Partners Paul Schmidt and Jay Nanavati are quoted in an article published by Bloomberg BNA’s “Daily Tax Report” on Jan. 13, 2017. The article “Will Trump Keep Spotlight on Multinationals’ Tax Compliance?” discusses the future of the federal government’s crackdown on tax cheats in coming months.
Read the article: Reproduced with permission from Daily Tax Report, 09 DTR G-3 (Jan. 13, 2017). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
Tax Compliance Will Trump Keep Spotlight on Multinationals’ Tax Compliance?
By Alison Bennett
The incoming Trump administration is likely to continue a crackdown on tax cheats in coming months, though the vigorous hunt for misbehavior by U.S. multinationals could ease.
That issue is a huge one for dozens of companies with business overseas that have been under the intense scrutiny of the Internal Revenue Service and the Treasury Department for the past eight years.
Opinions differ on whether that focus might dim, according to Bloomberg BNA interviews with practitioners.
Although President-elect Donald Trump has vowed in tweets that he will go after multinational companies and put a stop to inversions designed to dodge U.S. taxes, that may not last forever, one attorney said. “I think that this will blow over,” said Kimberly S. Blanchard, a tax partner with Weil, Gotshal & Manges LLP.
Trump and his Cabinet need to do that now to shore up support for a rewrite of the tax code, said Blanchard, who specializes in cross-border acquisitions and mergers, internal restructurings, business formations and joint ventures. But once the new president takes office, she said, he may become “educated that changing domicile has nothing to do with taking away jobs.”
Tax enforcement questions surround the new administration, with many companies in the midst of audits, litigation and other efforts to get them to pay what the IRS says they owe.
Many practitioners said they don’t expect those efforts to change much in the short term, with Trump’s government in need of revenue as much as President Barack Obama’s administration.
No ‘Fresh Start’ Anticipated
“Some companies may have up to 10 open tax years” where revenue collectors are engaged in enforcement, said Brian Kittle, co-leader of the Tax Controversy & Transfer Pricing practice at Mayer Brown LLP.
With Trump likely in need of money to pay for some of his costly infrastructure and other proposals, Kittle said, tax collectors might be even more aggressive. “I don’t think the IRS is going to give you a fresh start,” he said.
Even if the administration eventually calls for a shift in enforcement, it is going to take time, said Scott Michel, a member of Caplin & Drysdale Chartered who has done extensive work with overseas financial institutions caught in the U.S. hunt for noncompliance.
Michel said he expects IRS agents to conduct audits and other types of compliance activity “in the usual comprehensive and sometimes aggressive manner, barring a further decline in resources or some massive restructuring. If it turns out the administration wants to change the IRS’s enforcement priorities, it will take a couple of years to shift,” he said.
Some attorneys, however, said it is possible that big companies—including multinationals—may be able to breathe a sigh of relief, to a certain extent. Phil West, chairman of Steptoe & Johnson LLP, said whether the IRS backs away from audits and enforcement depends to some extent on the agency’s top attorney.
William J. Wilkins, the current IRS chief counsel, has tendered his resignation, which takes effect at noon on Jan. 20, according to a Jan. 11 Office of Chief Counsel notice (CC-2017-003). William M. Paul will become the acting chief counsel.
West said this might allow for a change in direction by the Trump government. “As Bill leaves his post, it may be an opportunity for the new administration to adjust course on enforcement priorities or intensity,” he said. If a Trump appointee is “in the mold of appointments so far,” West said, “you might expect a business-friendly approach,” although that may not come in the form of specific instructions.
The chief counsel selection “sets a tone at the top that filters down, rather than a directive,” West said. A new appointee could take the tone that businesses have every right to pay as little tax as possible, he said.
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Side by Side
Another big question regarding tax enforcement under Trump is how it would co-exist with his expected plan to overhaul the U.S. tax system.
Paul Schmidt, tax chair at Baker & Hostetler LLP, said he expects the two to move forward side by side, but said it is likely that more of the administration’s resources will be devoted to a tax revamp in coming months.
“I do think reform will be their priority” and that will address tax misbehavior, at least in part, by giving taxpayers more incentives to comply, Schmidt said. Once that tax law is on the books, however, Schmidt said it would be a policy call as to how much effort to put into enforcement actions.
Jay Nanavati, a Baker & Hostetler partner who previously worked in the Department of Justice’s Tax Division, said he wouldn’t be surprised if the Trump government clamped down hard on noncompliance after a tax overhaul is enacted.
“The administration could be more galled by evasion that takes place in this new post-reform landscape,” Nanavati said. He said he doesn’t expect the Trump administration to back away from legal tax cases, in large part because those cases offer a big return on the government’s DOJ funding.
“I don’t see a change and one of the main reasons is that when budget issues come up, tax is the big selling point,” Nanavati said. With a return of about $17 on every dollar spent to fund the Tax Division, “I just think, regardless of politics, it’s a wise investment,” he said.
Shift From Guidance Expected
Despite differing views on the administration’s expected focus on enforcement, practitioners said they expect a sharp shift from the current administration’s continuous work on major tax guidance.
The Obama administration “spent a tremendous amount of energy regulating”—including guidance on specific controversial issues—and it is highly unlikely that will continue, Schmidt said.
According to John Harrington, a tax partner at Dentons US LLP, the issue is “what do they do about those regulations that have already come out?” The former Treasury international tax counsel said it is a certainty that major corporate guidance will be under the microscope.
“They could be suspended or withdrawn,” Harrington said. “Whether Congress does that or whether Treasury does that, is the big question.” To contact the reporter on this story: Alison Bennett in Washington at email@example.com
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Reproduced with permission from Daily Tax Report, 09 DTR G-3 (Jan. 13, 2017). Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>