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Blake E. Christian
Blake Christian

Corporate tax transparency and corporate tax reform

Trends in technology and increased availability of information have placed a spotlight on corporate and individual taxpayer compliance and financial stewardship.

March 28, 2013
by Blake E. Christian, CPA

Last month I attended the annual University of Southern California Gould School of Law Tax Institute conference. As usual, the quality of the presenters, as well as the technical content, was exceptionally high.

While there were plenty of presentations covering the American Taxpayer Relief Act (ATRA) of 2012, P.L. 112-240, a few notable presentations covered some interesting trends and predictions relevant to business taxpayers.

Following is a summary of a few tax trends and policy discussions:

Technology and tax transparency

Pamela Olson, current U.S. deputy tax leader and Washington National Tax Services practice leader at PwC and former U.S. deputy assistant secretary for tax policy for the Treasury Department, was one of three keynote luncheon speakers during the three-day conference. She provided attendees with a very interesting presentation on how the widespread availability of public (and some private) data has put the spotlight on the domestic and international tax burdens of public companies, as well as some private companies and high-net-worth individuals.

With the contentious debates over the past two years regarding the proper distribution (and proposed redistribution) of federal and state tax burdens among low-, middle-, and high-income taxpayers, there has been a blizzard of reports, op-ed pieces, speeches, blogs, advertisements, and movies advanced by politicians, economists, CEOs, entertainers, and community activists supporting whatever agenda is being advanced. All these people can be accused of manipulating statistics in their favor; however, because information is now so widely available, the playing field is leveled and allows the general public to compare data via the same technology and the flood of information available through public and private sources.

Olson established that, while there are some issues associated with transparency, increased disclosure is a net positive in ensuring that taxpayers are complying with the established tax reporting and payment guidelines. Citing former Supreme Court Justice Louis Brandeis, who famously said “sunlight is the best disinfectant,” she went on to detail how technology and social activism are affecting tax compliance, as well as tax policy.

Publicly traded companies are required to disclose a wide variety of details surrounding their U.S. and international operations, including their federal, state, and local effective tax rates and the reason their rate may vary from the statutory rates for the various taxing jurisdictions.

This allows the media and others to attack such things as Facebook’s large 2012 tax loss and federal refunds generated from its massive stock option deduction, General Electric’s lack of 2011 federal tax burden, and Google’s, Starbucks’s, and other U.S. companies’ relatively low tax payments in foreign jurisdictions.

Olson stressed that data mining is made easier with the internet, including hundreds of sites focused on “outing” private and/or semiprivate information about individuals and companies. These sites allow investigative reporters, the curious, the well-intentioned, activists, public opinion influencers, and the vindictive to ferret out detailed information that can be benchmarked against similar businesses to determine tax burdens as well as other metrics to evaluate each company’s relative ranking as a good (or bad) corporate citizen.

In addition to websites, Olson listed a variety of reasons for the increasing transparency:

  • Tax return disclosures/penalties (e.g., Sec. 6707A);
  • Tax preparer disclosures/penalties (e.g., Sec. 6694);
  • Foreign financial account reporting (e.g., Sec. 6038D);
  • Financial statement cross-referencing;
  • Congressional/parliamentary investigations (regulatory, foreign bank accounts, and outsourced operations and treaty shopping);
  • The media;
  • Think tanks and nongovernmental organizations (NGOs);
  • Whistleblowers and bounty hunters; and
  • Disgruntled employees, spouses, competitors, etc.

Olson explained that, while the increased transparency can be credited with forcing changes in corporate and individual taxpayer behavior (generally for the better), there are other intended and unintended consequences. With the increased access to information, and the many complexities in the tax arena, there can often be oversimplified or outright erroneous reporting in the media—and this leads to the general public’s misunderstanding the issues. In addition, the trend toward sound bites vs. sound tax policy is increasing, which increases political discord and complicates the legislative process.

There is a growing trend in emphasizing that companies must do the morally right thing over simple legal compliance. Companies in virtually all industries, but particularly energy/industrial, as well as technology and pharmaceuticals, have certainly felt the wrath of the public as information (not always accurate) concerning net tax burdens in various jurisdictions has come to light over the past few years.

Olson went on to produce some interesting projections of U.S. economic growth and the federal budget outlook through 2022 and as reflected in the most recent Congressional Budget Office (CBO) report. The GDP growth rate forecast by economists, the Obama administration, and the CBO averages less than 3%—which is below the level of what the administration and CBO agree is needed to close the annual budget deficit. As a result, the federal deficit is projected to continue to grow through 2022 by $2.3 trillion to $11.6 trillion (cumulatively), depending on whether the best-case or worst-case economic results occur. The net effect will likely be a higher interest burden for the government and even more pressure to raise revenues through taxes.

A large percentage of business entities are flowthrough structures such as limited liability companies (LLCs), S corporations, and partnerships. As a result only 9.9% of the $2.448 trillion in annual federal revenues are attributable to C corporation income tax collections. Individual income taxes made up 46.2% of the fiscal 2012 revenues. Estate and gift taxes provided only 0.6% of the total federal revenues. Social Security and Medicare taxes accounted for another 31.7% of the 2012 revenue pie.

Based on the foregoing, there is little doubt why ATRA raised virtually all its revenue by increasing individual rather than business tax rates.

Upcoming budget talks, debt limit, and tax reform will reopen the debate about spending cuts vs. additional tax increases, “fair share” of taxes, and redistribution of wealth among the haves and have-nots.

Upcoming tax reform: Broadening tax base vs. more rate increases

A common theme from several speakers, as well as other economists I have heard over the past few months, is a growing drumbeat from both conservatives and liberals to consider a value-added tax (VAT). The United States is one of very few industrialized countries that do not currently have a VAT, and such a system, which imposes a tax based on the marginal value increase at various stages of production and sale, can generate billions of dollars per year. The underlying issue of a VAT is that it is regressive and imposes a bigger relative burden on the poor and middle class. Of course, this can be easily corrected via an annual exemption or a rebate for economically disadvantaged individuals.

Other revenue raisers that might be considered included a minimum tax or gross receipt tax on flowthrough entities such S corporations, LLCs, partnerships, and trusts. Obviously these flowthrough entities require significant IRS resources to write regulations and process and audit returns, and a small tax based on gross receipts or Schedules K-1 would offset the aforementioned administrative costs.

Estate tax proposals

Paul Caron, visiting professor at Pepperdine Law School and nationally recognized tax blogger, gave an interesting, albeit controversial, keynote lunch presentation titled “Occupy the Tax Code” (see his blog for more) in which he presented his case for modifying the estate and gift tax code to more aggressively redistribute wealth upon the death of wealthier taxpayers. Caron pointed out that second- and third-generation trust beneficiaries seldom used their inherited wealth in a way to help society—to which the attorneys, CPAs, and trust fund babies in the audience groaned or squirmed in their seats.

While Caron appeared to convince few in the audience that we should reopen the estate and gift tax debate, he did share some interesting slides (see Chart 2 in Caron and Repetti, “Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth,” 40 Pepperdine L. Rev. 101, 107 (2013)) that showed that the wide disparity in incomes between the rich and poor may be the reason the United States has significantly more social issues as compared to countries with less disparate incomes. Even more interesting was Chart 3, which shows the state-level income disparities and the relative rankings of states from a social woes standpoint—take a look at how your state ranks. Caron fielded a lively set of challenging questions during the post-presentation Q&A session and provided some witty responses.

Conclusion

These thought-provoking presentations may have raised as many issues as they resolved, but they certainly provided some excellent insights as to how the international interdependence, technology, data mining, social media, and the traditional press have placed a spotlight on corporate and individual taxpayer compliance and financial stewardship.

The genie is out of the bottle and this trend is not likely to reverse in any free society. While I do not condone groups, such as Anonymous or Wikileaks, releasing classified or confidential data, the increasing flow of public and not-so-public information making its way into the mainstream, the pressure on businesses and individuals to comply with international, federal, state, and local tax and GAAP rules and regulations is increasing daily. On the positive side, the multibillion dollar U.S. tax gap (see Christian, “IRS Compliance Trends for the Next Decade,” Corporate Taxation Insider (June 28, 2012)) may begin to close—or at least not increase, which will put less pressure on legislators to further increase tax rates.

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Blake Christian, CPA, MBT, is a tax partner in the Long Beach office of HCVT LLP.