SEC: Taxes in Season

Last Friday, the Wall Street Journal published an interesting piece from Emily Chasan about the SEC, taxes and comment letters.

In that article, Ms. Chasan reported that the SEC grilled a number of companies on their disclosures regarding the possible tax implications of using offshore cash to support their operations.

Such comment letters are a fairly routine matter for companies that have significant foreign cash reserves, and with good reason; there are significant US tax implications for companies repatriating foreign earnings. Therefore, if a repatriation could have a significant impact on the company’s liquidity, the potential impact must be properly disclosed in the company’s financial statements.

Another important aspect of these disclosures, one that is also commonly addressed in comment letters, is the name and tax rates of the countries where foreign earnings are held.

This issue is a hot topic, so to speak. In 2013, the SEC issued 611 comment letters to 258 companies related to tax issues and implications. Foreign earnings were recently in the news, especially when Congress was asking questions of Apple (AAPL). Although this is a common issue, responding to such inquiries is a far from trivial matter for many companies.

Speaking of Apple, the SEC sent the company a comment letter asking about the tax implications of capital repatriation on June 13, 2013. It took Apple 84 days and 2 iterations to resolve all the issues. Apple was asked to list specific financial needs and uses of cash outside of US borders. Among the reasons listed were: the need to pay manufacturers located outside of US; prepayment on long-term supply agreements; and acquisitions of foreign businesses.

This line of reasoning, which led Apple to believe that those earnings were indeed indefinitely reinvested, was made public, but the numerical information remained confidential.

Back in November, we wrote about prolonged SEC conversations and confidentiality requests. In that post, we hypothesized that such behavior indicates that the topic in discussion is highly sensitive to the company. In the case of Apple, it is quite apparent. Given all the publicity their tax strategies received after the Congress hearings on the matter, it’s no wonder they tried to keep as much information confidential as possible.

Apple is not the only company that requested confidentiality or had a prolonged multi-round conversation with SEC about their tax accounting.

In 2013, out of 258 companies that received tax-related comment letters from the SEC, ten, including Microsoft and Intel, also requested confidentiality on parts of their response. Both companies have been criticized in the past for their IRFE strategies.

Note: The analysis is based on comment letters issued by SEC in 2013 with regard to 10-K and 10-Q filings