By
Cathy Lockman
When
Marilyn Gerdes accepted her appreciation gift at the conclusion of the
Department of Accountancy’s recent Lyceum, she quipped, “Is this taxable?”
It
was a fitting conclusion to an engaging presentation on tax controversies given
by two University of Illinois graduates--Gerdes, former Senior Vice President
of Tax for Sara Lee, and Patrick Roxworthy, Senior Vice President of Tax for
Hyatt Hotels Corporation.
Gerdes
drew on her experience in the manufacturing sector to explain to the
standing-room-only audience the ramifications of international tax rates on
corporations. It’s a topic she said is relevant not just for those who work
with or for multinational companies, but also for those employed by domestic
businesses. That’s because multinationals are able to engage in tax rate arbitrage,
a competitive advantage that is unavailable to domestic corporations. Gerdes
explained that arbitrage in this context is the opportunity to take advantage
of lower tax rates by parking your cash in another country where you do
business instead of paying the U.S. corporate tax rate of 35 percent if you
bring that money home.
Only
one country in the world, Japan, has a higher corporate tax rate than the
United States, and most are far lower, so rate arbitrage can play a significant
role in boosting a company’s bottom line. When you calculate both the potential
tax savings and the cheaper labor costs in many of these countries, it becomes
more obvious why manufacturers may have less of a presence in the United
States. In fact, said Gerdes, companies that don’t take advantage of international
corporate tax rate benefits may have to answer to shareholders who see tax rate
arbitrage as just plain good business sense.
Manufacturers
aren’t the only companies avoid paying unnecessary taxes by using tax rate
arbitrage. Roxworthy explained that companies with intellectual property (IP) must
be adept at the game as well. He cited the value of trademarks and other IP as
a specific point of contention as regards taxability, with tax collection
agencies such as the IRS typically putting a higher monetary value on the IP than
the corporations. These concerns and others, he said, keep companies from quickly
bringing their money back to the United States “where if it were taxed at a
lower rate would create many economic benefits, including employing more people
and growing the company. The current system creates an anti-competitive tax environment.”
With
more than an estimated $1.8 trillion of corporate profits residing in countries outside the United States, it’s
understandable why the IRS would frequently audit multinational corporations. But
both speakers agreed that with the 35 percent tax rate waiting for those
profits when they hit U.S. soil, it’s also obvious why corporations are
investing their profits in overseas countries instead. An added reason is that corporations
understand that the U.S. sporadically offers official tax holidays. When a tax holiday comes down the pike, they
can bring their money back when it’s cheaper to do so, or, even better says
Roxworthy, “real corporate tax reform, which is desperately needed but unlikely
to be addressed until 2013, due to the upcoming elections.”
Even
with extensive reform, however, Roxworthy predicts that in 20 years “we’ll
likely be right back were we are now” because there is a reset cycle of
creating tax credits and loopholes and then eliminating them over time only to
return to the process years down the road.
But
as much as tax policy may change, there’s one thing that large corporations can
count on remaining the same, said Gerdes and Roxworthy. And that’s the
likelihood that the IRS will audit them.
While
sharing some of their personal stories of the challenges of being on the
receiving end of an IRS audit, both speakers offered similar advice: be
prepared for an IRS audit to take a lot of time and patience; always be
professional; treat the IRS auditors with kindness, but don’t let yourself be
pushed around; don’t take a position you can’t support, and keep a sense of
humor. In the case of an audit by a foreign government, Roxworthy suggested
using local accounting firms, not getting involved unless the issue is
significant, and understanding the cultural issues that may come into play,
such as the different negotiating styles that are acceptable in different
countries.
However,
at the end of the day, said Gerdes, it’s not audits or cultural issues or
differing international corporate rates that makes our tax system, both for
individuals and businesses, so complicated.
“The
tax code is so complex because it is used has an instrument of public policy,”
Gerdes explained. “A tuition or daycare tax credit or deductions for mortgage
rate interest have a public policy purpose, to encourage people to buy homes,
for instance. In the same way, public policy comes into play in the corporate
tax world as well,” said Gerdes, with tax credits being provided for environmental
stewardship, research and development, and other corporate initiatives.
It’s
unlikely that the marriage of public policy and taxes will be dissolved anytime
soon. However, both Gerdes and Roxworthy agreed that broad tax reform for
individuals and corporations is on the political horizon, and that everyone,
from taxpayers to policymakers, believes it’s needed.
“The
question is how will we pay for it?” said Roxworthy.
And,
to quote Gerdes, “Will it be taxed?”
