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Bramwell’s Lunch Beat: A ‘Sensible Fix’ to Corporate Tax Rules

May 6th 2014
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Non-GAAP disclosures decline
Newly public venture-backed companies are getting more conservative in their use of tailor-made financial indicators that don’t comply with US Generally Accepted Accounting Principles (GAAP). That’s at least partly because securities regulators say they have gotten tougher on the use of “bogus” and misleading measures, wrote Emily Chasan, senior editor of the Wall Street Journal’s CFO Journal.

According to a study of 71 US companies by law firm Gunderson Dettmer, just 32 percent of venture-backed IPOs included non-GAAP benchmarks, such as “free cash flow,” in their registration statements last year, down from about 50 percent in 2011.

Chasan noted that in 2010, the US Securities and Exchange Commission (SEC) encouraged companies to include non-GAAP figures in their filings again in a bid to give all investors access to non-GAAP benchmarks that companies disclosed at roadshows and analyst conferences.

But as IPOs surged in 2011, the SEC looked askance at a little-used non-GAAP measure used by daily deals company Groupon Inc. in its IPO filing. The agency was concerned that the figure, which stripped out marketing expenses, could mislead investors. Groupon dropped its figure before going public, according to Chasan.

Pfizer’s bid for AstraZeneca: It’s time to reform the US corporate tax system
Robert C. Pozen, senior lecturer at Harvard Business School and nonresident senior fellow in economic studies at the Brookings Institution, took a close look at the proposed merger between Pfizer Inc. and AstraZeneca PLC – and the implications it would have for US tax collections and tax policies.

Pozen wrote how Pfizer's determination underscores how driven US multinational corporations are to shift their domicile outside the United States. Why? Unless they keep foreign profits abroad, the United States subjects them to a corporate tax of 35 percent. As a result, more than $2 trillion in foreign profits held by multinationals are “locked out” of the United States.

“So what would be a sensible fix to these problems? The United States should stop the current system of high rates and permanent tax deferral, and instead adopt a 17 percent tax on foreign profits of US multinationals, with a US credit for taxes already paid on such profits to foreign countries,” he wrote.

In his article, Pozen explains how the new system could work and the advantages it would provide.

The cost of an error
Our friends at Audit Analytics blogged last week about the Bank of America $4 billion accounting error it disclosed last week in its capital reserve calculations.

“If the financial statements are still reliable and the bank is still well capitalized, why did the bank lose over $8 billion of its value in one day? In part, this can be attributed to the length of time the error went undetected. This in itself may signal a potential issue with controls and accounting inside the bank,” Olga Usvyatsky wrote on May 1.

Section 404 of the Sarbanes-Oxley Act (SOX) requires companies to issue internal control reports, she noted. Filed annually, these disclosures must specify whether the company’s internal controls over financial reporting (ICFRs) are effective and, if not, disclose any material weakness identified. These can provide important information for investors.

“If a weakness or a deficiency was remediated prior to filing of the report, however, the company can say in its 404 report that its ICFRs are effective, as of the period end,” Usvyatsky added. “SOX Section 302 reports, on the other hand, are reported quarterly, and so may provide more timely insight into the control environment.”

According to Audit Analytics, there were 232 companies that disclosed control deficiencies in their Section 302 reports in 2013. In the blog, Usvyatsky looks at some recent cases of companies that filed inefficient disclosure control reports.

Calstrs to vote against BofA directors in proxy campaign
Julie Steinberg and Christina Rexrode of the Wall Street Journalreported yesterday the California State Teachers’ Retirement System pension fund voted against four members of Bank of America’s board in response to the bank's announcement last week that it had miscalculated capital levels.

Steinberg and Rexrode noted that the move is largely symbolic because many big shareholders have expressed support for Bank of America's management and are expected to vote for the current board.

The pension fund, known as Calstrs, cast its votes against four of the five members of Bank of America's audit committee, according to disclosures the company made Monday. Shareholders are permitted to vote for directors until a certain point during the Charlotte, North Carolina-based bank's annual shareholder meeting on Wednesday, the article stated.

As of March 12, Calstrs owned about 31 million shares, or 0.3 percent of the total shares outstanding. It was the 71st-largest holder as of December 31. The group has a track record of being a vocal investor.

“The shortcomings in processes and risk controls underscore the need to make the necessary changes to ensure this sort of issue does not arise again,” said spokesman Ricardo Duran in an e-mailed statement, according to the article.

Credit Suisse near US tax deal for over $1 billion
According to a person familiar with the matter, Credit Suisse Group AG, facing a US criminal probe of whether it helped Americans evade taxes, is close to resolving the case with an agreement that may include a penalty of more than $1 billion and a guilty plea, Bloombergreported today.

Bloomberg’s source didn’t specify whether the plea would be entered by the entire firm or a subsidiary. Credit Suisse, the largest of 14 Swiss banks facing criminal tax probes by the United States, was told in 2011 that it was a target of prosecutors.

US Attorney General Eric Holder said yesterday that his department is readying criminal cases against banks that show financial institutions aren’t too big to prosecute, without specifying any firms, the article stated.

Intense negotiations are underway between Credit Suisse and US prosecutors over the Justice Department’s crackdown on offshore tax evasion, and an agreement is expected to come soon, people familiar with the matter said yesterday, according to Bloomberg.

[Click here to read a Politico article on the potential Credit Suisse settlement.]

Steny Hoyer urges Dems to oppose Lois Lerner contempt
House Democratic leaders are urging their members to vote against holding former IRS official Lois Lerner in contempt, Minority Whip Steny Hoyer (D-MD) said on Monday, Lauren French of Politicoreported.

Hoyer said leadership would oppose the contempt vote, which is scheduled to reach the House floor this week, on grounds that it is “political messaging.” He also predicted that any court will side with Lerner.

“People want to read the Constitution right up until the time it makes them uncomfortable with providing people with the rights that they don’t think they ought to have,” he said, according to the article. “I think if it passes, the courts will sustain Ms. Lerner’s claim of Fifth Amendment privileges.”

[The House Rules Committee meets at 5 p.m. ET today to lay down procedures for this week’s vote. Click here for AccountingWEB’s article on the pending contempt vote.]

Cities, states to lose big if highway fund disappears
According to a new report from Transportation for America, states and local governments stand to lose $46.8 billion in federal funding for transportation and transit projects next year if Congress doesn't put more money into the Highway Trust Fund and it slides into insolvency, Larry Copeland of the USA Todaywrote recently.

The report concludes that unless Congress acts to add to the fund, there will be no federal money for new projects in fiscal year 2015.

The fund, which has been used to pay for road construction and transit projects since 1956, is funded by the federal tax on gasoline and diesel fuel. The tax has not been raised since 1993, as construction costs have soared and Americans drive fewer miles in more fuel-efficient cars, Copeland noted.

Without congressional action, all the federal tax money coming in to the trust fund would be used to pay for existing projects, leaving no money for new state and local roads, bridges and transit, the group said.

“America is at a crucial decision point for transportation,” said John Robert Smith, the group's co-chairman and a former 16-year Republican mayor of Meridian, Mississippi, according to the article.

[The Senate Finance Committee today will discuss how to replenish the depleted fund.]

Quick Links:

  • The IRS is asking tax preparers to trust but verify (because you might be an alien) (Going Concern)
  • You can turn LinkedIn stalking into a job, says guy (Going Concern)
  • Making Big Four partner ‘meritocratic but high commercial’ (Accountancy Age)
  • How Russia Inc. moves billions offshore – and a handful of tax havens may hold key to sanctions (Bloomberg)
  • Will a wealth tax work in America? (Los Angeles Times)
  • Did Ways and Means’ EO data dump break the law? (Tax Analysts)
  • EU countries pledge to tax share trades by 2016 (Wall Street Journal)
  • Welcome to the dark side – of tax (Forbes)
  • Tax Geek Tuesday: Determining a shareholder’s basis in S corporation stock and debt (Forbes)
  • Smart spending on R&D will keep America ahead (Forbes)
  • Special tax penalties on Donald Sterling are a personal foul (TaxVox)
  • Janet O’Neill and Catherine R. Latham promoted to shareholders of Mayer Hoffman McCann PC (MHC)

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