US Company Tax Issues On The Rise

Burger King grabbed headlines a while back when it announced it will be joining with the iconic Canadian chain Tim Hortons and moving its headquarters to the north. Burger King has long been a staple in the American tradition of fast food and is now becoming part of a new pastime, corporate inversions. We referenced in our previous post that the Congressional Research Service found 47 corporate inversions or expatriations in the last decade and 30 coming in the last five years alone. While some criticize such moves as “unpatriotic”, it is difficult to ignore the benefits of moving to a country with more laid-back tax laws.

In an effort to limit inversions, the Treasury last month took actions that attempt to reduce the economic benefits of merging with a company abroad. In light of these changes, Salix Pharmaceuticals Ltd and Cosmo Pharmaceuticals SpA recently announced that they will be terminating their deal, which would have had Salix merge with an Irish subsidiary of Cosmo. While there is much speculation as to what will happen in the future concerning tax inversions, these actions by the Treasury are the culmination of what seems to be increased scrutiny over US company tax issues in the recent past.

The table below shows the totals and percentages of tax-related issues for several categories over the last three years.

Source: www.AuditAnalytics.com

As one can see in the table above, there was a slight increase in the total number of tax-related restatements in 2013. The restatements were not limited to a specific area of accounting, but rather affected a wide variety of topics, ranging from incorrect presentations of tax assets on the balance sheet, to incorrect calculations of uncertain tax positions in previous years. Halfway through 2014, this trend appears to be continuing, with 68 total tax-related restatements.

Perhaps the most interesting number in the table, though, is the large number of errors that were corrected as out of period adjustments. In 2013, of 274 out of period adjustments, 86 records, or more than 31%, were tax-related. These 86 out of period adjustments were filed by 79 unique companies. (It is not uncommon for companies to record out of period adjustments for two or more consecutive periods.)

Even changes in accounting estimates, which most commonly relate to depreciation and percentage of completion revenue recognition, saw an increase in the number of tax-related events. These increased three years in a row (from 6 in 2012 to 23 in the first half of 2014), indicating the difficulty some companies were facing in estimating their valuation allowances.

Regulators, including the SEC, were also looking closely at the adequacy of tax disclosures. As evident from the table above, tax related comments comprised about 8.6% of all the comments in the past three years. Topics covered ranged from adequacy of valuation reserves to a request to explain whether repatriation of indefinitely reinvested funds would be needed to meet general liquidity needs and whether accrual is required to repatriate those funds.

One thing we can take away from this data is that there seems to be a general increase in awareness for tax issues. We can speculate that one reason for the increase is that domestic companies are beginning to look harder at themselves and question or adjust their own tax strategies. However, it seems more likely that as tax inversions, indefinitely re-invested foreign earnings and corporate tax rates become hot topic subjects, tax issues draw greater interest from regulatory bodies.