Tax Blog/Blawg

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

As the IRS sifts through dozens of comment letters on the proposed disclosure of uncertain tax positions, in-house tax officers have to wonder what's next. Over the last decade, CTO's have been hit with a barrage of new demands and worries. We have seen the rise of FIN 48 (now ASC 740-10), Sarbanes-Oxley and the resulting increased focus on controls, increasingly burdensome quarterly and annual attest firm reviews, listed transactions disclosures, the electronic filing mandate (Everson's legacy), Schedule M-3, and now the still proposed UTP disclosure.

Notwithstanding the new challenges, the number one performance metric used to judge a tax department's performance is still the effective tax rate ("ETR"). CTO's and their staffs continue to be measured by their delivery on the ETR at a time when most at the IRS seem to believe that all tax planning is bad, outside counsel is becoming more cautious, attest firms are insisting to review opinions (thus jeopardizing privilege), budgets and head count have been cut and, oh by the way, "cash is king".

A simple answer to all of this nonsense . . . retirement. For those who don't have that option, CTO's must continue to develop processes and policies that help them manage an increasingly difficult environment. My last post suggested a few initiatives a CTO may consider specifically reacting to the UTP disclosure. However, in a broader context, there is a process that would help the CTO and the tax department cope with the array of recent challenges, while increasing the awareness of tax matters across the organization.

Perhaps a weak analogy, but just as the captain of a ship wants all hands on deck when entering rough waters, the CTO has to have help negotiating through the conflicting demands of ETR targets, IRS disclosures and audits, SEC and GAAP rules, and attest firms' increasing focus on taxes. One way for a CTO to manage these demands is to consider forming an internal tax group, composed of peers, to provide a forum to vet tax issues. The name of the group doesn't matter; it could be the Tax Discussion Group, the Tax Advisory Committee, or even the Tax Transparency Council if you wish to borrow the IRS' favorite new word. What is important is its purpose and composition.

The group would provide an appropriate multi-functional forum for the periodic discussion of tax-related issues. These may include obtaining input on tax planning opportunities, discussing risks inherent in discrete transactions and ongoing business operations, and weighing the tax accounting decisions related to all of the above. The group should meet on a regular basis, such as late in each quarter when most issues to be addressed in the close have been identified.

The group's composition should minimally include the CFO, Controller, Treasurer and Chief Counsel (or designee). Other potential members may depend in part on the company's organization structure, but some ideas include the heads of Investor Relations, International Finance and Strategic Analysis.

The group may discuss tax issues in pending transactions and related positions to be taken on a return or for tax accounting purposes. This is not meant to take the decisions out of the hands of the CTO. Most likely, the CTO's recommended handling will be accepted by the group. But the process ensures that the final decisions regarding tax treatment will be made with the benefit of the group's perspective. Also, through this discussion the CFO and Controller will be briefed about issues that may arise during the attest firm's quarterly or annual audit of tax accounts.

CTO's above all should see value in this. The tax staff is often not brought into discussions about potential transactions until after some initial decisions are made, leaving the tax staff to play catch up. The discussions of pending transactions on a quarterly basis will inevitably result in members raising questions about the tax impacts in potential transactions as well; this allows tax input before any decisions are made.

The group is an ideal forum for a balanced discussion between the competing needs of cash flow, operating profit and ETR with respect to possible transactions or tax plans. Examples may include tax structures which cause one-time operating costs but long-term ETR savings, or repatriations of low taxed foreign cash that may be appropriate from a capital structure standpoint, but have devastating impacts on the ETR.

Discussions will raise tax issues that deserve presentation to the Audit Committee. For example, perhaps the planned tax treatment of a transaction is "more likely than not", but will likely result in litigation to obtain the desired result. In today's environment the Audit Committee should be hearing about such an issue when the transaction takes place, not when the IRS sets up the issue with penalties three years later. The discussions among the cross functional membership of the group should identify the issues crossing the Audit Committee threshold.

Finally, when discussing issues that may result in litigation, the CTO should use the group opportunity to sensitize the leaders in the company to the potential consequences of thoughtless, inaccurate or speculative transaction-related communications. The group should have all the right people to communicate the do's and don'ts of document generation across the company and to the banks, accounting firms or other service providers. Ideally this discussion and communication takes place while the transaction is in the early planning stages. If the transaction is beyond that, the CTO should use the group to canvass the organization as well as its service providers to obtain copies of previous communications and weigh any resulting risks.

Those CTO's who have not formed such a group should consider the potential benefits of doing so. In this challenging environment, complete with likely tax return disclosures of uncertain tax positions, no CTO can operate on an island. CTO's would be wise to create a forum that will increase the awareness of tax issues across the organization, surface tax sensitive transactions early, increase the effectiveness of the tax staff, and highlight the benefits the tax department can bring to the bottom line.