Life sciences 2017 tax year in review—And a look ahead
INSIGHT ARTICLE |
Proper tax planning is imperative in order to avoid unnecessary tax exposure and minimize risk. In 2017, there have been numerous tax developments affecting life sciences companies. Among the most significant areas of change are the treatment of certain corporate and debt restructuring, the deductibility of certain significant expenses common to life sciences companies, and global reporting and compliance. Life sciences companies should consider the 2017 developments discussed below, which have implications for the industry.
Also included below are links to federal and state and local tax planning guides. With tax reform on the horizon, understanding your company’s tax obligations and preparing for the future has never been more important.
Mergers and acquisitions
IRS limits and reconsiders certain corporate transaction rulings
The IRS issued a statement addressing requests for private letter rulings regarding four types of corporate transactions. Although the IRS has issued multiple favorable rulings in these areas, it is now reconsidering its views. After this reconsideration, the IRS may issue new guidance governing these types of rulings. The four areas are (1) worthless stock loss eligibility under section 165(g)(3)(B) of the Tax Code, (2) Delayed distributions in connection with a section 355 or section 361 distribution; (3) “drop-spin-liquidate” and similar transactions; and (4) reorganizations resulting in a transfer of a portion of a subsidiary’s assets to its corporate shareholder. The IRS previously provided favorable rulings in similar situations, which will not be affected by any later procedures put into place. However, additional scrutiny will be applied by the IRS where these transactions occur.
Limit to a common restructuring transaction identified by the IRS
Corporate groups may use the Upstream C with a Drop technique to effectively accomplish a tax-free asset distribution from a subsidiary to its parent. The IRS declined a request for an Upstream C with a Drop ruling, and the declined ruling request presented a situation where the only apparent difference between the subsidiary before and after the transaction was the distribution of assets during the transaction. Thus, care should be taken to make sure that there is a material difference between the subsidiary before and after the transaction, aside from the distribution of assets to the parent during the transaction.
Debt issuance costs deductible upon subsequent borrowing
A company issuing a debt instrument generally incurs various costs that are amortized over the debt’s term to maturity. When the debt is later modified or refinanced, a question often arises: Is the company allowed to immediately deduct the balance of its unamortized debt issuance costs? Based upon the taxpayer’s facts, the IRS answered “yes” in a Field Attorney Advice (FAA 20172901F), addressing a situation involving a refinancing and a substantial additional cash borrowing.
Court ruling on SEC fines may have tax implications
In general, fines and penalties paid to a government are not deductible under the U.S. tax regime. The Securities and Exchange Commission (SEC) can impose penalties on a filer for certain violations of the securities law. This article addresses a recently settled case where certain disgorgement payments were treated as penalties for SEC law purposes. Taxpayers that made similar payments should re-assess the nature of the payments and consider the impact if the deduction were to be challenged by the IRS based on the arguments in this case.
Treasury releases report recommending action on burdensome regulations
Following an executive order to review all significant tax regulations issued in the years 2016 and 2017, the IRS identified eight areas considered burdensome to taxpayers and provided recommended action to repeal entirely or in part, or modify these regulations. Some of the areas identified affecting corporations include the re-characterization of debt to equity under section 385, the treatment of certain transfers of property to foreign corporations under section 367 and regulations related to currency gain or loss. The recommendations made are outlined in this article.
International tax planning
EU value added tax refund potential for pharmaceutical companies
A recent opinion by the Advocate General (AG) for the European Court of Justice (ECJ) opens the door for pharmaceutical companies to potentially claw back previously charged value added tax (VAT). The effect of the outcome of the case under deliberation would apply to 28 member states of the European Union. Pharmaceutical companies that have similar facts, and therefore a potential reclaim opportunity, should speak to their tax advisors in order to evaluate and pursue a claim. It should be noted that each member state sets its own statute of limitations, but there could nonetheless be a possibility of making claims for a number of prior years. The final judgment has not been handed down, but in order to protect earlier accounting periods, companies should consider submitting protective claims.
Cross-border intercompany loans trigger income inclusions
In a 2017 case, the Tax Court held that certain transactions between a foreign corporation and its domestic brother-sister corporations triggered tax on a portion of the foreign corporation’s offshore earnings. The case is notable because it reminds taxpayers that cross-border intercompany debt can result in unexpected taxation of offshore earnings. All corporations that have cross-border intercompany debt should review their transactions with their foreign related parties to determine if there are factors that give rise to income inclusion of the foreign corporation’s earnings.
IRS answers common questions regarding country-by-country report
In 2016, regulations were issued that require companies that are the U.S. parent of a multinational group to provide country-by-country reports of the group’s global operations. The IRS has published frequently asked questions (FAQs) regarding the new U.S. country-by-country (CbC) reporting standards. The questions are divided into four sections and will be continually updated as additional information or new guidance becomes available.
Credits and incentives
Understanding R&D credit benefits for the life sciences industry
Many life science companies qualify for the federal research and development credit. The credit is not refundable and is generally used to reduce regular income tax. The 2015 PATH Act provides eligible small businesses with two additional incentives that allow certain businesses below certain gross receipts thresholds to achieve some benefit from the credit. To learn more about the eligibility criteria read our article Understanding how the R&D tax credit can offset payroll taxes.
IRS provides safe harbor for large businesses research credit costs
The IRS issued a directive to its Large Business and International (LB&I) employees that is intended to guide the examination of the federal research and development credit claimed by certain taxpayers that have R&D costs on their financial statements. The directive addresses the documentation criteria required by a taxpayer to substantiate its costs qualifying for the credit. The IRS will allow ASC 730 financial statement R&D as sufficient evidence of qualified research expenses if certain criteria are met. This article summarizes the certification requirements and areas of complexity that require consultation.
2017 year-end tax considerations
2017 year-end planning guide
This guide reflects the tax considerations and developments that we believe may create risk or opportunity for businesses in 2017 and beyond. It is not a holistic list of all tax issues that may affect your business, but is designed to help you make informed decisions related to year-end tax planning.
Additional 2017 year-end tax issues
A look ahead
From a major federal tax overhaul to specific state and local tax law changes, government entities are constantly adjusting the tax landscape for businesses. Further, both President Trump and the House Republicans believe that tax reform is essential if the U.S. economy is to increase its rate of growth.