section 368(c)) of the corporation

PARENT

Sub

Transfer of Property

Stock received in exchange for property

By default the basis in the stock received is Parent's cost basis in the property transferred

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362(e)(2)(C) Election• §362(e)(2)(C)Election to apply limitation to transferor's stock basis– Election generally made in the case where transferor transfers

built in loss assets– If the 362(e)(2)(C) election is made by both the transferor and

transferee, the transferor's basis in the stock received from the 351 transfer shall not exceed the fair market value of the property transferred immediately after the transfer

– Essentially, the transferor's basis in the stock received will be the fair market value of the property transferred (i.e. – loans) The transferee's cost basis in the property received will be the cost basis of the transferor prior to the transfer

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Accrued Bonus Deductibility• In what circumstance can a taxpayer deduct its accrued bonus

in the year accrued?

• What is the employer's bonus policy?

• This is important as it relates to satisfying the 3 elements of the All Events Test– All events test

• All the events have occurred that establish the fact of the liability• The amount of the liability can be determined with reasonable accuracy

• Economic performance has occurred for the liability

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• Employer's bonus policy– Employers bonus policy is key in determining timing of the deduction

• Fixed or minimum bonus pool

– The general question to determine timing is what happens to an employee's bonus if the employee no longer works for the company at the time of payment?

• Under many bonus policies the employee receiving the bonus must be employed by the company at the time of payment. In this scenario in order for the accrued amount to be deductible the bonus amount must either be paid to the employee (even though they no longer are employed) or the dollar amount must revert back to a general bonus pool and paid to employees

Accrued Bonus Deductibility

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• Revenue Ruling 2011‐29– Issue: Can an employer establish the “fact of the liability” under 461 of the IRC for bonuses payable to a group of employees if the employer does not know the identity of any particular bonus recipient and the amount payable to that recipient until after the end of the taxable year?

– Conclusion: as long as the bonus pool is fixed or has a minimum it doesn’t matter to whom the bonuses are paid or in what amount

Accrued Bonus Deductibility

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Deferred Taxes – Subsidiary Stock• Generally, banks do not book deferred tax assets on built in

gains in connection with subsidiary stock because they do not plan to sell the subsidiary in the foreseeable future (usually 1 year). Banks do not generally book deferred tax liabilities in connection with built in losses of subsidiary stock because they have the ability to liquidate the subsidiary tax free

• If the subsidiary is not an 80% owned subsidiary or is a partnership or LLC for example, a deferred tax liability may have to be booked on the investment

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Common Tax Return Elections• Safe harbor election regarding success based fees Revenue proc. 2011‐29

• 362(e)(2)(c) transfer of basis• 1.263(a)‐3n election to capitalize all repair and maintenance costs that are treated as capital expenditures on books

• 1.263(a)‐1(f) de minimis safe harbor election• Bonus depreciation opt out election• 248 election for Organizational expenditures• 461(h)(3) election to adopt the recurring item exception• 195 election to deduct startup expenditures

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• 351 Transferor & Transferee Statements• 331 Liquidation Statement• 332 Liquidation Statement• 382 Loss Corporation Statement• 368 A Corporation Party to a Reorganization

Common Tax Return Disclosures

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