The document discusses issues around corporate tax reform and inversions in the US. It notes that while politicians call for action, comprehensive tax reform is unlikely before or just after the 2016 election. Temporary measures may not stop companies moving to lower tax countries. The IRS is seeking more data to enforce current laws and prepare for potential future reforms from studies on base erosion and profit shifting. Multinational companies should prepare to react to potential upcoming changes to tax laws.

1. The Quest for U.S.
Tax Reform:
Fact or Fiction

2. The Quest for U.S. Tax Reform:
Fact or Fiction
The perpetual drumbeat for tax reform continues to
echo around Capitol Hill. On August 5th, Senators
Richard Durbin, D-Ill., Elizabeth Warren, D-Mass.,
and Jack Reed, D-R.I. urged President Obama to
take independent action to stop the tax-avoidance
practice commonly known as corporate inversions.
Their plea was made to the deserted corridors of the
Capitol, as Congress has left Washington, D.C. for
its August recess. The Administration has suggest-
ed that executive authority might be exercised to
prevent inversions, albeit only as an alternative to
Congress not moving forward with tax reform.
To stem the latest strategy of U.S. corporations em-
ploying mergers with foreign businesses to escape
the high U.S. tax rates, the most effective count-
er-measures would require a comprehensive reform
of the U.S. tax system, an overwhelming and unreal-
istic prospect before or after the mid-term elections,
and possible only slightly after the 2016 Presidential
election. More attainable stop-gap solutions, such as
cutting U.S. corporate tax rates to 28 percent will not
stop companies from moving to lower tax “havens”
such as Ireland, where the tax rate is 12.5 percent.
During a press briefing on August 5, White House
spokesman Josh Earnest told reporters that
the administration is not prepared to make an
announcement about any unilateral actions from the
president on inversions. In the absence of tax
reform, the onus is on Congress to pass specific
legislation that would retroactively close current
inversion (merger) strategies.
Rep. Sander M. Levin, D-Mich., ranking member
on the House Ways and Means Committee, noted
that, “Corporate inversions, as well as other tax-
avoidance strategies, threaten to cause long-term
damage to the U.S. tax base and increase the tax
burden on ordinary Americans—and swift collective
action is required.” Shakespeare’s Macbeth offered
his précis on life and death, which, unfortunately,
applies equally well to Congress’ many attempts to
refashion U.S. tax law: “[A] tale told by an idiot, full
of sound and fury, signifying nothing.” Since the orig-
inal 1916 tax code, reformists have fought behind
the familiar banners of fairness and simplification,
as well as the prevention, recovery and salvation of
the American and global economy, while maintain-
ing a measured focus on collecting tax revenues
sufficient to fund the massive federal budget. How-
ever, the Internal Revenue Code has become bur-
dened with countless layers of provisions included to
satisfy politically correct, “of-the-moment” social
objectives and entitlements or to provide some
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urgently required stimulus. Rather than separat-
ing out these distinctly-purposed laws, the path of
least resistance has pointed to targets that have no
(or lower) apparent impact on the general public. In
an economic and financial environment of increas-
ing globalization, the U.S. has sought to brand all
things “international” as presumptively evil (read: “tax
avoidance”) and even unpatriotic. The current “sound
and fury” of Congressional and Administration calls
for action are but the latest example of playing to the
public’s fears without actually stepping forward with
actual, substantive tax proposals.
Base Erosion and Profit Shifting
From the Kennedy-era Subpart F rules seeking to
retain U.S. tax coverage over U.S taxpayers invest-
ing wealth offshore, to the myriad efforts to limit
the movement of manufacturing, services and the
companies to lower-taxed foreign countries, the
clear message proclaimed by the current Admin-
istration in its two campaigns is that your life and
well-being is diminished by U.S. companies look-
ing outside, and not within, the U.S. The Senate’s
hearings on “profit-shifting” attacked structures used
by multinational giants Microsoft, Apple and others,
illustrating how those companies managed their
very significant U.S. tax costs with planning available
under the current tax code, resulting in large cash
reserves held offshore. The sheer size of the tax
dollars actually paid, and the comparative num-
bers of what these companies could have paid
under less sophisticated structures, created a media
event, and generated calls for tax reform. Again, the
message was that the tax savings of these
U.S. companies hurt the so-called average taxpay-
er. No data was presented on how the companies’
higher tax costs might have impacted the consumer
prices those average taxpayers paid.
With significant statutory change approaching, IRS
has sought data to support whatever changes might
be implemented, as well as to enforce any laws cur-
rently available to them. Enforcement of filing require-
ments for information returns detailing U.S. owned
foreign financial accounts and foreign entities, as
well as increased scrutiny of required tax withholding
from payments to foreign recipients has increased
the risks of inadequate or missing reporting. More-
over, the accumulated data will effectively roadmap
future enforcement of new anti-deferral provisions.
This discussion is not intended to suggest that
the U.S. is alone in its international crusade for tax
revenues. Rather, the Organization for Econom-
ic Co-operation and Development (“OECD”) has
com-missioned multiple studies under an action plan
to combat the erosion of separate country taxable
in-come and the shifting of profits between relat-
ed par-ties (under the acronym: “BEPS” for Base
Erosion and Profit Shifting). BEPS study areas
include many of the exposures focused on by
Congress and the Ad-ministration. The conclu-
sion is inescapable that U.S. tax reform, or at least
tax change, will occur at some point. Changes will
impact existing transfer pricing and profit shifting
provisions, as well as permanent establishment
standards extending countries’ tax bases beyond
their borders. Consequently, multinational busi-
nesses will be well-advised to prepare to react to
these changes.

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A c c o u n t i n g T a x A d v i s o r y
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to organizations across a variety of industries.
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SMART DEVINE CAN HELP YOU
Doug Nakajima has over 30 years of experience in federal and international tax and
strategic business planning, serving a U.S. and foreign client base of multinational
manufacturing, service and technology businesses. He has advised clients on the
tax treatment of domestic and cross-border transactions, inbound and outbound
business expansion strategies, domestic and cross-border acquisitions, disposi-
tions and reorganizations, intercompany transfer pricing analysis, documentation
and audit defense, treaty interpretation, and repatriation planning. Doug has worked
extensively with tax advisors in foreign countries to develop global structures that
minimize U.S. and foreign tax exposures, and in this role, has forged effective
working relationships with key professionals throughout North America, Europe,
Asia and the Pacific Rim. For more information, please contact Doug Nakajima
at 267-670-7307 or dnakajima@smartdevine.com
DOUGLAS W. NAKAJIMA, J.D., LL.M.
Managing Director, Tax Services
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