Foreign Tax Risks and Bringing Money Back

Indonesia just announced its intent to collect $418 million in taxes and penalties from Google. This comes on the heels of the European Union’s intent to collect $14.5 billion from Apple.

uncle-sam-wants-your-tax These events are real-life evidence of the risks international companies are willing to face in order to minimize their overall tax bill and they create support for the ideal, which would be a unified international tax policy agreed to by all the countries of the world, including the United States. Since that is not going to happen, at least not now, let’s focus on how to help the United States’ budget deficit.

The fallout from Apple and Google’s woes will help encourage United States firms to bring more profits home. Recent history suggests the government can do something to help make this happen.

In 2005, George W. Bush’s Homeland Investment Act (HIA) dramatically reduced the amount of taxes paid on repatriated funds. This act aided in bringing back into the United States roughly $300 billion dollars. Yes…. $300 billion!

I still remember the day my finance professor asked the class to identify the single most important factor influencing top level business decisions. The students’ answers included things like cost, reputation of the supplier, market analysis, etc. He just kept shaking his head rather disappointingly. Finally, he said, “the answer is tax. The one factor that most influences top level business decisions is tax.”

tax-burdenEverything I have witnessed in the ensuing thirty years of my career has confirmed the truth of my professor’s words. During elections, as I see the campaigns unfold, I hear his words in the back of my mind as candidates lay out their plans. As elections finish and government ensues, they pass and change tax law. Companies make strategic decisions based not only on current tax law but also what they perceive will happen to those laws in the future. Their objective is to pay the least amount of tax as possible, while keeping another eye on the risks of tax based decisions.

Here is the bottom line. If you want money to stay in the United States, make it advantageous to keep it there. And if it isn’t there, follow George W. Bush’s plan, and make it advantageous to bring it here.

Then, if you are really smart, take some prudent positions in the FX market and make some money with the transfer process.

SEC’s Investor Advisory Committee Objects to FASB Materiality Proposals

FASB SEC RULESThe Security and Exchange Commission’s (SEC) Investor Advisory Committee (IAC), in a January 21, 2016 letter to the Financial Accounting Standards Board (FASB), objected to two recent FASB proposals that would give companies more control over what does and does not get disclosed in financial statement footnotes by letting management and auditors determine materiality based on a subjective legal test rather than a mathematical percentage test.

The two proposals were issued in September 2015 as Proposed Amendments to Statement of Financial Accounting Concepts (CON) No. 2015-300, Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information, and Proposed Accounting Standards Update (ASU) No. 2015-310, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material. The proposals call materiality “an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report.” Information is material “if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.”

The IAC’s concerns are that these proposals would give management too much discretion about the information investors get. They are concerned that this test could be used to give even less information than is currently required… and there are many who believe the current standard does not require enough disclosure as it is.

The FASB plans to hold a roundtable that will discuss all of its disclosure projects, including the guidance for footnote disclosures for fair value measurements, pension liabilities, and income taxes in mid-2016.

Much Ado About Nothing

It Must Be Election Time Again

Money and FlagOn Tuesday, Democrats in the United States Congress introduced legislation that would deny government contracts to corporations that move their tax domiciles abroad. Last week, President Obama called into question the loyalty and patriotism of corporations that have or are considering what is known as an “inversion”. Reading the headlines and listening to the sound bites would lead one to believe there is an immediate danger that requires drastic action. As with most election rhetoric, it has much ado about nothing.

What is an Inversion?

Simply put, an inversion is where a new corporation is established somewhere and then an existing corporation merges into or becomes a subsidiary of the new corporation. The new corporation takes on all the business and assets of the existing corporation but with a new, legal domicile. There is nothing illegal about such a transaction and it is commonly done for a variety of legitimate business reasons.

So… What is the Problem?

The United States has one of the world’s most aggressive tax regimes. United States based companies pay income tax on earnings from all over the world, while other countries only tax earning from within their own country. If a company inverts to a foreign domicile it will only pay United States taxes on its United States derived income, not on its world-wide income.

How Big a Problem is it?

Over the past 32 years, 52 United States corporations have completed inversions.


If the Democrats really believe inversions are a problem, they should look at fixing the cause, not the symptom. Making legislation to punish companies for doing something that is completely legal is not the answer. The answer is to overhaul the United States Tax Code, especially when it comes to taxing foreign income of domestic corporations. If the Tax Code didn’t motivate corporations to move out of the United States, they wouldn’t go.

SEC Considers Regulationing High-Frequency Traders

High Frequency Traders - Wallace Associates Group - AttorneysAdvocates for the small investor may be getting their wish. New rules are being considered by the SEC that would require high frequency traders to register as broker-dealers, which would make them subject to additional supervision from Securities and Exchange Commission.

Who are these High-Frequency Traders?

High-Frequency traders use complex computer programs that takes massive amounts of information from press releases, web postings, news reports, etc., to produce computer issued buy and sell orders on every kind of imaginable position. Since the only real human element involved is the extensive computer programming required to produce such a system, buy and sell orders can be issued within seconds of the time information is released.

Why would High-Frequency Traders be a Problem?

Wallace Associates Group High Frequency TradersSome investors believe these systems increase market volatility since they react so quickly and have the potential of, if the computer deems it warranted, taking large and even controlling positions in a market within seconds. Other investors believe these same elements increase the risk a market may crash. Still others believe that should these programs become too effective the small investor will never be able to make money in the markets because by the time they get and analyze the same information the high-frequency traders have taken the profitable positions already.

Other investors feel these concerns are not valid. They point out that every high-frequency trading program is set with a different set algorithms. They point out that two high-frequency traders will often end up on different sides of a position. Others point out that since these are private individuals or entities and they only buy and sell with their own money that it is nobody else’s business what they do as long as it is legal.

What Happens if High-Frequency Traders are Required to Register?

If High-Frequency Traders are forced to register as Broker Dealers, they would become subject to the Security and Exchange Commission’s regulations designed for those who trade other people’s moneys. Full disclosure and reporting would be only one of the things they would be required to do. In addition, they would become subject to the Financial Industry Regulatory Authority’s examination program, which would force them to make their books and records available to both the Securities and Exchange Commission and the Financial Industry Regulatory Authority.

Obviously, High-Frequency Traders would object to this. They guard their algorithms like the government guards the gold in Fort Knox. They are always tweaking their formulas to become better than every other High-Frequency Trader and any disclosure of what they buy and sell could help others to discover their secrets.

Definition is a Huge Issue

One of the biggest issues will come as a result of the fact that there is no accepted definition for high-frequency trading. One way would be to focus on the total number of trades in a year. Another would be to focus on the total number of securities a trader owns. No matter what method is chosen, people that don’t even use the computerized trading systems may be forced to open up their records as well.

Just the Hint of Possible Regulations has Already had an Impact

Even without an industry accepted definition of who is a high-frequency trader, some companies, fearing possible complications from even being associated with someone who might be one, have taken steps to distance themselves. For example, Berkshire Hathaway’s Business Wire has said it will no longer make its direct feeds of press releases available to high-frequency traders.