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Bramwell’s Lunch Beat: CapEx Not Affected by Expired Tax Breaks

Oct 30th 2014
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Deal to lock in US tax cuts is bubbling up on the Hill
Some US lawmakers are exploring a post-election deal that would lock in permanent tax cuts for major corporations and low-income families, Richard Rubin of Bloombergreported on Tuesday.

The potential trade is one way Congress could break a logjam over reviving dozens of popular tax breaks that lapsed at the end of 2013, said a Senate Democratic tax aide who sought anonymity because the idea is still in early discussion stages. It would follow a time-honored Washington tradition: If you can’t figure out which tax cuts to give, give more.

If House Republicans insist on making some lapsed business tax cuts permanent, Senate Democrats will want to make something permanent for middle- and lower-income households, the aide said, according to the article. They’ll start with expansions of the child tax credit, earned income tax credit, and higher education tax credit, all of which expire at the end of 2017.

The result may please Republicans and such companies as Intel Corp. that have sought a permanent tax break for corporate research and development, Rubin wrote. It also could satisfy Democrats, who have been trying to bolster tax credits for families and low-income workers. The losers would be anyone worried mostly about the US budget deficit; such a bill would cost the government more than $200 billion over 10 years, according to the article.

Bloomberg BNA: Bonus depreciation has minimal impact on capital investments
Corporate tax incentives, such as bonus depreciation and expanded expensing under Section 179 of the Internal Revenue Code, have a marginal impact on US businesses’ corporate investments, according to a new study by Bloomberg BNA.

Eighty-three percent of corporate tax and accounting professionals report that the 2013 expiration of both incentives has not affected their organizations’ capital expenditures this year, according to the study, US Corporate Capital Expenditures: Consciously Uncoupled from Federal Tax Incentives.

“For large corporations, tax incentives, such as bonus depreciation, are nice to have, but not necessarily critical to business investments,” Dean Sonderegger, executive director of product management for the software segment of Bloomberg BNA, said in a written statement. “As Congress continues to debate the future of these breaks, it’s important to look at how exactly they affect corporate and, consequently, economic growth.”

In the report, Bloomberg BNA surveyed 100 tax and accounting leaders at US businesses with average revenues of $7.5 billion to examine how corporate capital investments have changed since the 2008 recession and how tax policy changes have influenced financial decision-making at large firms.

Key findings of the survey include:

  • Fifty-five percent of respondents report that their organizations’ capital expenditures have increased since the recession.
  • Thirty percent of tax and accounting leaders feel that the current tax policy climate stifles their firms’ willingness to make capital expenditures.
  • More than half of respondents feel their firms’ capital expenditures would not increase, even if available tax breaks reduced their total cost of capital by 10 percent.

The study concludes that, despite other positive economic indicators, such as rising consumer spending and falling unemployment rates, corporate capital expenditures have yet to experience a dramatic jump. Further confirming the minimal impact of tax policy on expenditures, 51 percent of survey respondents expect their firms’ capital investments to remain the same through fiscal year 2014.

“On the surface, US businesses’ capital expenditure levels may seem sluggish, but the ‘tax extenders’ legislation – even if passed – will not necessarily be the boost that businesses have been waiting for to jumpstart capital spending,” Sonderegger said.

IRS issues tax guidance related to Ebola outbreak in Guinea, Liberia, and Sierra Leone
The IRS on Wednesday issued two items of guidance in response to the need for charitable and other relief due to the Ebola outbreak in Guinea, Liberia, and Sierra Leone.

Under the leave-based donation guidance, employees may donate their vacation, sick, or personal leave in exchange for employer cash payments made to qualified tax-exempt organizations providing relief for the victims of the Ebola outbreak in Guinea, Liberia, or Sierra Leone. Employees can forgo leave in exchange for employer cash payments made before Jan. 1, 2016. Under this special relief, the donated leave will not be included in the income or wages of the employees. Employers will be permitted to deduct the amount of the cash payment.

For example, if an American company has such a program and makes a cash donation of the value of an employee’s donated leave before Jan. 1, 2016, to an organization that is providing medical services and supplies for Ebola victims in Guinea, Liberia, or Sierra Leone, the IRS will not consider the amount of that payment as gross income or wages of the employee. Additionally, the IRS will not assert that the US company can only deduct such cash payments under Internal Revenue Code Section 170.

The IRS emphasized on Wednesday that taxpayers can take simple steps to ensure their contributions go to qualified charities. More information is available on the IRS website.

The qualified-disaster guidance allows recipients of qualified relief payments related to the Ebola outbreak in Guinea, Liberia, and Sierra Leone to exclude those payments from income on their tax returns. Under the new guidance, payments generally include amounts to cover necessary personal, family, living, or other qualified expenses that were not covered by insurance.

For example, if an employee living in Guinea receives reimbursement from an employer-sponsored charitable organization for medical expenses incurred by the employee as a result of the Ebola outbreak, such reimbursement will not be included in the employee’s gross income for US federal income tax purposes.

Also, if an employee of an American company is relocated within Liberia under a quarantine order due to the Ebola outbreak, and the American company pays for the employee’s transportation, rent, and living expenses related to the quarantine order, such payments will not be included in the employee’s gross income for US federal income tax purposes.

Accounting firms’ anti-Hong Kong protest stance prompted by pressure
Kathy Chu and Yvonne Lee of the Wall Street Journalreported on Tuesday that pro-Beijing entities encouraged affiliates of the Big Four accounting firms in China to take out advertisements against Hong Kong’s protest movement in June, before the demonstrations led to confrontations with police, according to people with knowledge of the situation.

The Hong Kong affiliates of Ernst & Young (EY), PricewaterhouseCoopers (PwC), Deloitte, and KPMG bought ads in three Chinese-language newspapers in Hong Kong warning that the protests could cause an exodus of businesses, “shaking Hong Kong from its position as an international financial and commercial center.”

People involved in placing the half-page ads said they did so after entities with ties to Beijing encouraged accounting executives at the Hong Kong affiliates of the firms to do so. They didn’t specify the names of the entities, Chu and Lee wrote.

One person involved in placing the ad declined to give a reason for the decision. Referring to the proportion of the Big Four’s accounting business that comes from the mainland, the person said, “Do you think we had a choice?”

Representatives for PwC, EY, KPMG, and Deloitte in Hong Kong and at the firms’ headquarters declined to comment on the ad, according to the article.

More than 50 countries sign tax deal
Harriet Torry of the Wall Street Journalreported that officials from more than 50 countries signed an agreement on Wednesday that they said marks a decisive step in combating tax evasion, a top priority for austerity-hit countries in Europe as they seek to fill depleted state coffers.

The agreement, which was signed in Berlin, under the auspices of the Organization for Economic Cooperation and Development (OECD), will now force governments to collect and exchange information on taxpayers’ assets and income outside their home country, including bank accounts, interest payments, bank balances, and beneficial ownership.

The financial and sovereign-debt crises of the past half-decade have prompted leading industrialized countries to redouble efforts to counter tax fraud and evasion in the digital age, Torrey wrote. The German government, which for decades chased its citizens’ undeclared bank accounts in Alpine neighbors like Switzerland and Liechtenstein, is among the countries leading the charge.

While states supporting the initiative include Switzerland, Liechtenstein, the British Virgin Islands, and the Cayman Islands, the United States isn’t a signatory.

“The US have their own discussion,” German Finance Minister Wolfgang Schäuble said, according to the article. He stressed, though, that the Foreign Account Tax Compliance Act (FATCA) had added momentum to the debate about automatic exchange of information in Europe, which helped lead to Wednesday’s deal.

KPMG statements on OECD reporting standard
Officials from KPMG LLP issued the following statements on Wednesday concerning the signing of the Multilateral Competent Authority Agreement on implementation of the automatic exchange of information standard during the Global Forum on Transparency and Exchange of Information for Tax Purposes in Berlin.

“The agreement to exchange information under the OECD Common Reporting Standard (CRS) is a major international tax development and an important new step toward greater tax transparency,” said Michael Plowgian, a principal in the International Tax group of the Washington National Tax practice of KPMG and a former senior advisor with the OECD. “It is also a significant development for financial institutions, which will face complex new customer due-diligence and reporting obligations under the standard.

“The standard calls on jurisdictions to implement standardized customer due-diligence procedures and reporting requirements for their financial institutions and to exchange the reported information with other governments on an automatic basis,” added Plowgian, who also served as attorney advisor with the Office of the International Tax Counsel at the US Treasury Department. “While many of the signatories to the Multilateral Competent Authority Agreement have previously issued a joint statement committing to adopt the standard, the agreement marks the first international agreement obligating them to collect and exchange this information with each other.

“While the United States is not a signatory to today’s agreement, any branch or subsidiary of a US financial institution in an implementing jurisdiction will need to comply with the CRS in that jurisdiction,” Plowgian continued. “The fact that the United States has not implemented the CRS may actually create additional challenges for US-based financial institutions in coordinating implementation across the various jurisdictions in which they do business.

“Companies that are not financial institutions also need to be aware of the CRS and will need to determine and certify their CRS status if they do business with a financial institution in an implementing jurisdiction,” Plowgian concluded.

Jennifer Sponzilli, a principal with KPMG’s US international tax team in the United Kingdom, said: “The CRS and attendant commentary provides guidance to financial institutions in the signing jurisdictions about the scope of the due-diligence and reporting obligations that will apply in those jurisdictions.

“Now that the Multilateral Competent Authority Agreement has been signed, there will be a race against the clock for both governments and financial institutions to meet the ambitious timelines,” Sponzilli added. “Governments will likely need to enact legislation or regulations to effectuate the Multilateral Competent Authority Agreement in their jurisdictions. Financial institutions will be working hard to get customer due-diligence procedures in place by Jan. 1, 2016 – less than 15 months from now – and then will turn to meet the deadline for the first reporting of information about nonresident account holders required in 2017.”

Britain’s Fraud Office launches probe into Tesco accounting scandal
Britain's Serious Fraud Office (SFO) has opened a formal criminal investigation into accounting errors at Tesco, raising the stakes in a scandal that has hammered the reputation of the country's biggest grocer, Neil Maidment and Kate Holton of Reutersreported on Thursday.

Already battling challenges on multiple fronts, Tesco said on Wednesday it had been notified of the SFO's new investigation into the 263 million-pound ($424 million) overstatement of its first-half profits that has led to the suspension of eight senior members of staff.

Tesco is already facing one proposed investor lawsuit in the United States over the accounting irregularities caused by booking deals with suppliers too early. Britain's accounting watchdog, the Financial Reporting Council, is also examining how the error came about, Maidment and Holton wrote.

When the SFO launches a full criminal investigation against a company or individuals it has to be satisfied that there are reasonable grounds to believe that conduct might involve serious or complex fraud or bribery. Such investigations can take years to complete.

“The SFO confirmed today that the director has opened a criminal investigation into accounting practices at Tesco PLC,” the independent government department said in a statement, according to the article.

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  • Canada set to unveil parental tax break (Reuters)
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  • Puerto Rico may raise petroleum tax to back $2.9 billion of debt (Bloomberg)
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  • The labyrinth of corporate tax reform (The Hill)
  • 51 nations swap offshore account & tax data, FATCA on steroids (Forbes)
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