"The general mood in corporate America is a reluctance to do anything until they know what's to come," said Simon Moore, Midwest director of international tax services at Ernst & Young. The statement expresses a widely-shared view of business and tax ...
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"The general mood in corporate America is a reluctance to do anything until they know what's to come," said Simon Moore, Midwest director of international tax services at Ernst & Young. The statement expresses a widely-shared view of business and tax professionals as the US heads for a presidential election in November for which the candidates have announced diametrically-opposed plans if elected, on most key issues, including tax reform.
"The questions that are looming are: 'Will there be tax reform? How deep will it be? What's going to happen with the provisions that are expiring?'," said Ernesto Perez, national practice leader of international and transactional tax at Alvarez & Marsal Taxand.
One change President Obama and Republican candidate Mitt Romney agree on is lowering the corporate tax rate from 35%. Obama has proposed 28%, while Romney has suggested a bigger reduction to 25%. The US has one of the highest corporate tax rates among developed nations, prompting several companies to move abroad.
"Since 2009, at least 10 US public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so," the Wall Street Journal (WSJ) reported. "That's up from just a handful from 2004 through 2008."
Risk manager Aon, expects its move to the UK in April 2012 will reduce its tax rate, from an average of 28% over the past five years, by five percentage points in the coming years, potentially boosting its annual profits by $100 million, the same WSJ report said.
Apart from if and to what extent the corporate tax rate will be lowered, other questions that remain unanswered and fuel uncertainty relate to whether tax breaks and incentives will be revoked. One example is R&D tax credits that expired at the end of 2011
"They are usually reinstated retroactively but the system does create havoc for companies in terms of their financial reporting," explained Jim Eberle, Alvarez & Marsal Taxand's R&D managing director.
It can also affect companies' decisions related to where they will conduct their research.
"There have been research centres springing up in Ireland, Eastern Europe, China and India because these countries want to attract the talent, such as scientists and engineers, involved in research and development," Eberle added.
Eberle said there are two things for policymakers and taxpayers to consider in relation to R&D: a Bill that will extend tax credits for another one or two years; or a longer-term approach of reducing the corporate tax rate for all industries and doing away with tax credits altogether.
From a broader tax perspective, Patricia Sweeney, who chairs Miller & Chevalier's tax department, cites the IRS's reorganisation of its large business function as a key development for multinational companies. "They've geared up and are reorganising in a way that there's going to be a huge emphasis on international tax issues and transfer pricing."
Lowell Yoder, head of US and international tax practice group at McDermott Will & Emery, agreed that the government has become more organised and more focused on transfer pricing issues.
"It's been an issue for a while but I think there is a convergence of factors that has made it more noticeable today," he said. Such factors, said Yoder, include the budget deficits in the US and around the world which have prompted governments to seek ways of broadening their tax base; increasing number of stories appearing in the media about US companies and their offshore profits; and an increasing groundswell for international tax reform.
"The US Congress must address some basic issues regarding the US tax system, particularly as it relates to the taxation of multinationals," said Michael Lebovitz, tax leader of DLA Piper's Los Angeles practice and who divides his time between the US and Europe. "These issues include deciding between a worldwide tax system and a territorial regime as well as the corollary issue of what to do about the over $1 trillion in untaxed earnings of US multinationals considered to be permanently invested offshore."
While there's a lot of talk about international tax reform, one adviser said he does not expect anything to happen until after 2013. "After the election there will be chaos and then whoever wins will need a year to get their act together."
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