Tax reform potential provides international tax planning opportunity
TAX BLOG |
Tax reform is expected to be a top legislative priority when the Trump administration takes the reigns in January. Repatriation of foreign earnings, whether as a part of comprehensive business tax reform or as a stand-alone issue, seems nearly inevitable. While uncertainty is generally viewed as bad for business, changing tax laws generally create significant planning opportunities. Understanding the nuances of tax reform proposals can help taxpayers gain a competitive advantage.
A recent example of this comes from the U.S. Tax Court’s opinion in Analog Devices, Inc. v. Commissioner. Thanks to savvy tax planning, and persuasive attorneys, Analog Devices was able to claim the full benefits of the now expired section 965 tax holiday for offshore earnings.
The issue before the Court was whether an intercompany accounts receivable, established by the taxpayer under special IRS rules governing transfer pricing adjustments, constituted “related party indebtedness.” Analog Devices was able to significantly reduce its tax liability by taking the position that such intercompany accounts were not “related party indebtedness” for purposes of the repatriation holiday. While it is unlikely that any future tax reform would offer the same planning opportunity, there will undoubtedly be opportunities to be had.
Many taxpayers are taking a wait-and-see approach with tax planning in light of the uncertainty that tax reform may bring. However, there are some things we can predict with a high degree of confidence that provide ample planning opportunities now.
For example, year-end planning takes on a new light knowing that corporate rates will not be going up. So it may make sense to defer income and accelerate deductions. In addition, taxpayers who may benefit from a tax holiday on foreign earnings should review the earnings and taxes pools to make sure they are accurate because it is likely that any tax holiday for repatriated earnings would depend on these pools.
For more on the Analog Devices, Inc. v. Commissioner ruling please see our Tax Alert “Transfer pricing adjustment did not limit tax holiday for repatriation.”