Robert B. Jennings and Elizabeth Taishoff Sweigart on Serious Tax Implications for U.S. Multinationals in the Proposed Affordable Health Choices Act of 2009
Embedded in the Affordable Health Choices Act of 2009 are two pieces of tax legislation that can potentially cause uncertainty for multinational enterprises. This Emerging Issues Analysis explores H.R. 3200 and Congress's proposal to codify the economic substance doctrine, and provides tax practitioners with insight into how their U.S. multinational clients’ tax planning -- particularly with respect to transfer pricing -- may be affected.
Authors Robert B. Jennings and Elizabeth Taishoff Sweigart write:
Key tax changes in H.R. 3200, 111th Cong. (Affordable Health Choices Act of 2009), could create significant issues for U.S. multinationals. Section 452 would codify what until now has been an amorphous but critical aspect of tax planning: the doctrine of economic substance. Section 453 would tweak IRC Section 6662 so that instead of the "substantial authority" standard or "reasonable basis plus disclosure" tests of current law, transactions would be subject to a "more likely than not" (MLTN) test for corporations with more than $100 million of annual gross receipts or publicly traded corporations. If H.R. 3200 is enacted in its current form, companies may have to accrue for additional penalties under FIN 48 for positions taken on a tax return where the position did not meet MLTN. In light of these proposed -- and likely -- changes, multinationals with a U.S. taxable presence, and their tax advisors, should consider aligning their operational and tax strategies upfront to reduce enterprise risk.
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Section 453: Effect of IRC Section 6662 Change
Disparity in Penalty Standards. With the proposed change by Section 453 to the language of IRC Section 6662(d)(2)(D), there is now a disparity between the penalty standards for tax return preparers and the taxpayers on whose behalf they work. There had been a discrepancy between the MLTN standard to which preparers were held (greater than 50 percent probability of success on the merits) and the taxpayers' lower standard of "substantial authority" (interpreted to be an approximately 40 percent probability). This disparity was eliminated in the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (P.L. 110-343).
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For taxpayers and practitioners engaged in cross-border transactions, the primary focus must be on establishing the nontax business purpose for the transaction and documenting that purpose in "real time." Whether the government will consider the overall economic benefit to a company or only the impact of the discrete transaction remains to be seen. The best practice is for companies to align their operational and tax strategies upfront to reduce the enterprise risk associated with the proposed legislation.