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Thursday, September 1, 2011

Is it Time to Review Your International Tax Strategy?


We think it’s time for CFOs to re-evaluate their international tax strategy. Here’s why:

Concerned that it may be leaving tax revenue on the table and driven by a new set of laws designed to close the tax gap and incent American companies to invest in the U.S., the IRS is closely examining U.S. corporations with foreign operations.

Congress has recently codified deep federal budget cuts as a result of the recent U.S. budget crisis which are likely to prompt stronger enforcement efforts by the IRS, and CFOs will have to be prepared for the likelihood of more aggressive enforcement in the form of audits and other actions by the tax authorities.

If your business has international presence you should be aware that nowadays, any kind of transaction conducted across an international border will produce a tax impact, and most likely a negative one — unless steps are taken to adjust your international tax strategy.

Armanino Partner Jon Davies, an international tax specialist in the firm’s Silicon Valley office, says that while there may not be any corporate tax increases on the horizon, there will likely be increased enforcement.

“Our debt-burdened and revenue-starved government is moving to tighten rules and aggressively enforce them to take in all the revenue it can under current laws and rules and as new rules phase in,” he says.

But Davies sees these changes as an opportunity for CFOs to bring additional strategic value to their own corporate table. “Any CFO who sees this coming and who brings an early strategic answer to their CEO or Board of Directors is contributing directly to the bottom line of the company,” he says.

Davies suggests that CFOs and their tax strategists review their international tax strategies and consider focusing on two things:

Consider restructuring your company for greater tax efficiency – How your company is structured at home and abroad is crucial for gaining the lowest effective tax rate. As conditions and laws change, run scenarios that produce effective tax rates under different structures. Remember that just because there are recent changes in law, there are still proven restructuring methods that can be employed to lower your effective tax rate.

Examine your system of transfer pricing – Particularly in the area of intangibles. The IRS is targeting transfer pricing in general and intangibles are getting a laser focus for audits. The best defense here is to evaluate your systems of documentation and to make them uniform across the enterprise. Compliance defense is crucial if your company is transferring intangibles like marketing intangibles and intellectual property. 

“Taxation is a core function within the CFO role,” says Davies. “By managing international tax effectively, the CFO showcases for senior management and directors his or her broader abilities to manage complex global issues and deliver strategic insight at a high level.”


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