From the April 2011 issue of Treasury & Risk magazine

Fuzzy Tax Reform

While the Obama administration highlighted a number of corporate tax reform issues in its fiscal year 2012 budget, tax experts agree that major changes--especially those likely to be unpopular with business--probably will be postponed until after the 2012 presidential election. Hank Gutman, a principal in the national tax practice of KPMG in Washington, predicts little reform will occur this year. "These issues are very complex--as a matter of economics and policy, and as a matter of politics," he says.

Gutman points to the Tax Reform Act of 1986 as an example of the far-reaching scale of the tax reform that's under discussion but says, "The 1986 experience is not particularly relevant to today because the economic and fiscal situations are entirely different."

Rafic Barrage, a tax partner at the law firm of Mayer Brown, agrees major tax changes will have to wait until after the elections, but points to some issues that could move forward this year, including provisions on deferring deductions related to interest expense, an alteration that's opposed by the business community. "If that were eliminated, it would be a significant change to the system," Barrage notes.

Lawmakers could also look at a provision that would require companies to determine foreign tax credits on a pooled basis. "This would eliminate a company's ability to cross-credit their high-income-tax pool against a low-income-tax pool," Barrage notes. "You lose a lot of the tax advantage that each separate entity may have." Transferring intangibles to foreign entities is another hot-button issue this year, according to tax advisers, as the administration has questioned whether current transfer pricing rules are sufficient to prevent the migration of intangibles offshore.

Multinational companies have been lobbying hard for another tax holiday on repatriated offshore income, but the issue is also politically fraught, says Jack Heinberg, a partner at Allen & Overy.

"Companies still say that they have a lot of cash offshore and need to get it back to the U.S., but any provision would have to have a guarantee that if money comes back, it will be reinvested in the U.S.," Heinberg says. The last time Congress gave companies an opportunity to repatriate profits at a lower tax rate, in 2004's American Jobs Creation Act, critics charged that the tax break led to relatively few new jobs.

Despite the corporate push, "no one should be under the illusion that [major tax reform] will happen quickly," Gutman says. "The most important thing is for companies to be nimble and ensure they are in a position to take advantage of what does develop."


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