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White House Backs Down on Corporate Foreign Earnings Tax

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

The Obama administration is slowly starting to pick its battles; starting with taxes on corporations’ foreign earnings.

The administration has abandoned its proposal to eliminate U.S.-based multinationals’ ability to defer tax on income by shifting assets to foreign subsidiaries, according to a published report.

While details are sketchy, Bloomberg reported on Tuesday that the administration’s proposed budget for fiscal 2011 shows that it has abandoned its plan to eliminate the so-called “check the box” system under which U.S. companies can defer U.S. tax on income by shifting income-generating assets to foreign subsidiaries without recognizing gains on the transfer.


The proposal would have eliminated companies’ ability to avoid tax on such transfers and forced the repatriation of earnings shifted in this way.

According to Bloomberg, the administration backed down in the face of intense opposition from multinationals. Observers note that Congress has tried to squelch the efforts of the Internal Revenue Service to clamp down on U.S. companies getting foreign tax breaks at the same time as U.S. tax breaks, although many of those breaks are facilitated by the check the box system.

“Maybe the administration figured this was one it did not need to pick a fight on,” Jasper Cummings, a partner in the Raleigh, N.C., office of Alston & Bird and a former associate chief counsel of the IRS, said in an email to CFOZone Tuesday. “They have enough fights as it is.”

Still, Cummings noted that the administration still has “a pretty long list of other changes” in international taxation that it is pursuing. Chief among them is a plan to tighten the pricing rules for transfers of intangible assets.

As CFOZone reported last fall, one such proposal would crack down on asset transfers of employee compensation. In a paper released in May outlining its budget for the last fiscal year, the administration said it would “clarify” the treatment of transfers of intangible assets to include shifts of such expenses.

At present, many companies avoid paying tax on gains resulting from transfers of so-called “workforce in place” under rules that also allow goodwill and “going concern” to go untaxed. In early 2007, however, the IRS issued a staff directive and audit guidelines warning that it was “improper” for taxpayers to classify workforce in place as goodwill and going concern. And an IRS official in September indicated that transfers of workforce in place should include the value of products or services the employees create if much of the work is complete at the time of the transfer.

According to Bloomberg, the administration’s proposals to toughen the rules on transfer pricing would generate $15.5 billion in tax revenues for the coming year and along with other international tax changes produce $122.2 billion over a decade.

KPMG Survey: Cost Cuts May Not Be Sustainable

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

Corporate executives have really gotten to show off their cost-cutting skills during the financial downturn and the ongoing, tepid recovery, as many have managed to push earnings up even as revenues sagged.

But, in looking forward, they have to wonder what cost those reduced expenses came at.

According to a survey released by KPMG on Wednesday, board members and senior executives are doing just that. Forty-five percent of the respondents expressed concern about the sustainability of the cost reductions undertaken by their companies in response to the economic crisis.


“Significant cost cutting can create a variety of risks to the business, both near- and long-term,” said Mary Pat McCarthy, KPMG Vice Chair and Executive Director of the Audit Committee Institute, in a press release.

In particular, two-thirds of those surveyed said they were most concerned about the impact of cost cutting on their company’s employee talent and training. Other concerns include the impact of cost-reductions on internal controls (36 percent), fraud risk (25 percent), management of outsourcing and supply chain (24 percent), financial reporting integrity (21 percent), and the Foreign Corrupt Practices Act and compliance issues (9 percent).

Some 13 percent of the respondents said their companies had not implemented significant cost reductions.

While previous recessions were characterized by short-term belt-tightening and a quick return to normal, KPMG noted that current cost reductions may be much longer-term, and possibly permanent.

The long-term nature of the cuts is understandable in light of the executives’ economic outlook. The survey found that 45 percent of respondents don’t expect the U.S. economy to reach pre-crisis growth in terms of investment, employment and productivity before at least 2013, and 22 percent said it would be beyond 2014.

Another 17 percent were particularly pessimistic, saying the economy would not see pre-crisis growth “for the foreseeable future,” while 15 percent said recovery could come in 2011. Just 1 percent said recovery could occur in 2010.

Similarly, in a separate response, 66 percent said American companies will not return to “business as usual” and will operate in this new environment through at least 2013.

Latest Survey of CFOs Confirms That Surveys of CFOs are Bunk

Less than two weeks ago, we shared with you the latest results from Grant Thornton’s National CFO Survey.

What we learned is what we already knew, which is that the job market sucks and will continue sucking if we are to believe the 516 CFOs surveyed from October 5th to October 15th:

In a national survey of U.S. Chief Financial Officers (CFOs) and senior comptrollers conducted by Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, only 29% plan to increase hiring in the next six months, while 21% plan to decrease hiring.

Not so good, huh? Well fortunately for all of you looking for a job out there, the GT methodology is severely flawed for two reasons: 1) It included the extra-super-tragic days of October 5th and October 15th when CFOs were feeling especially negative and 2) They survey far too many CFOs.

Had they performed their survey on October 6th through the 14th like FEI and Baruch College and kept cut their population by roughly half (FEI/Baruch interviewed 249 CFOs), they would have discovered that things aren’t really that bad at all:

While CFOs this quarter continue to forecast high unemployment nationwide (on average predicting at least nine percent through October 2011), hiring prospects at their own companies paint a rosier picture. More than half (56%) plan to hire additional employees within the next six months, and overall they anticipate a four percent increase in hiring over the next six months.

So obviously Grant Thornton just needs to tweak their methodology a bit and then we’ll all be on the same page.

Until that happens, feel free to get some of your hapless friends together and start asking CFOs for their broad-based economic outlook. It appears that as long as you have a shell of a methodology and manage to get at least 250 responses, it’s perfectly acceptable to share the findings with everyone and claim that things are turning around.