Tax Summit Week 2020 Covered Ground

ARTICLE | November 12, 2020

Authored by RSM US LLP

The RSM Tax Summit 2020 was held virtually and focused on insightful post-election perspectives, changes in our world and business models, and considerations for business owners and tax professionals going forward. Sessions were recorded and are available to watch by visiting RSM Tax Summit: Seeking solid ground. A recap of presentations, top interactive moments and highlights from virtual sessions are summarized by day:

• Day 1: Cashflow and liquidity considerations
• Day 2: Managing risk and uncertainty
• Day 3: Adapting workforce models
• Day 4: Global tax considerations
• Day 5: A wrap to 2020

Opening address: Will 2021 bring solid ground to North America?

The potential for significant changes to U.S. tax policy under a prospective Biden administration will largely hinge on the makeup of the Senate, which will not become clear until a January runoff election for both of Georgia’s seats. That unknown—and the prospect of a Senate split 50-50 between Republicans and Democrats—was a key point Monday during the keynote address of the RSM Tax Summit 2020: Seeking Solid Ground.

“It’s very hard with momentous change to keep 50 senators aligned in favor of a proposition,” RSM National Tax Go-to-Market Leader Jim Alex said. “Because it’s so close, it’s going to be difficult to get sweeping matters done.”

If Republicans keep their majority following the January runoff for Georgia’s seats, it would be difficult for Biden to advance his entire tax plan, which proposes various rate hikes for corporations and high-income earners. Biden, however, might be able to garner support at least for portions of his plan by tying any rate increases to the nation’s response to COVID-19 and the corresponding economic impairment.

“Raising rates on the upper tier and on corporations may hold if he couples it with stimulus spending,” said Alex, who joined RSM in 2019 from the U.S. Treasury. “That might be more likely to get through a very narrowly defined Senate compared to some of the other changes. But given that it’s close, it probably won’t be the broad stroke that we see in the Biden plan.”

The changing landscape of transfer pricing

Companies seeking to leverage tax rate arbitrage should be steadfast in documenting all types of transactions, including those overseas, across state lines in the United States, and between the United States and Canada, RSM principal Tansy Jeffries said.

“Having a [transfer pricing] study in place with benchmarking is really the first and foremost priority that you should have in terms of looking at how you support and justify that your transactions are arm’s length,” Jeffries said.

Regarding price changes related to the pandemic Jeffries recommends documenting them as they happen throughout the year. “The thought process, the rationale, the intended duration of the arrangement if this is temporary—make sure you have that paper trail in place to support those changes,” Jeffries said. “Again, act now. Retroactive adjustments have consequences.”

RSM partner Charles Britt reiterated the importance of documentation regarding intercompany transactions, as state revenue authorities can sense tax gaps and are increasingly working with transfer pricing consultants to close them.

Tax planning and cash flow during the economic crisis

As economic pressure and uncertainty from the pandemic continue, U.S.-based companies facing cash flow challenges should review their income tax returns and audits with an eye toward seeking opportunities for refunds and audit settlements. While interest rates remain low and many states face daunting fiscal problems related to the pandemic, companies might have an opportunity to negotiate favorable near-term assessments.

“States are looking for cash now,” said RSM partner Sherri York. “This is a way for you to generate liquidity for your company, but at the same time, the states are able to settle at some sort of a reduced rate on audits or even other refunds.”

The fact that huge swaths of the workforce have gone virtual since early 2020 also brings opportunities for companies to downsize or eliminate their real estate footprints, as well as explore potential tax savings related to remote workers. It is critically important, however, for business leaders to understand where their virtual employees are working from, in order to get ahead of the employee tax withholding obligations expected to stem from this surge in remote work.

Even amid a recession, companies can take advantage of credits and incentives by, for instance, confirming their good-standing status, capturing missed benefits and focusing on retention. They also should examine net operating loss carryback provisions related to the Coronavirus Aid, Relief and Economic Security Act, and repatriation considerations for controlled foreign corporations.

Canadian budget pain

Canada’s fiscal response to the pandemic has contributed to a federal deficit that is projected to reach $344 billion in fiscal year 2020-21. Provincial budgets are strained, as well, and it remains unclear how the government will fund programs that have helped many Canadians. Neither the federal nor provincial governments have proposed any broad based tax increases; instead they have said they can borrow the necessary funds.

However, potential tax changes include higher taxation of capitals gains, tightened anti-avoidance measures, provincial rate increases, carbon tax increases and a New Democratic Party wealth tax.

“Canada had a very big debt problem back in the 90s,” said Dean Woodward, Alberta tax leader at RSM Canada. “ I don’t think (the federal government) likes the idea of a return to those days, but they’re selling the story that today’s debt is not as serious as the debt that we had back then mostly because we’re in such a low-interest environment. But, of course, there’s no guarantee that will be perpetual.”

M&A tax considerations during an economic downturn

While the economy presents M&A opportunities for companies seeking to grow, some tax considerations are crucial to making any transaction a productive one. There’s a significant disparity in the tax treatment depending on the legal entity structure of the target that’s being acquired, RSM senior manager Patrick Phillips explained.

“Some of these are things we would typically see in any deal, but it’s heightened in this case because of the nature of tax attributes,” Phillips said. “Is the target a flow-through or a C corporation for U.S. tax purposes? Is that income blocked? Or do we have some other income flow-through that our buyer might get, might need to think about?”

Also, different tax rules might apply depending on whether a company is within bankruptcy.

“One interesting tidbit that we’re seeing a lot is so-called ‘ABC’ transactions (assignment for the benefit of creditors),” Phillips said. “It’s almost like a pre-packaged bankruptcy, but it’s kind of all-in-one where the assets are transferred to a trustee that understands the industry of the potential debtor to say, ‘How can I maximize these assets and settle off as much of the debt as I can without having the stigma of a bankruptcy on the corporate record?’”

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Gifting strategies to consider with the potential reduction in the estate tax exemption

Amid all the uncertainty about whether a prospective Biden administration would succeed in reducing estate, gift and generation-skipping transfer (GST) tax exemptions, there is consensus that no significant changes are expected before the calendar turns to January 2021. Families and high-net-worth individuals, then, should heed the green light to move forward with their wealth transfer strategies.

“Time is of the essence,” said Rebecca Warren, RSM senior manager. “We are running out of time. We need to really think about what we can do and when we want to do it because if you’ve got valuations folks or attorneys involved, their time is getting filled up because a lot of people out there are looking to make transfers by the end of the year.”

RSM tax professionals emphasized the importance of individuals controlling variables they are able to, given what is unknown about the composition of the Senate in 2021 and what that will mean for Biden’s tax plan. Biden has indicated a preference to revert estate and gift tax rates to 2009 levels.

“The bottom line here is uncertainty,” Warren said. “We don’t know what the future is going to hold, so we’re trying to look into our crystal ball.”

Tax technology: One small step

Robotic process automation technology can reduce the time and effort tax professionals spend on manual tasks, freeing them to apply their skills to higher-value work. So what are the first steps a company might take toward embracing such technology? Begin with a repeatable and straightforward process, said Brad Collins, a partner in RSM’s tax technology team.

“I would start small with a proof of concept,” Collins said. “Starting small allows you to build upon that. You figure out where you have a small, repeatable process, show success with that, and that will allow you to show the return on investment and ask for additional resources.”

Update on 163(j): Business interest expense limitation rules

Companies should consider potential tax planning and savings opportunities related to the new business interest expense limitation rules under section 163(j), said Ben Wasmuth, a senior manager in RSM’s Washington National Tax practice.

Those new final and proposed regulations, released in July, may allow organizations to amend returns to increase interest deductions and refinance or restructure to improve interest deduction results. It is important to note that the final 163(j) regulations ultimately abandoned the most controversial aspects of the proposed definition of interest, as well as the previously proposed capitalized depreciation rule.

RSM professionals also discussed the implications of the 2020 proposed 163(j) regulations on controlled foreign corporations, including a safe harbor election allowing exemption for certain controlled foreign corporations that meet specific eligibility parameters. The session concluded with an overview of the state income tax impact on section 163(j) and emphasized the importance of carefully reviewing tax law, regulation and guidance for every state.

Finding balance through efficient tax operations

The light bulb turned on for Michael Charette one day in a previous job when he realized his bosses hardly ever cracked open the binders on the dozens of tax reports he compiled each year. The revelation prompted him to think more critically about tax functions and their value, a perspective he shared during a plenary session about efficient tax operations.

“A lot of organizations get married to a piece of software or a process that really doesn’t work anymore,” said Charette, now a partner at RSM Canada. “They’re constantly tinkering and trying to modify something that doesn’t work. What you need to be agile is honesty that this thing that we love or that we’re committed to doesn’t work anymore.”

More recently, Charette has noticed a trend of disruption. New technologies, legislative changes and COVID-19 continue to alter the way companies do business. This does not bode well for tax functions that plan a yearly strategy and budget and are too rigid to adapt quickly.

Charette suggested that tax functions begin strategizing more in real-time in order to remain agile. That includes making investments that fit the size and scope of the objective. To make his point, he equated an investment in tax software to a driver’s education teacher purchasing a car.

“I wouldn’t get a Mercedes to drive around with the students,” he said. “Often, we’re finding that tax departments have invested heavily in big platforms or overarching software, and they really only needed a car to boot around in. On the flip side, we wouldn’t want to have a driving instructor who’s using a pedal cart. “

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Federal and state impacts to the changing workforce environment

The location and jurisdiction of an employee’s so-called tax home is a critical data point for a variety of federal, foreign, state and local taxes and potential deductions. But even that can be difficult to pin down because of how nomadic some workers have been since COVID-19 disrupted businesses in March.

Anne Bushman, a partner in RSM’s Washington National Tax who specializes in compensation and benefits, listed questions to which employers should seek answers from their employees. For example, if an employee’s tax home has shifted, do you know where their new one is? Are individual employees working from multiple locations? Have employees relocated for long enough to have a new primary work location? And, just as importantly, do employers have processes in place for employees to report that information to them?

“I didn’t have concern immediately when it was a couple of months,” Bushman said. “But the longer this goes on, it’s certainly something that we have to start considering because of the risk to the employer of covering some expenses.”

At the federal level, taxation issues regarding remote workers center on whether expenses are deductible and payments to employees are taxable. Disaster relief legislation in some cases eases tax burdens on employers and employees, specifically regarding travel expenses and expenses necessary to enable working remotely.

At the state and local levels, there is a broad range of tax implications of expanding virtual workforce arrangements and decentralizing or closing offices. They include entity- and individual-level business income tax, eligibility for credits and incentives, sales and use tax and state payroll tax withholding.

“Be deliberate about all of this,” said Brian Kirkell, a principal in RSM’s Washington National Tax who specializes in state and local tax. “Understand when it’s a temporary change, when it’s going to become a true virtual transformation with a permanent change. Understand that deciding to go permanent may impact the temporary relief provisions that have been put out at the state level. You’ve got to navigate that wisely.”

2020 state tax legislative recap: Coronavirus disruptions and tax policy responses

Estimates for the collective state budget shortfalls due to the public health and economic crises exceed $200 billion over the next two fiscal years. Although some data in the third quarter of the calendar year indicated a strengthening economic recovery, the recent record-setting spike in virus cases have reinforced fears that states will face massive fiscal challenges in 2021.

How might states combat those shortfalls, given that most of them are required to balance their budgets? David Brunori and Mo Bell-Jacobs, members of RSM’s Washington National Tax state and local tax team, discussed the possibility of rate increases for personal income tax and sales and use tax, given that those two types of taxes account for 70% of all state tax revenue.

Recent history shows that state personal income tax increases are rare, and Brunori reiterated that policymakers will be reluctant to raise individual income taxes while the economy continues to face challenges. Meanwhile, sales and use tax rate increases are politically unpopular. Those roadblocks could compel states to try to increase the sales and use tax base by enacting taxes on services and digital goods they do not currently tax.

“There will be pushback, certainly, on tax increases because when you tax something you get less of it,” Brunori said. “Retailers are not going to want higher sales tax rates considering what has happened to consumption in retail sales over the last year. So I think there’s going to be some incremental moves on some of these taxes.”

Bell-Jacobs noted that states could more aggressively pursue audits related to sales tax provisions that stemmed from the Wayfair ruling in 2018.

“Get informed, get flexible and be ready to act,” Bell-Jacobs said. “We don’t really know what’s going to happen.”

The future of global mobility programs

Organizations with global workforces need to be especially vigilant about new tax obligations that may arise because of the pandemic. Travel restrictions, stay-at-home orders and quarantine requirements have forced employees to work remotely or relocate. While some employees might find themselves unable to move between a company’s global locations because of these restrictions, the shift to remote work has also opened up new options for employees who want location flexibility.

These disruptions can create income, social and payroll tax obligations for employees as well as potential corporate tax implications for the employer. It is crucial for multinational organizations to address any tax implications and assess how best to achieve their business objectives amid these changes.

“It’s not just about your expat population anymore,” RSM US senior manager Audra Marshall said during Wednesday’s session on global workforce mobility. “As a company, you really do need to know where your employees are. It really is important to begin to look at your compliance globally.”

Because the pandemic has affected immigration processes around the world, employers considering changes to work arrangements or staffing should consult with their labor and immigration attorneys for guidance. Additionally, employers might need to navigate what varying local and national COVID-19 relief measures mean for tax obligations.

Business leaders may also want to ask themselves if they need to reevaluate company policies and processes in this new workforce landscape, and whether to allow employees to work from any location.

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More Paycheck Protection Program questions—and answers

Although there have been few legislative developments involving the Paycheck Protection Program (PPP) over the past few months, Small Business Administration guidance continues to address tax and accounting issues regarding the relief loans and forgiveness of them, as many borrowers come to the end of the 24-week covered period.

Ryan Corcoran, RSM Washington National Tax senior manager and PPP specialist, discussed tax-related issues and options for borrowers that spent their PPP loan in 2020 but will not have their loan forgiven until 2021.

“We’re hearing that the IRS is really looking at this and may yet issue some guidance,” Corcoran said. “Discuss with your tax advisor and get an idea about the risk of each option and make an informed decision according to your risk profile and objectives. There is flexibility and uncertainty out there. PPP has been a great program, but it’s so novel that a lot of guidance is coming out in real time.”

On the accounting side, Faye Miller, RSM partner and national accounting leader, discussed the challenges of recognizing the earnings impact of a PPP loan on financial statements prior to forgiveness.

“The SBA has indicated they’re going to audit anyone who, along with their affiliates, received $2 million or more in proceeds,” Miller said. “That audit, in conjunction with their determination of whether or not the borrower really needed the loan, is so subjective. There’s a lot of uncertainty about what exactly will they be looking for and how are they going to come down on these subjective matters.”

Everything you thought you knew about U.S.-Canada trade might be wrong

While U.S.-China trade relations have dominated headlines over the last few years, recent trade policy shifts within North America are just as crucia ;for companies to assess and understand. RSM professionals discussed the implications of the United States-Mexico-Canada Agreement (USMCA) (which went into effect in July), including changes to the rules of origin for many imported products, new certification methodologies and a new low-value exemption for imports into Canada.

There may be a perception that the USMCA’s replacement of the North American Free Trade Agreement (NAFTA) is largely an issue for the auto market, but organizations in other industries need to understand the changes just as thoroughly, said RSM Canada’s Trade Advisory leader Kenn Jordan.

“We've seen other key areas that have been drastically affected,” he said. “There have been significant changes to plastics, rubbers, other changes ... so it’s important that all companies pay attention.”

Businesses need to understand that rulings made under NAFTA are no longer valid in Canada and could be challenged by the United States in some situations. While there are differences between North American countries in valuing imported merchandise, there are similarities as well. That makes it all the more important for U.S., Canadian or Mexican exporters and importers to understand the rules and regulations under the USMCA.

“Compliance goes both ways,” said RSM US trade advisory manager Travis Fournier. “We’re nearing the end of customs’ six month leniency period where enforcement will begin on Jan. 1, 2021. … There’s a lot to understand and a lot to unpack.”

Business leaders need to make sure to optimize free trade agreement benefits available to their organizations, and to evaluate the trade implications of any COVID-19-related relief programs. As the U.S. trade dispute with China continues, companies doing business with China should explore what mitigation strategies might be available to them in order to reduce costs and potentially even recover tariffs already paid.

Indirect tax: Adapting to change

Many states are seeking to redefine what is taxable under existing laws as they try to combat budget shortfalls exacerbated by the public health and economic crises.

“Everybody knows a lot of the sales tax laws were written decades ago,” said RSM partner Brad Hershberger. “So revenue authorities are just trying to bring existing taxability up to how technology works in today’s world and expanding that tax base without having to go back and increase rates or tax more services.”

It is becoming common in the United States, Canada and other countries for taxing authorities to aggressively examine digital services and ecommerce. That includes what Hershberger referred to as the sharing economy, which includes rideshare services, scooter sharing, and apps that rent parking spaces. As that applies to digital services, taxing authorities are seeking to define components such as software-as-a-service and information services and identify the taxable transactions involved.

“Each state is going to want to say that taxable transaction occurred in their state, especially if that’s a taxable item in the state,” Hershberger said.

Global tax issues: 2020 and beyond

Changes in the global tax landscape, coupled with pandemic disruptions, give internationally- active businesses many tax issues to consider. Near the top of the list, perhaps, is global intangible low-taxed income (GILTI) and the final regulations about the GILTI high-tax exception election, which the IRS released in July.

“Final regulations allow for the election to be made retroactively, including [going] back to 2018,” said Ayana Martinez, a senior manager in international tax at RSM Washington National Tax. “So if you couple the NOL carryback provision of the CARES Act with the retroactive application of the GILTI high-tax exception election, you could potentially reduce taxable income in prior years and subsequently increase your available NOLs.”

Meanwhile, proposed regulations include unified rules for GILTI and Subpart F. “Making the GILTI high-tax exception election is not always beneficial,” Martinez said. “So, modeling this out is really going to be critical.”

Thursday’s presentation about global tax issues also featured a technical discussion about foreign-derived intangible income (FDII), Canadian trade agreements and how value-added taxes are changing in countries worldwide.

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A solid end to 2020: Recap of year-end business planning

With federal and state tax rates expected to rise in the next few years, tax planning is crucial as 2020 ends. RSM presenters shared a range of strategies for how businesses and individuals can plan for future tax increases and take advantage of today’s lower tax rates, as well as how to enhance liquidity through 2020, such as through net operating losses carrybacks to the prior five years.

Businesses and owners might consider whether to accelerate tax deductions on capital investments, increase charitable giving and take advantage of estate tax exemptions. Restructuring or selling an entity may be an option for some, but “it is really important to understand the implication of a sale if you’re thinking about selling your business,” said Matt Talcoff, RSM partner and national tax industry leader.

Entities should also review any tax implications of COVID-19-related relief programs, such as the Employee Retention Credit, credits for paid sick leave or paid family leave, and any tax implications of having newly remote employees. “While we may not know exactly when federal rates will go up, there is a strong chance that state tax rates will also increase as state governments deal with budget shortfalls and the economic impact of the pandemic,” Talcoff said.

"We are still talking a lot about managing uncertainty related to future tax legislation and embracing flexibility,” said Patti Burquest, RSM principal and Washington National Tax leader. “For each of these tax planning topics, modeling is very important, and really trying to get to the heart of what it is you want to do. Don’t do a transaction just because you’re going to get a tax benefit. It needs to really work from a planning perspective, a business perspective, a life perspective. … Be informed, be flexible, and consider what your goals really are.”

Whether through entity restructuring, estates and gift tax planning, transactions or planning in reverse, businesses and individuals should carefully consider the options available to them before anticipated changes in the tax environment arrive.

Key considerations for active and passive high-net-worth individuals for 2020 and beyond

The session detailing considerations for active and passive high-net-worth individuals reiterated one of the biggest themes of Tax Summit Week: flexibility.

Given the uncertainty stemming from the public health and economic crises, remaining agile by understanding and modeling various options is one of most effective ways in which taxpayers can position themselves as 2020 ends. Whether the focus is PPP loan forgiveness, succession planning, charitable giving or liquidity measures, comprehensive planning can help taxpayers respond to changing circumstances in and around the tax landscape.

Within the scope of planning, though, RSM’s panelists agreed: “It’s not all about tax savings,” said Andy Swanson, RSM partner in Private Client Services.

“Everybody’s plan is unique,” added Ben Berger, RSM partner and family office practitioner. “As planners, it’s really important for us to understand the family’s objectives before we begin to recommend ideas.”

Canada tax: A review of 2020 and forward to 2021

Uncertainty shapes the Canadian tax landscape near the end of 2020, as the federal deficit—which has deepened due to COVID-19 response programs—is projected to exceed CA$330 billion before it decreases. There is a significant likelihood of tax changes and rate hikes in the near future, while the Canadian Revenue Authority scales up its efforts to audit select participants in the Canada Emergency Wage Subsidy (CEWS) program.

At the beginning of the pandemic, the Canadian government embraced a high-trust approach by which it issued funds quickly without a detailed review of the applications, so that businesses that needed cash immediately would receive it as soon as possible, said Clara Pham, partner and RSM Canada National Tax leader.

But that pay-now and ask-questions-later approach meant that hard-to-detect issues around eligibility and elections and exceptions were likely missed in the haste to disburse funding. Audits were launched in late summer, “and the preliminary audit queries appear very extensive,” Pham said.

The list of potential tax changes in 2021 includes raising the goods and services tax from 5% to 7%, raising the capital gains inclusion rate from 50% to 75% or 100%, and introducing taxes on digital services.

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