RSM Tax Summit Week 2021 truly is tax in motion. As we covered topics from, tax policy developments to changing workforce dynamics to new technologies, these discussions bring to life ideas and insights that help you and your business move forward. Below we recap events from each day to help you keep up with the highlights.
TAX IN MOTION TOPICS:
- Tax policy and economic change: Federal legislation, estate planning, workforce and supply chain considerations, IRS and controversy, and mergers and acquisitions
- Year-end planning: Federal, individuals, SALT and Canada
- Tax technology
- Global operations: Tax system reform, operational transfer pricing, M&A, indirect taxes
Tax policy and economic change: Federal legislation, estate planning, workforce and supply chain considerations, IRS and controversy, and mergers and acquisitions
Federal tax policy update – Nov. 1
Dave Kautter expects Congress will enact wide-ranging tax changes on businesses and high-income individuals before the end of 2021, but the amount of political work still required to reach that milestone equates to significant uncertainty about which existing proposals will be included in final legislation.
Kautter, RSM’s federal specialty tax leader, applied his experience as the former assistant secretary for tax policy at the Department of the Treasury and former acting commissioner of the IRS to clarify the legislative path forward just four days after a flurry of policy activity.
“There is desire on the part of Democrats to go into next calendar year with some significant legislative accomplishments under their belt,” Kautter said. “They’re viewing the infrastructure bill and this Build Back Better plan—the so-called reconciliation bill—as the ways in which they can achieve those. So, I can’t guarantee it—no one can—but, I think it is a virtual certainty there will be tax legislation this year".
Kautter analyzed the differences between the two tax bills that have come out of the House of Representatives—one from the Ways and Means Committee on Sept. 15 and the other from the Rules Committee on Oct. 28. He advised taxpayers not to discount provisions in the first bill that were excluded from the second, saying final legislation is expected to be some combination of the two bills and additional provisions.
Click here for a full breakdown of the top five takeaways from Kautter’s update on federal tax changes.
Death and taxes: Updating your estate plans for new laws
Creating flexibility in your estate plan is especially crucial at the moment, given the uncertainty about how pending federal tax legislation will address estate and gift taxes and exemptions.
The budget reconciliation bill proposed by the House Rules Committee on Oct. 28 left out the transformational estate and gift provisions that are in the Ways and Means Committee bill from mid-September. However, final legislation probably will address wealth transfers somehow, so, in the meantime, building options into estate plans creates flexibility to respond to whatever comes out of Congress.
This could entail using as much of the lifetime gift exemption as you can to the extent that you are comfortable with remaining assets. The exemption currently is $11.7 million, but the Ways and Means Committee proposed a reduction to about $6 million.
Other actions that could enhance flexibility include evaluating trustees for state tax ramifications; distribution planning; creating trusts that give access to your spouse; and disclaimer, rescission or marital deduction planning.
“Nobody wants surprises, especially when you’re talking about paying taxes,” said Rebecca Warren, a senior manager who specializes in estate, gift and high net worth individual tax planning for RSM’s Washington National Tax group. “Attorneys are going to be busy. Valuation firms are going to be really busy in the coming months. Take a look at your plan today and make sure you’re comfortable with everything you have in place.”
Workforce changes are becoming permanent—now what?
Companies had to react quickly in 2020 to deal with a flood of changes in how and where their employees worked, and temporary relief programs shielded them from a number of tax consequences. In 2021, though, these remote and hybrid workforce models have become the norm, and companies “have no excuse” for failing to understand the implications on tax obligations, said Brian Kirkell, RSM partner and leader of the firm’s Washington National Tax state and local tax team.
“The pandemic is done, as far as state taxation is concerned,” he said. “If you have employees in a state and you’re doing things in that state, that’s going to be viewed as you are purposely doing things in a non-emergency situation.”
Implementing and maintaining remote work arrangements require due diligence on the issues of immigration, data privacy and security, employment law, payroll obligations and more. Organizations also need to assess how compensation and benefits may have shifted.
A company’s tax function can’t do all this work in isolation, said Anne Bushman, RSM partner and leader of the firm’s Washington National Tax compensation and benefits practice
“Tax, legal, human resources, IT—they all have to come together to wrap their arms around this,” she said. “The best practice is to spend some time thinking about that and developing a policy. The employer is carrying a lot of risk here if they aren’t asking these questions.”
Among the key questions these teams should be discussing to develop such policies:
- Who will own the policy development and compliance management?
- Who will approve possible incremental cost?
- Who will identify authorized versus unauthorized host jurisdictions?
- Who will document the approval process?
- Who will define the employee preferred profile for remote arrangements?
Not making a decision in these areas is also a decision in itself, Kirkell said.
“If you don’t have a policy, you actually do have a policy—and it’s burying your head in the sand,” he said. "Be deliberate, keep your head up, look at all of this stuff, make sure you understand it and that you’re taking advantage of credits and incentives and managing the risks.”
Supply chain resilience: Understanding trends and policy implications
Persistent supply chain disruptions over the last 18 months have sent ripple effects through most industries, and companies are continuing to navigate the fallout not just from an operational perspective, but also from the tax side of their business.
This intersection of such economic trends with policies related to tax means it is crucial in the current environment for tax leaders to understand how value-added tax, customs and duties, and transfer pricing relate to supply chains.
Specifically, that includes how remote working policies affect supporting staff, and ramifications of the gap in VAT receipts due to non-compliance. There also is increased demand from tax authorities for online reporting and data, which represents a trend toward greener taxes and incentives for businesses to introduce green policies, said Duncan Stocks, RSM US national VAT leader.
Along with understanding the tax implications of macroeconomic trends, companies should update their inventory planning parameters, making sure to consider demand, material costs, lead time and product information.
“In the future, I do anticipate that tax leaders will be playing a much bigger role, because there is a need to have a better view of how these supply chain changes impact tax and vice versa,” said Anju Singh, RSM US operational transfer pricing leader.
INSIGHTS FOR THE CEO
Strategic actions companies can take to mitigate the effects of supply chain disruptions include pre-planning and contracting with alternative sources, increasing safety stock levels and gaining greater visibility into the status of operating assets. Business executives, governments and other entities also need to prepare for what the winding down of certain COVID-19-related relief programs will mean for tax policy in the future.
“As businesses, governments and countries come out of COVID, there is actually a shortfall of tax revenue now,” Stocks said. “The consequence of these reliefs over the last 18 months means there will have to be tax policies in place to generate revenue.
The hunt for revenue: Hot topics in tax controversy and IRS enforcement
A highly anticipated increase in IRS funding designed to enhance the agency’s enforcement capabilities is an impetus for businesses of all sizes, and even wealthy individuals, to consider a playbook for how they would contend with a field examination, the most comprehensive and complex type of IRS exam.
Patti Burquest, leader of RSM’s Washington National Tax practice, recommended strategies aligned to the three phases of a field examination—planning, execution and resolution. As a former attorney in the IRS Office of Chief Counsel, she described best practices ranging from communications with IRS agents and managers, to timing components, to technical mechanisms that could improve a taxpayer’s outcome.
Given how interpersonal interactions between the business and the IRS set the course for an audit, Burquest emphasized the importance of taxpayer representatives cultivating a productive working relationship with IRS team members.
“I’m not saying go to lunch with them,” Burquest said. “I’m saying just get to know them so that they know who you are so that you have input during that process.”
INSIGHTS FOR THE CEO
Assessing your company’s audit risks includes understanding what the IRS is looking for and its campaign issues, especially as the agency becomes more determined and more capable of closing the estimated $600 billion annual tax gap.
RSM Principal Alina Solodchikova, a former attorney in the IRS Office of Chief Counsel, noted several issues that tend to attract the IRS’ attention. For corporations, they include net operating loss carrybacks and international elements, such as transfer pricing and foreign tax credits. For partnerships, some red flags are the sale of partnership interest and reporting of gain or loss.
Planning for a successful IRS exam is crucial. “Meeting with your tax advisor and identifying the soft spots on the tax return is important,” Solodchikova said. “If you identified soft spots on the return, discuss with your tax provider whether to file a qualified amended return. That may protect you from the accuracy-related penalties.”
Selling your business in a time of growth, uncertainty and change
A record amount of dry powder with private equity firms, an accelerated business lifecycle, and uncertainty around potential tax rate changes are some of the major factors creating a hot market for private businesses. Regulatory and market uncertainty is leading to accelerated transaction timelines. Business owners considering a sale need to understand their personal goals and conduct thorough sell-side due diligence to ensure a successful outcome to the process.
“If you’re moving forward, you need to move forward quickly but also realize you don’t want to leave money on the table,” said Andy Swanson, partner in RSM’s Washington National Tax group and leader of the firm’s business owners practice. "Proactivity is key to an accelerated timeline".
Proactivity starts with building an M&A advisor team comprised of professionals whose experience enables you to pursue your goals quickly. This, along with understanding your personal goals and thorough sell-side diligence, will set you up for success.
Before a transaction, there are a handful of tax items business owners should carefully consider in order to increase after-tax cash flow and decrease surprises. Those include estate and charitable planning, evaluating pre-transaction reorganizations and structure, state and local tax planning, tax benefits and exposures affecting value, and international tax planning.
Pass-through entity taxes at the state and local level: Addressing the SALT loopholes
Taxpayers in any state whose legislature provides an elective pass-through entity tax have myriad considerations in deciding whether to utilize that workaround of the deduction limitation on state and local taxes.
More than 20 states provide for pass-through entity workarounds in 2021, and no two states have identical rules for the tax. Determining whether to make the election depends on careful consideration of state-specific answers to such questions as whether the tax is binding on all eligible partners, what factors determine whether income is subject to tax, differences in tax rates, and many others.
A strong line of communication between partners can ensure an election decision that best serves everyone. That could include getting partners’ individual tax preparers involved to do a full analysis
“If you’re making an assessment at the entity level, it’s certainly not going to take into consideration things you’re not aware of,” said Daniel Klimas, RSM senior manager and state and local tax specialist. “A partner may have other losses or other sources of income that may offset income from one partnership, and it may not be beneficial to make such an election.”
Adding to the uncertainty is whether pending federal tax legislation will address the SALT deduction limitation. Proposals are evolving as congressional negotiations continue, in some instances making different headlines multiple times in the same day. That underscores the importance of modelling various law changes and assessing outcomes.
“Look at these regimes with your eyes wide open,” said Ryan Corcoran, senior manager in RSM’s Washington National Tax practice.
Year-end planning: Federal, individuals, SALT and Canada
Full Speed ahead: Year-end tax planning
The likelihood of increased tax rates and new tax rules established by pending federal legislation should encourage taxpayers’ year-end planning sessions to closely consider whether to accelerate or defer taxable events.
“We shouldn’t go on autopilot and just always assume we want to capture losses at the end of the year to offset our gains,” said Matt Talcoff, RSM national tax industry leader and the partner charged with leading the tax practice’s increased focus on client experience. “That may not be the case this year.”
The strategy—which Talcoff referred to as “planning in reverse”—can be applied by companies and individuals to a long list of business and financial considerations. Talcoff and Patti Burquest, leader of RSM’s Washington National Tax practice, illuminated what planning in reverse might entail for business taxes, individual taxes, entity choices, investment strategies and more.
A business could consider accelerating income into 2021 and delaying expenses, Talcoff explained. It could also elect to capitalize and depreciate capital improvements over time rather than take advantage of bonus depreciation, as one of many examples.
An individual that anticipates enactment of tax legislation that is unfavorable to their circumstances could, for example, accelerate ordinary income from a retirement account now, match it with charitable donations and have it be tax-exempt in the future. They could structure an investment to include qualified small business stock. They could structure a rollover investment in a current transaction as taxable to obtain lower capital gain rates, avoid a possible future surcharge tax and create a stepped-up basis for a future exit.
“Broadly, we say if rates are going up, you want to consider pushing out expenses,” Talcoff said. “But everything is personal, and it really does depend on your personal situation, which is why modelling with your tax advisor and considering personal goals is so important.”
Planning during uncertain times: Tax trends and issues affecting individuals and business owners
Tax legislation is still in flux in Washington, and that doesn’t just mean uncertainty for companies. Individuals, business owners, private equity principals, and family offices could be affected in such areas as estate and gift planning, succession planning and charitable planning by whatever changes ultimately are enacted.
While congressional tax policy negotiations continue, families and individuals can head off some of the uncertainty by addressing some key considerations and modelling the effects of proposed changes to tax rates and rules.
“With family offices, entity choice is a real issue,” said Ben Berger, RSM partner and national family office tax co-leader. “It's another compelling reason to consider using a C corporation as a family office management company. But there are pitfalls there as well. Really, you have to model this out and forecast what this is going to look like over a period of time before you make any decisions.”
Governance planning is another area that needs proper attention. Business owners who are interested in leaving a portion of their business to a charity, for instance, should take steps now to ensure the business will continue to be run smoothly and in a way that aligns with the owners’ goals and objectives.
“Estate planning is not just about the taxes,” Berger said. “It’s also about thinking through the governance and succession aspects of the business, investments, and charitable enterprises.”
Here are some important things to keep in mind as the end of 2021 approaches:
- Lifetime charitable gifts are generally far more valuable than postmortem gifts, and some individuals might prefer to take action in 2021, given the elimination of favorable charitable provisions (such as the 100% AGI limitation) and no proposed change to the tax benefit of contributions in 2022.
- Most state and local tax profiles have likely changed or will change soon, and individuals need to consider how this will affect them personally, as well as their family trusts..
- Individuals should consider assessing their estate planning objectives, and consider using their lifetime gift exemption in the near term, given the uncertainty about how final legislation might affect the available exemption.
Surprise, surprise: What healthy SALT revenues and state budgets mean for 2022
The state and local tax landscape is drastically different now than it looked less than a year ago, and companies need to understand what this shift will mean for how they do business across the country,
“I’ve never seen anything like this in 15 years, where literally eight months or a year ago we were scared the states were going to collapse, and that doesn’t even seem to be on the radar right now,” said Mo Bell-Jacobs, a senior manager on the SALT team in RSM’s Washington National Tax practice.
Thanks to federal stimulus money and the ongoing economic recovery, state budgets are largely back on track heading into 2022, following the disastrous effects earlier in the pandemic.
“The good news, in my opinion, is the good budget picture makes increasing taxes harder,” said David Brunori, senior director on the SALT team in RSM’s Washington National Tax. He added, though, that that could all change if there is another spike in COVID-19 cases or another economic downturn.
And even with healthy budgets, there are a number of nuanced state and local tax matters that companies need to be aware of as they prepare for the year ahead. Among them:
- Whether states will adopt the Multistate Tax Commission’s new guidance on Public Law 86-272, which relates to businesses engaging in a range of online activities
- The landscape for pass-through entity workarounds
- Tax implications of remote and hybrid workforce changes that, by all indications, are here to stay
In a hot market for mergers and acquisitions, it will also be crucial for organizations to work with state M&A tax advisors on such deals and ensure that a close examination happens at all levels, not just in regard to federal tax implications.
“It is becoming much more sophisticated and complicated, with lots of moving parts,” Brunori said in reference to M&A tax considerations. “Get on this early and talk to your state and local tax folks. A lot of times, people bring in SALT folks late in the game on due diligence, and that’s a mistake.”
Canada income tax in 2021 and 2022
Thorough year-end planning for Canadian taxpayers this year will include analyses of several novel corporate tax issues, how the global tax system is changing, and measures the Canada Revenue Agency is taking to enhance enforcement and close the country’s tax gap.
The key business tax measure enacted in 2021 changed the employee stock option rules. The old rules are still in place for employers that qualify under the preexisting regime. The new ones, however, establish criteria targeting high income individuals employed at large, long-established corporations. For companies involved in mergers and acquisitions, mandatory disclosure rules have been enhanced by five material changes designed to capture a broader array of transactions.
“Pay close attention to atypical transactions that could fall into some of the new reporting requirements, as it may not be obvious on the face of it that they should,” said Stephen Rupnarain, M&A tax services leader for RSM Canada.
Companies with cross-border structures or financing should examine how their circumstances might be affected by taxing authorities’ concerted efforts to combat tax avoidance and by rules designed to align with the base erosion and profit-shifting action plan.
Those planning considerations are against the backdrop of a purposeful CRA, which is “upping the ante on all audit fronts,” said Clara Pham, leader of RSM’s Canada National Tax practice. “These intensified audit efforts are here to stay in light of Canada’s national debt and the funding support already allocated from government.”
Tax technology
How tax technology can propel your business
Amid various factors driving digital transformation in middle market businesses, it is crucial for tax function leaders to understand that the success of any change initiative depends largely on employees who might not have had a say in taking on the project or structuring it. Ultimately, new technology systems are going to reliably do what they are built to do; it’s the people implementing, operating and supporting those systems that will determine whether the organization achieves its transformational objectives.
Common challenges include a general resistance to change, internal politics, dysfunction within work teams, coaching stakeholders on new processes, and managing ambiguity and change fatigue.
Michael Charette, tax technology consulting partner in RSM Canada, articulated questions that tax function leaders should answer as part of a change management plan.
“How do we coach these people to want to adopt the change?” he said. “How do we coach them to have the necessary skills and adopt the necessary behaviors to execute? How are we going to manage uncertainty and communicate to everybody that the uncertainty is being managed well?
“Everybody is important to the solution, but you also have to be mindful of the fact that there are people with various levels of power and various levels of concern,” Charette continued. “You have to understand that power doesn’t necessarily mean explicit power in the form of leadership, but it could be implied power in the form of a key resource. Make sure you understand what their concerns are.”
INSIGHTS FOR THE CEO
Comprehensively evaluating a business case for a digital transformation initiative will ensure the project aligns with the organization’s growth and optimization objectives. That requires vetting a wide variety of components and accounting for many granular details, efforts that will strengthen leadership’s collective confidence in the project.
This begins with understanding that transformation is a process, as opposed to an event. Be especially mindful of how personnel component described above runs through all other pillars, including strategy, data management, tactics and the technology itself. Clearly defining objectives and establishing measures for success will focus the project and facilitate any adjustments necessary along the way.
Managing post-merger risk: How automation can improve your global tax reporting obligations
Global companies already face major challenges in managing data to meet their tax reporting requirements, and significant mergers and acquisitions activity this year has underscored the importance of streamlining the tax and finance processes required in the post-merger phase.
Buyers should seek out automated solutions to help gather the data that they will need to fulfill their reporting obligations. Among other things, automation can help companies to extract and harmonize data from multiple enterprise resource planning systems, allowing buyers to ease the burden on their tax and finance teams and improve global tax reporting and the withholding obligation process.
“Manual processes, while they may have worked, have become less and less effective and present more and more risk,” said Aureon Herron-Hinds, national leader of Foreign Account Tax Compliance Act and global information reporting at RSM US.
Data requirements around information reporting and withholding obligations may also soon change if the Biden administration’s tax plan is adopted. That’s all the more reason for companies to have automated solutions in place now.
“The key here is making sure you’ve got a good handle on what your data is,” said Herron-Hinds. “Once the deal closes, you’ve got so many things to do, and thinking about where the data is located is not necessarily the best use of your time. Having a solution in place to do that can help you manage your time so you can focus on the bottom line.”
Maximizing your data with PartnerSight®
The ability of RSM’s proprietary pass-through tiering and allocation platform, PartnerSight, to clone data has an especially useful scenario planning application.
As PartnerSight automatically tiers income allocations, cloning data sets enables real-time modeling exercises for any number of potential tax policy changes, such as the carried interest holding period, the long-term capital gains rate, pass-through entity tax rules, and many more.
“What does a tax policy update mean to the investor or the general partner asking the question? We can easily answer ‘what if?’” said John Ihne, RSM senior manager for partnership technology services. practice. “The data is all usable, and you’re able to repurpose it throughout the year and not have to go through the process of using manually created Excel spreadsheets.”
INSIGHTS FOR THE CEO
Companies determined to capture value through digital transformation and improve employee work experiences can do both with PartnerSight. Lauren Demas, principal in RSM’s national tax technology consulting practice, detailed several instances earlier in her career in which she labored using Excel to gather data and complete analyses and compliance tasks—tasks that PartnerSight is designed to complete efficiently.
Ihne summarized the contrast between the old system and PartnerSight. “The data was there, the process of doing the work was all there, but it was not usable,” he said. “You had to work for your tax data. PartnerSight allows your tax data to work for you.”
Global operations: Tax system reform, operational transfer pricing, M&A, indirect taxes, and Canada tax controversy
OECD framework and the shifting international tax landscape
Grace Perez-Navarro, deputy director of the Organisation for Economic Co-operation and Development’s Centre for Tax Policy and Administration, conveyed a sense of promise in looking forward to outcomes of the recent landmark agreement to reform the international tax system.
"This is a whole new way of taxing multinationals,” Perez-Navarro said in the tax summit’s keynote presentation.
Read the full recap of her presentation, which includes a closer look at the two-pillar system, tax certainty, international coordination on tax rules, and more.
How a global minimum tax will affect your business, industry, and the economy
Global tax system reforms scheduled for implementation in 2023 require significant clarification and guidance as the two-pillar solution evolves from a statement into international tax rules. In the meantime, companies that opt for inaction due to the various uncertainties risk costly outcomes. On the other hand, a proactive approach can align multinational enterprises with new global tax structures and policies as efficiently as possible.
Mario van den Broek, a tax and business consulting partner in RSM Netherlands, described a three-phase approach to assessing the effects of tax rate changes, the use of low tax jurisdictions, and other impending reforms to determine whether restructuring is necessary to mitigate increased taxation and tax compliance complexity.
The first phase involves collecting information to calculate jurisdictional effective tax rates under the global anti-base-erosion rules and assessing which jurisdictions could claim taxing rights on profits that are subject to tax. The second step entails modelling based on country-by-country data. In the third phase, the business applies lessons from the modelling to strategic planning.
“Some clients say let’s wait it out until there’s more guidance, but there are lot of companies that really cannot afford to wait,” van den Broek said. “The outcome could result in certain restructuring or getting rid of entities or moving things around. Obviously, restructuring takes time. If you start restructuring only on Jan. 1, 2023, you might be too late.”
INSIGHTS FOR THE CEO
Tax integrity and sustainability has become a key trend in the international tax environment as the digitalization of the economy sparked momentum for global tax reforms, van den Broek noted. He has seen many internationally active companies issue corporate responsibility reports or tax contributions reports designed to show stakeholders—and the public, in general—what tax policies the company has implemented.
“We’ve seen a real shift in behavior,” van den Broek said. “Even though certain tax structures are allowed by law, more and more companies have to think about if it is something we should actually be considering or implementing. Of course, with the whole discussion on ESG or sustainability and environmental issues, it also becomes important how boards of directors are behaving around tax policy. A lot of people will say, well, we are not into tax evasion or avoidance. But what kind of policies have you installed to actually prove that? And how have you trained your people to make the distinction to between tax evasion and tax avoidance?"
How to solve your operational transfer pricing puzzle
Transfer pricing complexities commonly result in multinational enterprises overlooking their strategy for implementation. However, breaking down the implementation component into three phases could enhance business’ understanding of their challenges, said Anju Singh, RSM US national operational transfer pricing leader.
First is pricing and costing, a step in which a business model and transfer pricing policy come together, resulting in a methodology or set of rules that systems can understand.
The second phase—dubbed “record-to-report”—applies price and cost calculations to the accounting system so the system can record transactions correctly.
Third is the monitor and analyze phase. This entails comparing budgets and financial data to actual results to make sure transfer prices resulted in the desired outcome.
Strong intracompany collaboration and a clear governance framework are essential to overcoming obstacles such as disparate data and disconnected teams.
“Multiple teams are working on different components of this puzzle,” Singh said. “As long as they all come together and fit in their right positions, we can have a completed puzzle. If that doesn’t happen, what we are left with are lots of little, itty-bitty pieces that don’t make any sense.”
INSIGHTS FOR THE CEO
Operational transfer pricing is becoming more important for multinationals. Global tax reforms, transparency mandates, digital transformation, and increasingly scrutinized transfer pricing data are just some of the factors fueling a renewed focus on automation and operations.
Singh described operational transfer pricing as a combination of traditional transfer pricing technical capabilities layered with data processes and advanced technology. That formula enables a relatively valuable, efficient, and comprehensive transfer pricing solution from planning to implementation to compliance.
Mergers and acquisitions across North American borders
Multinationals expanding into Canada or Mexico face a litany of structuring and operational obstacles. Successful outcomes require an understanding of complex financing considerations, tax compliance issues that include differences between laws in each jurisdiction, and repatriation considerations.
Where to place debt is of critical importance in any cross-border deal. Current U.S. debt limitations, coupled with the increased limitations for years beginning after Jan. 1, 2022, are causing U.S. multinational corporations and private equity funds to reconsider their financing options when acquiring non-U.S. operations and entities.
“The time to allocate debt to a non-U.S. jurisdiction is at the beginning of a deal,” said Mitch Siegel, RSM partner and international tax leader in the firm’s M&A practice.
From the Canadian perspective, debt pushdowns are a standard component of a U.S. outbound acquisition. However, earnings stripping rules in the 2021 federal budget could further restrict the ability to push interest expenses into Canada to offset post-closing profits.
Other common issues include how flow-through structures are used to facilitate U.S. planning objectives, and that Canadian treatment of limited liability corporations is incongruent with U.S. treatment.
INSIGHTS FOR THE CEO
Many U.S. multinationals and funds are focusing on achieving U.S. benefits because the benefits of having income taxed overseas is diminishing and may be eroded further by legislation currently being considered, Siegel said. Consider how income overseas could be reduced by shifting functions and risks of non-U.S. operations.
Global indirect tax hot topics and recent updates
Indirect tax rules are strengthening globally as taxing authorities from the European Union to Canada and beyond push to capture revenue on e-commerce and digital services.
In addition to this, taxing authorities are seeking to control key elements of the indirect tax process and create access for themselves to all transactions invoiced and purchased by taxpayers. In doing so, they are increasing taxpayers’ reporting and administrative obligations, said Steve Butler, a senior manager on RSM’s global indirect tax team who specializes in advising U.S. multinationals about value-added taxes (VAT) and goods and services taxes (GST).
Authorities in various jurisdictions are implementing electronic invoicing regulations and are requiring taxpayers to issue VAT invoices via government-controlled platforms. Some authorities are requiring real-time or near-time reporting of transactions, a trend that could eventually lead to authorities determining a business’ VAT position without requiring it to submit a VAT return. Also, authorities are enhancing their data analytics systems to strengthen their audit capabilities.
“All of these measures demonstrate the importance of taxpayers being comfortable with their taxing decisions, the quality of data residing within their ERP systems, and having the full and complete audit trail in case of review from taxing authorities,” Butler said.
INSIGHTS FOR THE CEO
For American companies supplying e-commerce products to customers in the European Union and around the world, it’s important to understand their value-added tax obligations based on the specific fact pattern and rules set applicable to the business. Similarly, any business providing digital services globally must comprehend the global VAT landscape, including rapidly evolving tax laws, the types of customers to which it sells, and whether there are any VAT registration obligations.
Differences in tax rules and compliance processes by country underscore the value of technology that can be configured accordingly and integrate government invoicing solutions.
Tips, traps, and the Canadian Revenue Agency
The Canada Revenue Agency is part of the push by global taxing authorities to strengthen audit capabilities in response to digitalization of the global economy and government initiatives to combat economic effects of the pandemic.
Ramifications for middle market companies include more relatively stringent audits, especially examinations centered on tax debt avoidance, pandemic-related emergency subsidies, and transfer pricing practices.
The CRA is supported in its efforts by 2021 Canada Federal Budget, which, as the first federal budget since 2019, sought to make up ground, given significant changes in the economy and to the national debt. It featured proposals to increase the CRA’s audit and enforcement powers in order to close loopholes and reduce inequalities.
In practice, companies sense the CRA pushing boundaries of its power to demand documents. Businesses whose circumstances include areas at which the CRA is looking closely can prepare accordingly, said Clara Pham, leader of RSM’s Canada National Tax practice.
“The key to success in an audit involving COVID subsidy programs,” Pham said, “will be to have documentation, documentation, and more documentation at the ready when—definitely not if, but when—the auditor comes knocking.”
