Question

How International Taxation effects the multinational corporations?. How does the recently enacted Tax cut and jobs Act helps some US based multinational companies? Give one example.

Answer 1

As the quantity, velocity and complexity of international business continues to expand, multinational firms need a tax system that

facilitates multinational business and dispute resolution. On a daily basis these multinational companies deal with ambiguous,

inconsistent and ever-changing tax rules. Consider the environment for U.S. companies with overseas operations:

• Economic situations vary greatly by country and region. Some are recovering from a downturn occurring a couple of years

ago. Some are currently entering a downturn. Some have not experienced weakness at all, in fact their economies are

growing at rates that outperform the rest of the world.

• More companies have entered global markets, increasing the level and intensity of competition.

• Foreign tax regulations, both at the national and local level, continually change, impacting overseas income and

profitability.

• Chronic budget deficits, a heightened sense of fiscal urgency and a tax system full of loopholes and temporary extensions

has increased the possibility of fundamental tax reform in the U.S. Whether its real reform or tax code modifications, there

will be winners and losers.

With national and local jurisdiction governments, both U.S. and abroad, enacting new laws to increase tax revenue or direct certain spending, a company’s tax provisions and related tax positions require regular review and revision to ensure accurate

financial reporting and tax filings. As President Obama and Congress look for new ways to create economic growth, more

change is likely in the near future.

International taxation of U.S.-based companies, at its core, is laden with complexity. To understand the effects of taxes on

American multinational companies, one must have a grasp of U.S. tax rules, foreign tax rules, and the possible outcomes of their

interaction. Beyond that there are additional trends and challenges in international taxation that only those intimately close to the

regulations, transactions and nuances can understand with any level of depth. This paper discusses some of the key trends and

challenges facing the tax departments of multinationals, as identified by Clifton Gunderson’s international tax professionals.

VantagePoint software is a web-based, integrated software solution offering dynamic tax analysis

tools for multinational corporations. The system’s comprehensive database supports tax planning,

provision and compliance needs.

Transfer pricing is arguably the number one area of interest for those involved with international taxation. Transfer pricing refers

to the pricing of transactions by and between members of the same organization. Transfer pricing is receiving increased scrutiny

from both U.S. and foreign tax authorities, and is a mounting concern for multinational companies. Issues of note include:

• Transfer pricing audits have been increasing steadily over the past decade. The trend is expected to continue in 2011 and

beyond.

• Tax authorities around the globe are imposing new and stricter transfer-pricing documentation requirements.

Noncompliance can produce hefty penalties.

• Fueled by the economic downturn, tax authorities are focused on protecting their domestic tax base from erosion through

transfer pricing adjustments being made by the foreign tax authorities, which leads to greater opportunities for disputes to arise.

• At the same time tax authorities are placing increased emphasis on transfer pricing, the rules and regulations seem to be in

a constant state of change. Companies must manage in a new era of regulations, penalties, transparency and disclosure.

irs foCused on inTernATionAl eXAminATions

Transfer pricing is also a growing concern for our federal government. In May of 2011, the IRS announced the selection of its first

Transfer Pricing Director, Samuel Maruca. The IRS created the new transfer pricing position in August of 2010 as part of a

realignment that established the Large and Mid-Size Business (LMSB) division. When announcing the reorganization, the IRS

stated it expects the new division to grow by nearly 900 employees. Most of those people will come from current IRS employees,

along with new hires. The new division, combined with previous announcements of hiring 800 agents in both fiscal 2010 and 2011

to focus on international examinations, highlights the increased risk of audit and the necessity for extensive documentation to

support compliance with the arm’s length pricing regulations.

Uncertain tax position

Uncertain tax position reporting, commonly referred to as UTPs, dates to June 2006, when the Financial Accounting Standards

Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 intended to

clarify the accounting for uncertain tax positions recognized in an enterprise’s financial statements. Because of FIN 48,

multinationals must identify, measure, evaluate and disclose all material uncertain tax positions for all tax jurisdictions (federal,

state, and foreign).

The identification, evaluation, measurement and reporting of uncertain tax positions is a complex process requiring extensive

analysis of new, existing, and changed tax positions. Taxpayers must take into account all taxing jurisdictions and must ensure that

all filing positions, as well as all non-filing positions, are considered and evaluated relative to applicable tax laws. UTP information

must be updated and reported on a quarterly and annual basis with the filing of the 10Q and 10K.

In addition to financial reporting requirements, taxpayers are now also required to disclose UTPs with their annual tax return

filing. The IRS introduced Form UTP for 2010 tax return filings for corporations with $100 million or more in assets. Filing will

be required in 2012 for corporations with $50 million or more in assets, and in 2014 for corporations with $10 million or more in

assets.

ReCommendations

Companies with international operations, such as sales offices, distribution centers and foreign manufacturing facilities must assess

a variety of potential FIN 48 UTP positions such as the existence of permanent establishments and related tax filing requirements,

local tax authority audits and local tax statutes of limitations, Subpart F income and the use of foreign tax credits.

In addition to local country and U.S. tax implications, related-party transactions that cross jurisdictions must also be carefully

assessed to ensure that tax positions on both sides of each transaction are properly accounted for.

Interest and penalties must also be determined for each UTP.

Most taxpayers have already filed Form UTP for tax year 2010. For 2011 and future filings, we recommend that taxpayers keep a

watchful eye on audits and IRS focus areas as the information from the first set of Schedule UTPs gets folded into the audit

process.

The Taxation of Multinational Corporations in Developing Countries

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The provision of public services and infrastructure is an important factor for economic growth. But in many developing countries, the quantity and quality of public services are low. One explanation for this is that these countries find it much more difficult to raise tax revenue than developed countries. This research project will focus on multinational firms as an important potential source of tax revenue. Multinationals tend to be more profitable than domestic firms, implying that they should also pay higher taxes. But multinational corporations can also shift income to low-tax jurisdictions more easily using a variety of devices such as transfer pricing or excessive levels of debt. Anecdotal evidence suggests that developing countries lose a substantial fraction of their tax base through this ‘income-shifting’, but empirical studies of the topic are rare. This research project will investigate the determinants of taxes paid by multinational corporations in developing countries. This will involve estimating the extent to which such firms shift profits out of developing countries, and exploring the determinants of these profit-shifting activities. The researchers plan to address these issues using recently available accounting data for a large number of corporations, both multinational and domestic, in a range of developing countries. Income-shifting activities may be motivated by the avoidance of corporate taxation. Existing studies suggest that multinational firms operating in industrialised countries avoid taxes by shifting income to low-tax jurisdictions. It seems likely that this problem is more severe in developing countries as many of these countries lack sophisticated policies directed at stopping tax avoidance, such as controlled foreign corporation rules and transfer pricing regulations. In developing economies, profit-shifting activities could also be driven by the desire to hedge the company against political risks such as expropriation, and to protect the company from government or state failure. This research project will investigate the relative importance of these factors in driving income out of developing countries. Understanding why income-shifting occurs is vital for the design of policies that can improve tax revenue mobilisation in developing countries, maintaining the ability to attract multinational investment.

Family of Four Making $59,000 Per Year

• Steve and Melinda have two children in middle school and are living secure middle-class life – but

budgets are tight. With tax reform, they’ll get some much-needed breathing room financially.

• As a result of lower tax rates, a significantly larger standard deduction, and an enhanced Child Tax

Credit and new Family Credit, Steve and Melinda will pay over $1,182 less in taxes than last year,

reducing their total tax bill from $1,582 to only $400. That’s more money they can use for whatever is

important to them, whether it’s paying bills, purchasing a new refrigerator, or putting away savings for

the future.

Single Mother Making $30,000 Per Year

• Cindy has a fulfilling job and a promising career path as an assistant manager at a local restaurant. She

works hard to support herself and her 11-year-old daughter, but most days Cindy feels like she’s barely

getting by much less getting ahead. With the Tax Cuts and Jobs Act, relief is in sight.

• Come Tax Day, Cindy will receive a tax refund of over $1,000 as a result of the bill’s lower tax rates,

larger Child Tax Credit, and Family Credit. This is over $700 larger than the refund she receives today,

offering a more meaningful reward for her hard work as she raises her daughter and pursues her own

professional aspirations.

Firefighter Making $48,000 Per Year

• Alan is a young firefighter in the community he has called home his entire life. He enjoys the job and

has chosen as his profession just like his father and grandfather did before him. The Tax Cuts and

Jobs Act will allow him to see even greater reward for his hard and selfless work.

• Under this legislation, Alan will pay a top marginal tax rate of just 12% instead of the 25% top rate

he pays today. Additionally, he’ll see nearly double the amount of his paycheck protected from taxes

because the bill significantly increases the individual standard deduction from $6,350 today to $12,000.

In the end, Alan will see his total tax bill go down from $5,173 currently to just $3,872 –

a total tax cut of $1,301.

New Homeowners Making $115,000 Per Year in a High Tax State

John and Rebecca got married this past summer and just bought their first home. Today, they make a

combined income of $115,000. They will pay $8,400 in mortgage interest and $6,900 in state and local

property taxes. John and Rebecca would like to have children, but they’re not sure if now is the right

time financially. Under the Tax Cuts and Jobs Act, they’ll receive more support now and into the future.

• The bill reduces their tax bill from $12,180 to $11,050 – a total tax cut of $1,130. This results from

lower tax rates, a significantly larger standard deduction, and the addition of the new Family Credit. With

these benefits, John and Rebecca will also see tax relief for both their mortgage interest and state and

local property taxes – all without having to itemize deductions.

• Finally, if John and Rebecca do have a child, they would be able to claim an increased Child Tax Credit

of $1,600 – up from just $1,000 today – reducing their taxes even further so they can keep more money

to support their new family.

Local Small Business Making $500,000 in Income

• When Glenda was a teenager she started her own little lawn care business, mowing the yards of her neighbors during the spring and summer months. Sixteen years later, “Glenda’s Gardening and

Landscape” has 41 workers, serves three counties in the area, and is expected to earn $500,000 in net

income this year. Under today’s broken tax code, where small business income is taxed at individual

rates, Glenda and her husband will personally be taxed on everything earned by the company. That

means paying taxes at individual wage rates, with an income tax bill of about $128,000.

• With the Tax Cuts and Jobs Act, Glenda, her family, and her business will see some much-needed tax

relief. Her net business income will be taxed at a low maximum rate of 25%, which in combination with

no Alternative Minimum Tax (AMT) will reduce her tax bill by about $25,000. This will allow her to use

this hard-earned money to grow the business further, create more jobs, and give her loyal workers a

raise.

Main Street Startup Company Making $62,000 in Income

Tom always dreamed of opening his own bakery. Two years ago, he went for it and opened up “Tom’s

Treats.” Business has been slow but steady and this year he expects the bakery to earn roughly $62,000

in net income.

• Under today’s tax code, he will pay $8,638 in taxes. But, with the Tax Cuts and Jobs Act, Tom will see his

tax bill go down to $5,631 – a tax cut of $3,007 as a result of the bill’s tax relief for small businesses

that file as individuals. That’s a significant and sustained boost to help Tom through the ups and downs

of owning a business, managing a payroll, and making his own American dream a reality.