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Weekly National News

April 20, 2018

What Oklahoma's Sales Tax Nexus End Run Means

(AccountingWEB) By Michael Fleming, April 17, 2018 – When states need to raise money, one of their favorite ways to do so is to tax out-of-state sellers; this is exactly the position that Oklahoma Governor Fallin and the Oklahoma legislature found themselves in. The state’s teachers, who were ranked 49th in the county for lowest pay, went on strike for better pay and more spending on education overall. The problem was there was no money in the budget, but the politicians passed a $457 million revenue bill that included an “Internet” tax that allowed the teachers to get a very well deserved average pay raise of 16 percent, moving them to 29th in the nation from 49th. The hype surrounding the tax shows Amazon, eBay, Etsy and other marketplace facilitators are the intended targets. Since they would take the brunt of having to collect the tax. What is the impact?
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Bitcoin Buyers Have to Take a Wild Guess on Their Taxes

(Bloomberg) April 12, 2018 – If you thought trading Bitcoin was wild, try figuring out how to pay taxes on it. Cryptocurrency investors are wrestling with spotty records, tangled blockchain addresses and rudimentary guidelines issued back in the ancient days of 2014. After last year’s boom in values, many people are likely disclosing transactions for the first time, adding to confusion.
readmore

 

IRS Head Sees Huge Task Ahead to Administer New Tax Law

(The Spokesman-Review) April 12, 2018 – The acting head of the IRS says the current tax-filing season has gone well, while acknowledging the tough challenge the cash-strapped agency faces of administering the new tax law that will affect 2019 returns. The agency, pummeled for years by criticism from congressional Republicans and funding cuts, now must administer and enforce the most sweeping overhaul of the U.S. tax code in three decades.
readmore

 

The Seven Elements of Business Development

(CPA Practice Advisor) April 11, 2018 – Clients aren’t sold services. They buy on reputation, relationships and referral. Along the journey from not knowing you to engagement, they ask seven questions. How do your answers to their questions rate? Text.
readmore

 

The Trade War's Troubling Twist

(Industry Week) By Keith Belton, April 17, 2018 – The Trump Administration’s recently imposed tariffs on steel and aluminum, and its announced tariffs on $50 billion worth of Chinese imports — and the threat of $100 billion more — represent the latest battle in a war against unfair trade practices. One category of unfair trade practices stems from the behavior of state-owned enterprises in China and other countries. SOEs represent a growing problem—and one that has the United States working jointly on policy reforms with Canada, Mexico, the EU, Japan, and other major trading partners.
readmore

 

Tax Managers Forecast Tax Windfall Allocation

(CFO) April 17, 2018 – Various reports have appeared suggesting what U.S. companies will do with the extra cash they’ll be pocketing courtesy of the Tax Cuts and Jobs Act. But here’s one from a unique perspective: that of corporate tax executives themselves. Within that population, it’s a nearly unanimous expectation that companies will increase domestic capital spending as a result of the laws. Ninety-four percent of tax managers surveyed by law firm Miller & Chevalier and the National Foreign Trade Council said so.
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Levi’s CFO Turns to Robots to Help Keep the Books

(The Wall Street Journal) By Roger Nanney, April 11, 2018 – Levi Strauss & Co. is introducing robotic software to its finance function as the company’s efforts to automate the production of its iconic jeans have extended to the back office, said Chief Financial Officer Harmit Singh. “We are introducing bots where it makes sense,” he said. “The idea is not to eliminate jobs. We are going to upskill employees and have them spend more time on analysis.” The move mirrors Levi’s recent push to use lasers to create the holes, fraying and fading to give jeans a worn look, and replace a labor-intensive hand-finishing process.
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IRS to Turn Over Tax Collection Accounts to Private Collection Agencies – Watch Out for Scammers, Though!

(JDSupra) By Dustin Scott, April 18, 2018 – The IRS recently announced that, beginning this month, the tax agency will be assigning certain unpaid tax accounts to private collection agencies. The IRS will retain and continue to collect most unpaid taxes. The IRS has identified certain tax accounts, however, that it will assign over to these newly-designed private collection firms for collection. The accounts to be assigned to the private collection firms involve taxpayers who have not paid their taxes for many years and who should be well-aware of their unpaid taxes.
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What Oklahoma's Sales Tax Nexus End Run Means

(AccountingWEB) By Michael Fleming, April 17, 2018 – When states need to raise money, one of their favorite ways to do so is to tax out-of-state sellers; this is exactly the position that Oklahoma Governor Fallin and the Oklahoma legislature found themselves in.

The state’s teachers, who were ranked 49th in the county for lowest pay, went on strike for better pay and more spending on education overall. The problem was there was no money in the budget, but the politicians passed a $457 million revenue bill that included an “Internet” tax that allowed the teachers to get a very well deserved average pay raise of 16 percent, moving them to 29th in the nation from 49th.

The hype surrounding the tax shows Amazon, eBay, Etsy and other marketplace facilitators are the intended targets. Since they would take the brunt of having to collect the tax.

What is the Impact?

If the tax burden truly fell 100 percent on the marketplace facilitators it would be a win for everyone. But it does not. There is a notice and reporting requirement option in this legislation. This means a marketplace facilitator has two options:

  1. voluntarily collect sales tax for both their own sales
  2. collect sales tax from third-party sellers

So, Oklahoma residents pay tax on each transaction, raising prices they pay across the board. The OK residents may or may not agree with this as the money is earmarked for a good cause. However, instead of collecting the tax a marketplace facilitator could use the second option.

This option is to notify the Oklahoma purchaser that they, the purchaser, is required to pay the tax directly to the state. In addition, the marketplace facilitator has to notify the purchaser that they will be supplying the state with a list totaling the transactions made by the purchaser.

Here is what I believe many customers may think: “Since you are not doing your job and collecting the tax, you are now forcing me to do it for you. And to add insult to injury you are going to “rat” me out to the state to make sure I do. Not cool.”

While I think it makes common sense to begin collecting tax in this no-win situation, this is not always the case. For example, Rhode Island passed similar legislation that became effective last August, and Amazon turned over the information of all their third-party sellers to the state. Amazon was already collecting tax on their own sales. It will be interesting to see how Amazon, eBay and the other marketplace facilitators respond.

Who are the Biggest Losers?

Perhaps the biggest losers with this kind of legislation are the thousands of small sellers from around the country who fit the definition of a remote seller, which is pretty easy to meet. A remote seller is anyone who makes sales in a forum, with annual gross revenues in OK greater than $10,000 in the preceding 12 months, and who is not a marketplace facilitator, marketplace seller, or a referrer.

The term ‘forum’ is very encompassing and includes websites and catalogs. So, if you are making $10,000 in sales per year from your own website, you have the same requirements as Amazon.

This does not seem very equitable to me. The requirements are to “voluntarily” register to collect tax or follow the notice and reporting requirements which are paraphrased below:

  1. Post a notice on your website that you do not collect tax in Oklahoma, that use tax may be due to the state on their purchase, and if due than the purchaser is required to file a return with the state.
  2. At the time of sale provide a second notice stating that no tax has been collected and, the transaction may be taxable and if so the use tax must be remitted directly to the state.
  3. By January 31st a third notice must be sent by first class mail to the billing address if known, but if not known than it should be sent to the shipping address. This notice must include the same language as the previous notice but must also include a listing of all purchases and a comment that a list of all customers with purchase information will be sent to the state.
  4. Also, by January 31st, the list containing customer information must be sent to the state.

Does This Sound Like Extortion?

If all of that extra work sounds exhausting, it gets worse when we look at the penalties. For each notice that is missed, there is a potential minimum penalty of $20,000 or 20 percent of your last 12 months of sales whichever is less.

So, on $10,000 in sales if you had 200 transactions you could potentially have fines of $400,000 or more. I don’t think this will happen, as the Oklahoma Tax Commission has the ability to reduce the penalties if the penalties create an economic hardship, but that's the way the statute is written.

Did I mention extortion? Remember this all goes away if you choose to register. Even without the devastating fees, the cost to comply for small to medium sized sellers is prohibitive.

I personally spoke with one seller when Colorado implemented notice and reporting requirements last July. He did the math and said it will cost 58 cents to perform the requirements. With an average sales price of $10 would kill his margins.

Personally, I think, his numbers were low, but he was confident. It didn’t matter though because he said, “I give up; the state wins.”

It is cheaper and less risky to become the state’s tax collector, which is what the state wants to happen. Since the state cannot currently force you to collect tax if you do not have a physical presence, the state wants to make your life so miserable, that you volunteer to collect the tax.

Have I Mentioned Extortion?

How can the states get away with this? By now you may be asking, how do states think they can get away with this. Perhaps you may be thinking on waiting to act until the courts strike this down.

Well, while an Oklahoma court may strike this down for state constitutional reasons, most attorneys I talk to tell me the concept is here to stay. Colorado first introduced notice and reporting requirements back in 2010.

The Direct Marketing Association filed an immediate injunction and fought this in the courts for seven years. It went to the U.S. Supreme Court twice during that time, the first time the Court heard it, they said it was not a tax and sent it back to the lower court who ruled in favor of Colorado.

It was appealed back to the U.S. Supreme Court who refused to grant cert in December of 2016. So, while the court never decided on the merits they did have two opportunities to strike it down, which they did not.

Colorado implemented in July of 2017 and since that time a number of states have either passed stand-alone notice and reporting requirements or have coupled the requirements with marketplace sales taxes. The thresholds and penalties are different for all states that have passed this.

The worst states in my opinion are Oklahoma, Pennsylannia, Rhode Island and Washington. The thresholds in Oklahoma, Pennsylannia, and Washington are $10,000 and in RI it is 200 transactions. The minimum penalties start at $10,000 in RI and go way up from there.

Some of the other states to review are Colorado with a $100,000 threshold and Louisiana with a $50,000 threshold. Vermont has no minimum threshold, while are other states either do not have a penalty or do not currently appear to be enforcing.

Summary

It is becoming a lot more dangerous for small to mid-sized businesses selling on the Internet, and this is before we get a decision from the U.S. Supreme Court this coming June. As CPAs, we need to be aware of these issues for our clients, because even small companies with relatively low sales can have relatively huge exposure around the county.

A review of our retail clients is in order, to determine if their potential liability is material. My recommendation is that once the threshold is crossed in most of these states, the most conservative action is to register and collect the sales tax.

 

 

 

 

Bitcoin Buyers Have to Take a Wild Guess on Their Taxes

(Bloomberg) April 12, 2018 – If you thought trading Bitcoin was wild, try figuring out how to pay taxes on it.

Cryptocurrency investors are wrestling with spotty records, tangled blockchain addresses and rudimentary guidelines issued back in the ancient days of 2014. After last year’s boom in values, many people are likely disclosing transactions for the first time, adding to confusion.

Digital-coin enthusiasts and tax professionals are “freaking out” before next week’s filing deadline, said David Siegel, co-founder of a company that’s building a digital wallet for crypto investors. They’re scrambling to track down even basic information in a murky world where tokens are traded on multiple exchanges with limited recordkeeping.

“The big unknown is, who owns what, when and in what jurisdiction,” said Siegel. “That’s really hard to determine in a surprising number of cases.”

Last year’s 1,400 percent surge in Bitcoin lured droves of investors into the virtual currency and competitors such as Ether and Ripple. Since Bitcoin reached its peak of around $20,000 in December, before losing roughly half its value in 2018, many of those who sold last year would have gains to report.

For investors in need of help, it can be difficult to find someone who can adeptly take on the filing challenge. Many tax preparers are put off by the industry’s lack of records, as well as its association with criminal activity, said David Klasing, an accountant and tax lawyer in Irvine, California, who specializes in digital currencies. Others simply don’t have the expertise.

“There’s a lot of professionals that are coming in and trying to figure out how to provide services -- attorneys and CPAs and accountants,” said Irina Litchfield, an Austin, Texas-based adviser for blockchain startups and initial coin offerings. “Not a lot of them actually know how to do it well.”

Taxed as Property

The Internal Revenue Service’s only guidance on digital tokens came in 2014 -- before the industry hit breakneck growth. It said that in general it treats cryptocurrencies like property, which means most sales and trades are subject to capital-gains tax.

Simply buying digital coins and holding onto them shouldn’t trigger a tax bill. But just about every other crypto transaction could, at a welter of rates. Think mining, which many accountants consider taxable as ordinary income and possibly self-employment tax. Or using Bitcoin to buy a sofa on Overstock.com -- cue capital-gains taxes. Swapping one digital currency for another seems to be tax-free for this year’s return, though that will change next year with the new tax law.

But then there are trickier scenarios like “air drops,” when coins magically appear out of nowhere in your digital wallet. Or “hard forks,” when a cryptocurrency splits in two. Many accountants say the latter two are taxable like ordinary income.

Tax preparers are worrying about those newer types of crypto transactions, according to Klasing. They’re also spooked by the spate of ICOs that may have skirted U.S. Securities and Exchange Commission rules, he said.

“The government is basically just telling practitioners to take a wild-ass guess,” he said.

An IRS spokesman said that in addition to the agency’s 2014 guidance, taxpayers should look at other rules governing an exchange or transfer of property and find the “factual scenarios that most closely resemble their circumstances.”

Coming Clean

Paying the tax man is relatively new for an industry built on anonymity and avoiding government control. For this filing season, many investors who have been trading for years will “come out of the woodwork” and disclose crypto on their returns for the first time, according to Jeffrey Kahn, a tax lawyer in Irvine who works with digital-currency holders. Popular exchange Coinbase told about 13,000 users in February that it would be turning over their account data to the IRS after losing a court fight to keep records private.

The government is warning crypto investors that they must own up to their purchases. The IRS said in March that if taxpayers don’t “properly report” their transactions, they could face penalties and in extreme cases, criminal prosecution.

Accountants need to be mindful as well. If they sign off on a return that understates a tax bill due to “unreasonable” arguments or “willful or reckless conduct,” they can face penalties of as much as $5,000 or 50 percent of the fee paid.

DIY Confusion

For do-it-yourselfers, tax-prep companies offer resources for digital-currency buyers. TurboTax’s support site has 15 pages of questions tagged to “bitcoin,” a help center and a brief crypto tips page.

H&R Block Inc. has a four-part explainer on the topic, as well as an online community forum for crypto queries. In it are hairy questions such as whether taxpayers are eligible for deductions if their Bitcoins are stolen.

Luis Guerra, a copywriter in Seattle, tackled his return on his own and says he’s still wondering if he did it correctly. He, like many others, bought cryptocurrency in December after watching a friend get rich quick, but hadn’t considered the tax implications.

After a lot of Googling -- and getting a lot of misinformation -- Guerra ended up using a website that could generate a report of his buys and sells across exchanges and uploaded it to TurboTax. He followed the instructions to a T, but said the process was still confusing -- so much so that he almost gave up on trying to figure it out.

“Then the angel on my shoulder just pops up and is like, ‘Dude, do it right,” he said. “You don’t want to owe anybody any money, and you definitely don’t want the IRS knocking on your door.’”

 

 

 

 

 

IRS Head Sees Huge Task Ahead to Administer New Tax Law

(The Spokesman-Review) April 12, 2018 – The acting head of the IRS says the current tax-filing season has gone well, while acknowledging the tough challenge the cash-strapped agency faces of administering the new tax law that will affect 2019 returns.

Acting IRS Commissioner David Kautter told Congress April 11 that some 79 million refunds totaling about $226 billion have been issued as of April 6, averaging $2,900 – up $13 from last year. Around 80 percent of returns filed claimed a refund. The final year under the “old” tax regime, 2017, has to be accounted for by taxpayers in returns by April 17.

The agency, pummeled for years by criticism from congressional Republicans and funding cuts, now must administer and enforce the most sweeping overhaul of the U.S. tax code in three decades.

Kautter told the Senate Finance Committee that the new law “requires extensive work by the IRS this year and next.” The paperwork alone is immense: about 450 forms and instructions will have to be amended.

Sen. Orrin Hatch, R-Utah, the panel’s chairman, said the new burden falls on an agency with a history of mismanagement and taxpayer abuse that is laboring under funding and technology deficits.

“On the one hand, the IRS has made marked improvements in recent years,” Hatch said. “But, on the other hand, it is an agency stuck in the past. It relies on software and core processing systems designed during the Kennedy administration. IRS employees routinely have to manually input return information into agency computers, and often require taxpayers to send information via fax machine.”

The massive Republican tax-cut legislation was muscled through Congress late last year and now stands as President Donald Trump’s marquee achievement. It took effect Jan. 1, billed as a huge boon for the stressed middle class and a key GOP selling point in the midterm elections this year. The $1.5 trillion package provides generous tax cuts for corporations and the wealthiest Americans, and more modest reductions for middle- and low-income individuals and families.

The tax cuts for corporations are permanent, while those for individuals and families expire in 2026. Nonpartisan tax experts project that the law will bring lower taxes for the great majority of Americans, though not all.

Already taxpayers have seen a tangible result of the new tax law. Millions of working Americans saw bigger paychecks starting early in the year. Companies and payroll service providers – and their computer systems – had to adjust to new withholding tables crafted by the IRS to reflect changes in tax rates for different income levels under the new law.

The tax bill or refunds for the changes won’t come in until 2019.

For this filing season, “I haven’t heard about any disasters,” says Howard Gleckman, senior fellow at the Urban Institute. And he gives the IRS credit for doing a good job this season of keeping up with scams.

Still, the numbers that really count are the IRS budget figures. After years of Congress’ cuts, “The IRS doesn’t have remotely enough money to do what it needs to do,” Gleckman said. “There’s going to be huge challenges out there.”

During President Barack Obama’s tenure, Republicans controlling the congressional purse strings accused the IRS of liberal bias and unfair targeting of conservative tax-exempt groups.

This year, with the new tax law looming, Congress was more willing to open its wallet for the IRS and rejected to an extent the Trump administration’s proposed cuts. But it ended up cutting in other areas, with the result that the agency budget is about the same – $11.5 billion – as in recent years.

Kautter is doing double duty as the assistant Treasury secretary for tax policy. He is the acting head of the IRS. Trump has nominated as its new permanent chief Charles Rettig, a tax lawyer who has represented thousands of individuals and companies in civil and criminal tax matters before the agency. Rettig must be confirmed by the Senate.

The House tax-writing committee, meanwhile, approved a series of bipartisan bills Wednesday aimed at changing the way the IRS operates. They would, for example, create an independent appeals process to help taxpayers resolve disputes with the agency, bolster programs that provide tax assistance to low-income, elderly, disabled people and immigrants, and crack down on fraud by tax preparer businesses that prey on unwary people. The agency would have to submit a plan for revamping its customer service strategy.

The Ways and Means panel dispatched the legislation to the full House for a vote.

 

 

 

 

 

The Seven Elements of Business Development

(CPA Practice Advisor) April 11, 2018 – Clients aren’t sold services. They buy on reputation, relationships and referral.  Along the journey from not knowing you to engagement, they ask seven questions.  How do your answers to their questions rate?

1 Awareness — Who are you?
If clients are not aware of your firm, you can neither scope nor engage with them. The branding work done by our marketing colleagues is useful here. In the whitespace of corporate need, it is helpful to be known as an option. Think websites, social media, and airport signage. Being known in advance, of course, is not a necessity. Sometimes awareness first comes when you send an email or introduce yourself over the phone.

2 Understanding — Do I understand what you do?
Potential clients need to have an understanding of your capabilities. This is not a trivial point in a world where many firms offer a wide range of capacity. We often ask firms “What are you selling?” only to have them offer up a slurry of undigested professional services pap. Here is the rule: Specificity attracts. For example, “We sift through retail register data and are able to pinpoint which customers and which offers will help you optimize your marketing spend” is more compelling than “We drive digital transformation and strategy in a full range of industries across the globe.” Boil down what you offer to no more than a handful of value propositions where you have a) some form of competitive advantage, b) a data-rich track record of success and c) a statement that is easily understood by a parent or a neighbor. This is your elevator pitch and is the definition of your niche.

3 Interest — Do I have a problem for which you have an answer?
In order to sell consulting services, your client must have a felt need, an interest. At least they should be open to the idea of improvement. Create distinctions which illuminate challenges or opportunities to which you are the answer. This is why practice leads write thought leadership, speak at conferences and more generally work to articulate the kind of “burning platforms” on which urgency and engagement are built. “Did you hear they changed Regulation 8b?” you whisper to a potential client. “We are seeing a variety of responses. How is your company prepared to act?”

4 Belief — Do I think you can do the job?
Potential clients might know you, know you are active in a vertical and have a problem they need to solve, but they need to have a belief that you can do the work effectively. The secret to creating “Belief” is to clearly describe the promise of your service (“we lower costs,” “we drive revenues,” “we position you for future success”), while at the same time highlighting your track record of doing “the same thing for companies in your similar situation.” Think case studies and references.

5 Trust — Do I trust you?
For professional services business development, reputation is the Holy Grail. When you hear, “I’ve worked with her before; she’s a solid player,” you know someone is about to ink a new engagement. Here is the formula for creating trust: (Your effectiveness) x (Your “fit” with the client) x (The amount of time you have known the client) = trust. If you are super-smart and have been calling on a client for five years, you will not win an engagement if the client feels “she just doesn’t get us.” Ask yourself, “How can I demonstrate value to a potential client in advance of the sale, provide evidence of my fit with the buyer, and do this repeatedly over a long period of time?” Working shoulder-to-shoulder with executives builds trust, but so does staying continuously connected over time, so long as you add value when you do. This is why people travel, offer free audits, and distribute research. Abuse this imperative to repeatedly connected, however, and you risk being thought of as human spam.

6 Ability — Do I have the ability to pull the trigger?
Is the company (or division or unit) big enough to afford you? Are you talking to a decision-maker? This is not about pining after those hard-to-get CFO appointments; it is about being thoughtful about where the preponderance of decision-making lies. Here is a clue: It is generally not the CEO and often not in the C-suite at all. Yes, your partner went to prep school with a CEO and that resulted in a new engagement, but mostly, you are selling to the “head of retail operations” or the “director of compliance.” These are the problem solvers in an organization. Seek to be in front of the right level — not too low, but not too high, either. Target those with budget, authority and for whom your services move the needle on their objectives. Understand their mandates and responsibilities. Do your homework. What does the world look like from their perspective, not yours? Care enough to walk a mile in their shoes.

7 Readiness — Is the timing right?
Often you have convinced the decision-maker but for reasons beyond their control, she cannot make it happen. Be patient. You are selling to large organizations with their own idiosyncratic biorhythms, including planning and budget cycles and the Byzantine politics of who is on the rise and who’s not. Be attuned to timing, and never write off a potential client. No one ever needs a consultant, until they do, and then, when they do, it is the professional who has invested in a relationship and who is most proximate to the opportunity who wins the day. Stay in touch.

 

 

 

 

 

The Trade War's Troubling Twist

(Industry Week) By Keith Belton, April 17, 2018 – The Trump Administration’s recently imposed tariffs on steel and aluminum, and its announced tariffs on $50 billion worth of Chinese imports — and the threat of $100 billion more — represent the latest battle in a war against unfair trade practices. One category of unfair trade practices stems from the behavior of state-owned enterprises (SOEs) in China and other countries.

SOEs represent a growing problem—and one that has the United States working jointly on policy reforms with Canada, Mexico, the EU, Japan, and other major trading partners.

The Problem with SOEs

SOEs are entities owned or controlled by the government, either at the national, regional, or local level. They aren’t new or unique. Found in every country, they have long been providing basic services such as public transportation and utilities. For example, U.S. SOEs include the U.S. Postal Service, Fannie Mae, and Freddie Mac.

Trade issues arise, however, when SOEs engage in commercial activities and compete with private sector companies. Such SOEs may enjoy a wide variety of government-conferred advantages that include subsidies, preferential treatment in procurement and regulation, market power, captive equity, exemptions from bankruptcy rules, and/or information advantages.

These advantages have an impact—SOEs do not always act in accordance with their commercial interests—and the result is an inefficient market. For example, world overcapacity in steel—the justification for the new U.S. tariffs—has been attributed to the large number of SOEs in the industry, especially from China, the world’s largest steel-producing country. Subsidies and cheap finance make SOEs in steel production less amenable to market signals, and the result is overcapacity. SOEs are also driven more by political considerations than their competitors. For example, in 2010, China cut off exports of rare earth minerals to Japan during a territorial dispute.

The rationale for SOEs varies, from industrial policy (to ensure national leadership in some particular industrial sector) to protecting government revenue to ensuring access to good-paying jobs. But no matter the intention, SOE behavior often leads to market distortions—and the inevitable complaints from competitors about unfair trade practices.

According to the World Bank, SOEs were on the decline in the 1980s and 1990s when the privatization movement took hold. However, since then, several countries reversed course and took steps to preserve or expand SOEs in key sectors. It is this expansion of SOEs and the scale of their cross-border impact that has piqued current interest in SOE reform.

According to research published by the OECD in 2013, of the world’s 2,000 largest firms, SOEs hold a 10% share, and account for 6% of world GDP and 36% of manufacturing value add. In 2000, only one of the Fortune 50 was an SOE; today, there are a dozen.

SOE’s represent more than 50% of the sales, assets and market values of the ten largest firms in the following countries: China, the United Arab Emirates, Russia, Indonesia, Malaysia, Saudi Arabia, India, and Brazil. (In comparison, the vast majority of countries, including the U.S., have SOE shares under 10%.) According to The Economist, the world’s thirteen largest oil companies, largest bank, and largest natural gas company are SOEs.

China represents a particular concern. When it joined the World Trade Organization (WTO) in 2001, it promised that the government would not influence the commercial decisions of SOEs. According to the U.S.-China Economic and Security Commission, an organization created by Congress to monitor Chinese trade practices, “China does not appear to be keeping this commitment. The state does influence the commercial decisions of SOEs … If anything, China is … giving SOEs a more prominent role in achieving the state’s most important economic goals.”
For example, according to a recent report from the U.S. Trade Representative (U.S.TR), a substantial amount of Chinese outbound investment occurs through SOEs or is financed by Chinese state-owned banks.

Current Trade Rules Are Inadequate

In a 2017 article in the Harvard International Law Journal, Minwoo Kim argued that current trade rules—including domestic laws and WTO rules—are poorly designed to address modern trade disputes associated with SOEs because of the difficulty in determining a threshold question: whether state action is responsible for the conduct and/or whether a firm is controlled by the state (i.e., is it an SOE?).
The relationship between an SOE and its government is not always transparent. The organizational complexity of the modern SOE, coupled with a government unwilling to cooperate, makes it very costly for a complaining nation to bring and win such a trade case. This has been the experience of the U.S. with China, for example.

A variety of mechanisms have been employed to address SOEs’ unfair trade practices. These have their advantages, but none is sufficient to address all of the underlying problems. National anti-trust laws, for example, can be used to deal with anticompetitive effects of SOE merger and acquisition activities. Such laws, however, cannot address subsidies or predatory pricing strategies. The Organization for Economic Co-operation and Development’s (OECD) guidelines are voluntary and do not impose binding requirements on nations. Competitive neutrality frameworks (in the EU and Australia, for instance) can level the playing field with respect to certain cross-border activities, but their scope and enforcement vary widely.
New Trade Rules Are Emerging

Reform of SOEs is occurring in the context of new regional trade agreements. The most significant is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a trade agreement ratified by 11 countries (but not the U.S.) that breaks new ground in the definition of and obligations of SOEs.

CPTPP includes SOE provisions that remain unchanged from the original Trans-Pacific Partnership (TPP), which then included the U.S. It defines SOEs by the commercial nature of their activities, ownership/control by the state, and size. SOEs must act in accordance with commercial considerations, not discriminate against the goods or services of another party or non-party and receive no commercial assistance causing adverse effect or injury to trade or investment interests of other CPTPP members.

Each participating country must provide a transparent list of its SOEs and respond to requests for information about the relationship between the SOE and its government. There are exemptions—most notably, sovereign wealth funds and independent pension funds.

The provisions, however, are far from perfect. Critics say the definition of an SOE is not broad enough and the exemptions and exclusions are too numerous and allow for countries to continue to distort markets. On the other hand, they address well-known problems with current WTO rules and domestic laws that will likely change SOE behavior in ways that increase market efficiency.

CPTPP must still be ratified by each of its member countries in order to go into effect. Once it does, however, it commits participating countries to treat SOEs from all countries, including non-signatory countries, equally.

U.S. Advances Reform across Multiple Venues

The Trump Administration is eager to push SOE reform as part of its wide-ranging trade strategy, described in the 2018 Trade Policy Agenda. For example, one of its goals in renegotiation of the North American Free Trade Agreement (NAFTA) is to modernize treatment of SOEs, based on the CPTPP provisions. SOE reform could also be included in reforms to the U.S.-Korea Free Trade Agreement (KORU.S.). The U.S. government has called on the WTO to reform its rules on SOE, most recently last December at the WTO Ministerial Conference in Argentina. During that meeting, Robert Lighthizer, the U.S. Trade Representative, complained that China does not comport with WTO transparency requirements for SOEs.

The U.S. Congress is considering legislation to reform the Committee for Foreign Investment in the U.S. (CFIU.S.), an interagency group that reviews certain business transactions where a foreign entity seeks a controlling share of a U.S. company or U.S. held asset that has national security implications. Legislative proposals include expanding the jurisdiction of CFIU.S. to include a broader range of transactions (including those where SOEs play a minor role), expanding the list of factors to be considered by CFIU.S. in its national security review, and increasing the tools available to mitigate national security risks. These proposals are a reaction to recent U.S. investment by Chinese firms—including SOEs—in U.S. high-technology sectors in accordance with China’s far-reaching industrial policy.

SOE reform could also come about as a result of bilateral discussions between the U.S. and China to resolve differences in trade policy. Published reports indicate that both U.S. and Chinese government officials are open to discussion and, indeed, some high-level interactions have taken place. However, White House officials say that “serious discussions” have not yet begun. Given that concerns over the unfair trade practices of SOEs are focused on China, such bilateral discussions, coupled with multilateral efforts to modernize existing trade agreements, represent the best near-term hope for significant SOE reform.

 

 

 

 

 

Tax Managers Forecast Tax Windfall Allocation

(CFO) April 17, 2018 – Various reports have appeared suggesting what U.S. companies will do with the extra cash they’ll be pocketing courtesy of the Tax Cuts and Jobs Act (TCJA). But here’s one from a unique perspective: that of corporate tax executives themselves.

Within that population, it’s a nearly unanimous expectation that companies will increase domestic capital spending as a result of the laws. Ninety-four percent of tax managers surveyed by law firm Miller & Chevalier and the National Foreign Trade Council said so.

Correspondingly, with the new tax law expected to trigger the repatriation of hundreds of billions of dollars that U.S. companies had stashed in foreign countries, capital investment abroad appears set to decline. A majority (58%) of the 93 survey participants said they expected that outcome.

Shareholders, as most observers figured, will get their share of the windfall, but perhaps less than some believed. Just 21% of survey respondents said some of the money will be used to increase or institute share-buyback programs, while only 26% said shareholder dividends will get a bump.

Slightly more tax executives than that (29%) said corporate debt would decrease as a result of the TCJA.

One in five survey participants (21%) said companies would hike employee bonuses, while 15% expected wage increases and 11% predicted enhanced employee benefit packages.

Some companies won’t have to decide what to do with cash generated by the tax-law changes, because they won’t have any. Those that don’t generate taxable income or have overseas cash to repatriate won’t benefit, of course.

Overall, 19% of those surveyed said the new tax law would have little to no impact on their companies’ taxes. And 14% said the TCJA will serve to increase their taxes, given such provisions as limitations on the deductibility of interest expense and the newly adopted base erosion and anti-abuse tax.

Most of the respondents indicated they’ll need the government’s help implementing the tax-law changes; 73% of them expect to seek regulatory or other administrative guidance.

Additionally, 61% of the tax managers plan to seek technical corrections to the law, which Congress typically makes following tax-law revisions. However, almost half of respondents (44%) expressed concern that competing priorities mean Congress won’t be able to effectively enact such corrections in a timely manner.

Meanwhile, on top of the leap in U.S. companies’ domestic investments, tax professionals were highly optimistic about foreign direct investment in the United States: 93% of them expected it to increase.

However, 23% of respondents worried about the TJCA’s ability to endure following the 2018 and 2020 elections.

 

 

 

 

 

Levi’s CFO Turns to Robots to Help Keep the Books

(The Wall Street Journal) By Roger Nanney, April 11, 2018 – Levi Strauss & Co. is introducing robotic software to its finance function as the company’s efforts to automate the production of its iconic jeans have extended to the back office, said Chief Financial Officer Harmit Singh.

“We are introducing bots where it makes sense,” he said. “The idea is not to eliminate jobs. We are going to upskill employees and have them spend more time on analysis.”

The move mirrors Levi’s recent push to use lasers to create the holes, fraying and fading to give jeans a worn look, and replace a labor-intensive hand-finishing process.

The San Francisco-based company posted revenue of $4.9 billion in its 2017 fiscal year ended in November up 7.7% from the prior year, according to regulatory filings. Income reached $281.4 million in 2017, down from $291 million a year ago.

Levi’s is also exploring the greater flexibility to repatriate foreign profits under the new U.S. tax law, Mr. Singh said. The company typically brings home between $100 million and $150 million annually, he said. Levi’s has about $600 million in cash with roughly 80% of it overseas, he added.

“There’s no real impact on cash flow. What the law has provided is more flexibility in bringing cash home from international jurisdictions,” he said.

He didn’t provide an exact figure on how much the company plans to bring home. He said the great flexibility hasn’t changed the company’s strategic aims, which include investing in the international segment, which has grown larger than the domestic business, he said. “That was not the case five years ago,” he said.

The privately-owned company has booked a one-time charge of $136 million dollars in its latest quarter linked to the tax legislation. The overhaul lowered the corporate tax rate to 21% from 35% previously and introduced a mandatory one-time tax of 15.5% on unrepatriated foreign cash.

 

 

 

 

 

IRS to Turn Over Tax Collection Accounts to Private Collection Agencies – Watch Out for Scammers, Though!

(JDSupra) By Dustin Scott, April 18, 2018 – The IRS recently announced that, beginning this month, the tax agency will be assigning certain unpaid tax accounts to private collection agencies.  The IRS will retain and continue to collect most unpaid taxes.  The IRS has identified certain tax accounts, however, that it will assign over to these newly-designed private collection firms for collection.  The accounts to be assigned to the private collection firms involve taxpayers who have not paid their taxes for many years and who should be well-aware of their unpaid taxes.

The private collection firms will be authorized to contact taxpayers, request that the taxes be paid, and to also receive financial information from taxpayers and to set up payment plans.  These private collection firms, however, do not have the authority to file tax liens, and cannot garish wages or otherwise seize or levy a taxpayer’s assets to pay taxes – only the IRS has this authority.

The process will begin with the IRS sending an initial letter to taxpayers notifying them that their unpaid tax account has been assigned to a private collection agency and identifying this agency. Taxpayers who receive these written notices will have had a known tax debt for many years and will have been contacted by the IRS previously concerning payment of their taxes.

With the initiation of this new program, the IRS is warning taxpayers to be wary of scammers claiming to participate in this program.   Taxpayers should know that the designated private collection agencies are limited to four specific firms: CBE Group of Cedar Falls, Iowa; Conserve of Fairpoint, NY; Performant of Livermore, CA; and Pioneer of Horseheads, NY.

The IRS’s use now of private collection firms comes at an unfortunate time where many scammers, falsely claiming to be the IRS, have contacted taxpayers to fraudulently receive payments. While these scammers use many tactics, the IRS and its new private tax collection firms will never do many things that these scammers do.  The IRS and its private collection firms will never demand payment over the phone through credit card or wire transfer; will never threaten arrest or jail unless taxes are paid; and the IRS and its private collection agencies will not demand that taxes be paid without giving the taxpayer an opportunity to question or appeal the amount “owed.” Legitimate tax payment requests will also always be communicated first through mail, whether from the IRS or one of the four designated private collection agencies.

Hopefully, the notification letters to be sent out by the IRS under the new private debt collection program will provide some level of protection against scammers.  These notification letters will identify which of the four specific tax collection agencies the taxpayer’s account has been assigned.  If the taxpayer then receives a notice or call from the assigned tax collection agency, this should give a taxpayer assurance that the contact is legitimate.  Random, threatening calls from someone claiming to represent the IRS and attempting to collect a tax debt should be ignored.