Recently, the Committee on Benefits Finance helped to organize written testimony submitted by FEI President and CEO, Marie Hollein, to the House of Representatives’ Ways and Means Committee.  

The testimony, along with FEI's pension discussion points, seek to express upon Congress that at a time when companies desperately need cash to keep their businesses afloat, funding rules will require huge, countercyclical and unexpected contributions to pension plans.

As the United States Congress and the Obama Administration work to overhaul the nation’s health care system, please take time to review talking points created by the FEI’s Committee on Benefits Finance and Committee on Private Company Policy. With the goal of achieving a major domestic policy victory in the first year of his administration, President Obama and his Democratic colleagues in Congress have worked to fashion legislation that will provide affordable, available and accessible health care. However, many of the proposals will increase fees and taxes on the business community and place new mandates on employers and employees.

CBF and FEI will continue to monitor and update FEI members on the reform effort.

Section 106 of the Pension Protection Act of 2006 (“PPA”) directs the Cost Accounting Standards Board (“Board”) to harmonize Cost Accounting Standards 412 and 413 (together, “CAS 412 and 413”) with the minimum required contribution provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986 (the “Code”), as amended by the PPA (collectively, the “minimum funding rules”).   FEI’s Committee on Benefits Finance and Committee on Government Business strongly believe that the Board must revise CAS 412 and 413 in light of the changes enacted in the PPA.

The PPA reflects Congress ratification of the growing international consensus that pension obligations and assets should be measured to the extent possible on a mark-to-market basis.   CAS 412 and 413 now must be updated to reflect that reality.  At the same time, and fully consistent with the PPA changes, it is important that revisions to CAS 412 and 413 be promulgated in a manner that ensures that government contractors are equitably reimbursed for their pension costs; are treated uniformly relative to each other; and are allowed to recover charges attributable to a contract as they are incurred.  Those underlying principles should dictate the Board’s consideration of changes to CAS.

To learn more about Pension Harmonization, please visit the Office of Management and Budget’s Advanced Notice for Proposed Rule Making, and FEI’s corresponding comment letter.

On March 4, 2009, President Obama issued a memo asking his government to review how government contracts are awarded and sited the need for more competition. The President claims his changes would save the government $40 billion a year. 

President Obama’s March 4 memo requires OMB to issue new government-wide guidance addressing:

• The appropriate use of sole-source and other types of noncompetitive contracts and how to maximize the use of full and open and other competitive procurement processes;
• When, and under what circumstances, cost-reimbursement contracts are appropriate;
• How to assist agencies in determining the capacity and capabilities of their acquisition workforce; and
• When governmental outsourcing is and is not appropriate, consistent with Section 321 of the FY09 National Defense Authorization Act.

In 2005, the Tax Increase Prevention and Reconciliation Act was a vehicle for a revenue raising provision to mandate that federal, state, and local governments withhold 3% from payments for goods and services provided by all government contracts. This unprecedented withholding mandate would include Medicare payments, Farm payments, and some grants.  The legislation was signed into law by President Bush on May 17, 2006 was initially set to become effective on January 1, 2011.  However, the American Recovery and Reinvestment Act, more commonly knows as the “Stimulus,” delayed the implementation for one year making the new effective date January 1, 2012.

The Department of Defense estimates the 3% withholding requirement would cost $17 billion over the first five years to comply with the mandate which is far higher than the revenue that would be generated by the new tax.  FEI supports the full repeal of the mandate and supports legislation introduced in both chambers of Congress by Representatives Kendrick Meek (D-FL) and Waller Herger (R-CA) and Senator Arlen Specter (D-PA).

These talking points provide further information on the 3% withholding issue.

The Cost Accounting Standards Board (CASB) recently published a Staff Discussion Paper on how best to harmonize the newly-enacted pension funding requirements under the Pension Protection Act of 2006 with Cost Accounting Standards 412 and 413, which govern the assignability of such costs to government contracts.  FEI's Committee on Government Business (CGB) and Committee on Benefits Finance (CBF) submitted a joint letter to the CASB addressing several issues of concern with the Staff Discussion Paper.  The comment letter stressed the importance of insuring that revisions to CAS 412 and 413 be promulgated in a manner that ensures that government contractors are equitably reimbursed for tehri pension costs; are treated uniformly relative to each other; and are allowed to recover charges attributable to a contract as they are incurred. 

May 7, 2008 -- FEI's Committee on Taxation (COT) joined the R&D Credit Coalition and 100+ Organizations in a letter to U.S. lawmakers urging action now to renew the expired R&D Tax Credit and to extend other critical tax provision that are set to expire. Among the total of 114 organizations that signed the letter are organizations representing business, labor and education.

View the organization letter that was sent to Senate Finance Committee Chairman Max Bacus (D-MT) and and Ranking Member Charles Grassley (R-IA). View the R&D Tax Coalition Press Release below.  A similar letter was sent on May 7, 2008 to the full Senate, House and Senate leadership and the Chairman and Ranking Member of the House Ways & Means Committee.

The R&D Credit Coalition issued a press release on May 7 about its letter.

FEI's Committee on Taxation is a member organization of the R&D Credit Coalition.

FEI’s Committee on Taxation joined the R&D Credit Coalition and 100+ Organizations in a letter to lawmakers urging action now to renew the expired R&D Tax Credit and to extend other critical tax provisions that are set to expire.  A total of 114 organizations signed the letter, representing business, labor and educational organizations and was sent to Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA)

A similar letter was sent on May 7^th, 2008 to the full Senate, House & Senate leadership, and the Chairman and Ranking Member of the House Ways & Means Committee.  The R&D Credit Coalition issued a May 7^th press release about the organizations letter. . The Committee on Taxation is a member organization of the R&D Credit Coalition

Tax Competitiveness Study Released by U.S. Treasury Department

January 2, 2008
FEI Summary

On Dec. 20, 2007, the U.S. Treasury Department’s Office of Tax Policy released its study on: “Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.”  

As noted in remarks by Assistant Secretary for Tax Policy Eric Solomon, the comprehensive study “is a follow-up to [Treasury’s] July conference with business leaders, economists and policy makers about this important issue.”  He added, "To maintain the competitiveness of U.S. businesses and U.S. workers in a global economy, an examination of our business tax system in the context of the global marketplace is overdue.” Now that the study has been published, he said, Treasury will continue to have “discussions with Congress, the business community and other policy makers,” as they further consider this issue.

The study “outlines several broad approaches to business tax reform… [and] specific business tax areas that can be addressed,” said Solomon. However, he added, “There are no policy recommendations in this study. “ Rather than recommending a preferred approach at this time, he said, “We believe it will provide significant substance for discussion, and will further the effort to inform the public policy debate.”

Treasury issued a summary of the 121-page study. Here are the three major approaches for tax reform aimed at improving the competitiveness of U.S. businesses and U.S. workers in the study:

1.       Replace the Business Income Tax System with a Business Activity Tax (BAT)
The BAT tax base would be gross receipts from sales of goods and services minus purchases of goods and services (including purchases of capital items) from other businesses. Wages and other forms of employee compensation would not be deductible; interest would not be deductible or taxed as income. See the summary for more details.

2.       Broaden the Business Tax Base and Lower the Statutory Tax Rate/Provide Expensing
The top federal business tax rate could be lowered to 28 percent if all special provisions were eliminated (31 percent if accelerated depreciation is retained), Treasury’s study concluded, as noted in its summary. One option explored is to provide partial immediate writeoffs of depreciable assets. See the summary for more details.

3.       Specific Areas of the U.S. Current Business Tax System That Could Be Addressed, include:

a.       Multiple taxation of corporate profits;

b.       Tax bias favoring debt finance;

c.       Taxation of international income;

d.       Treatment of losses;

e.       Book-tax conformity; and

f.         Other areas to improve tax administration

Consistent with Solomon’s remarks, Treasury’s summary also states: “NOTE: The approaches presented in this study are not intended to be all inclusive and do not favor one approach over another.”

Book-tax conformity?

The discussion of the pros and cons of potentially conforming book and tax reporting – i.e. if the I.R.S. were to tax based on U.S. GAAP income under FASB standards. “A significant benefit of using book income as the tax base is that corporations would no longer have to keep a second set of books for tax purposes. Eliminating this requirement could save corporations substantial recordkeeping costs and decrease the role of tax legislation and the costs of enforcement,” says the study.

However, the study also notes some potential pitfalls of book-tax conformity. “It is unclear,” says the study, “whether the SEC is in a position to protect the tax base from eroding as effectively as it protects shareholders and creditors from overstated earnings.” The study adds, “Many corporations might respond to a book income tax base by seeking to decrease book income. Managers might find ways other than official income measures to communicate profitability to investors. If so, new costs might arise related to communicating free cash flow and other pro-forma earnings to analysts, market participants, and creditors. So while tax and book income might be formally conformed, in practice there could be two reporting regimes, one of which will effectively have no formal rules. Thus, it is possible that taxing book income could impair the competitiveness of the flagship financial reporting system that makes the U.S. capital market the strongest in the world,” says the study, “without leading to an increase in tax collections. Indeed, certain evidence from European countries suggests that conformity between book and tax income measures has reduced the reliability of book reporting in these countries.”

The study also notes challenges posed by a book-tax conformed system could arise from the increasing move to fair value accounting for financial reporting purposes.  “Fair value accounting seeks relevance even at the risk of some reliability and certainty,” says the study. “As such, fair value accounting is in stark contrast to tax accounting, which emphasizes certainty and so is based on historical values and the realization principle.”  Additionally, ”Valuation is a judgment call, and the SEC generally does not challenge a firm’s valuation if there is a reasonable basis for the value.” Therefore, the study says, “Using unchallenged financial accounting valuations may place government tax revenues at risk.”  Additionally, the study notes, “Financial accounting also requires more evidence and certainty for recognizing gain contingencies than for recognizing loss contingencies. This rule would tend to reduce tax collections. The accounting principles that require accruing losses sooner than gains also would permit corporate taxpayers to use management discretion to decrease the tax base.”

In conclusion, any move to conforming book and tax reporting would entail “significant difficulties and uncertainties,” says the study. For example, “A regulatory and enforcement system for nonpublic firms would need to be developed. Even more importantly, the relationship between FASB/SEC, the Congress, the Treasury Department/IRS, and the federal courts would have to be determined. “

The study also challenges others’ assertions that a book-tax conformed system would play a big role in resolving the tax gap. Although book income did exceed tax income in the late 1990s, that gap varies over time, and has been narrowing more recently, as shown in Chart 4.1 in the study.

Courts generally deny claimed tax benefits for transactions lacking in economic substance.  If the courts conclude that a transaction was entered into solely to derive tax benefits and did not result in a material change in the taxpayer's economic position independent of the tax benefits, those benefits will be denied.  Congress continues to consider codifying the economic substance doctrine by requiring taxpayers to demonstrate that (a) the transaction changes in a meaningful way (apart from federal income tax consequences) the taxpayer's economic position; (b) the taxpayer has a substantial non-tax purpose for entering into the transaction; and (c) the transaction is a reasonable means of accomplishing such purpose. 

The COT has weighed in with several objections to the current Congressional proposal.  To begin, the COT has urged Congress to eliminate the 40 percent, strict liability underpayment penalty.  It is simply too harsh given the ambiguous defnition Congress has crafted.  The COT has also urged Congress to eliminate the "reasonable means" test, arguing that it is far too subjective.  There are simply no guidelines on how to apply this requirement.  Finally, the COT has argued that the authority to assert the penalty should occur at the same level as the authority to settle the penalty.  The current proposal would permit IRS field agents to assert the penalty, but would only permit the IRS Commissioner to waive/settle the penalty. 

States and localities have widely inconsistent standards regarding the requirements for employees to file non-resident personal income tax returns and for employers to withhold income tax on employees who work outside their state of residence.  Employees who travel outside their state of residence for business purposes, even for a few days, are subject to onerous administrative burdens because in addition to filing federal and home state tax returns, they may also be legally required to file an income tax return in every state to which they have traveled.  Companies are required to incur extraordinary expenses in an attempt to comply with the non-resident withholding requirements. 

Rep. Hank Johnson (D-GA) and Rep. Chris Cannon (R-UT) introduced legislation on August 3 (H.R. 3359) to address this issue by limiting the authority of states to impose income taxes on nonresident employees.

• Maintain Current U.S. Tax Rules Relating to Foreign Business Income Until Fundamental Tax Reform

- Any proposal that would significantly change the current mitigating elements of our international tax rules (including deferral, active finance, check the box regulations and the foreign tax credit) should be carefully reviewed because these policies help American businesses compete with companies from other countries. 

- Current international tax rules have been enacted over time in an attempt to keep worldwide American companies on a nearly level playing field where both U.S. and foreign-owned companies pay the same local foreign country tax rate.

- Changing the current tax code on a piecemeal basis would put U.S. companies at a greater disadvantage relative to foreign competitors in foreign markets that operate under more flexible tax rules (e.g., territorial tax system.)  U.S. companies would owe current U.S. tax in addition to the local foreign country tax, even after a U.S foreign tax credit, because U.S. corporate tax rates are the second highest in the industrialized world. 

• Corporate Tax Rates

- A significant reduction in the corporate income tax rate is needed for the U.S. to remain competitive in the global marketplace and to promote continued U.S. economic growth and job creation.

- The U.S. corporate income tax rate is higher than the rates in all other OECD countries (save Japan, which is considering rate reductions.)

- The high U.S. tax rate creates a long-term competitive disadvantage for U.S. based businesses.  High corporate tax rates make domestic investment less attractive and create a disincentive for companies to perform high- profit activities in the U.S.

• Preserve Last-In, First Out (LIFO) Accounting

- The repeal of LIFO as a method of inventory accounting would have a detrimental effect on businesses in many different industries.

- LIFO repeal would cause businesses to restate the carrying value of their inventories, thus recording illusory profits on their books, when no economic activity has occurred that would justify recording any profits.

• Multi-year Extension of the Strengthened R&D Tax Credit

- Technological developments are an important component of economic growth, productivity and high paying jobs.

- Tax reform provides a historic opportunity to make permanent the research and development (R&D) tax credit.  It spurs innovation and economic growth and creates high-wage American jobs. 

- A permanent extension of the strengthened credit would enhance its incentive value by providing certainty that would permit companies to factor it into their long-range project planning.  Specifically, it is imperative that Congress acts to strengthen the simplified credit by extending and increasing the new alternative simplified credit rate from 14% to 20%.

• Repeal the Three Percent Tax Withholding Law That Applies to Government Contractors

- In 2005, the Tax Increase Prevention and Reconciliation Act was a vehicle for a revenue raising provision to mandate that federal, state, and local governments withhold 3% from payments for goods and services provided by all government contracts. This unprecedented withholding mandate would include Medicare payments, Farm payments, and some grants.  The legislation that was signed into law by President Bush on May 17, 2006, was initially set to become effective on January 1, 2011.  However, the American Recovery and Reinvestment Act, more commonly knows as the “Stimulus,” delayed the implementation for one year making the new effective date January 1, 2012.

- The withholding requirement will be very expensive to implement.  The Department of Defense (DoD) estimated the cost to implement this for the DoD alone at $17 billion (not counting the cost to contractors that would be passed through as part of overheard), as compared to a revenue score of $10B over 10 years for repeal. 

- This requirement represents a disproportionate response to the small portion of the “tax gap” attributable to government contractors, and policymakers should support repeal. 

Textron is a case concerning the review of the attorney-client, tax practioner-client, and work product privileges with regard to tax accrual workpapers.  It also discussed when those privileges could be waived or could be overcome. 

 Textron’s in-house counsel provided the accountants for purposes of certifying the financial statements a tax reserve summary spreadsheet that lists the uncertain issues identified by the tax advisors and, for each issue, the hazards of litigation percentage and assigned dollar values. 

The IRS issued an administrative summons seeking these tax accrual workpapers and supporting notes and memoranda written by in-house attorneys.  When Textron refused to comply, the government initiated a summons enforcement action in district court.  These tax accrual workpapers had been provided to Textron’s independent auditor in the context of its financial statement audit.  The government asserted that the workpapers were prepared in the ordinary course of business and, as such, were not privileged.

On August 29, 2007, the court held that the tax accrual workpapers were protected by the work product protection and thus denied enforcement of the summons. See United States v. Textron, Inc., No. 06-198T (D.R.I. Aug. 29, 2007).  The court found that the tax accrual workpapers were also protected by both the attorney-client privilege and tax practitioner privileges; however, the court considered and concluded that disclosure of the workpapers to the auditors waived these privileges.

 The decision offers much promise to corporate taxpayers concerned about the protection of confidential materials, but the contours of the opinion should be carefully evaluated.  Accordingly, the outcome of this case could determine whether a publicly-traded company can prepare, and share with its independent auditor, a candid evaluation of its exposure with respect to any pending or threatened claim without fear that this information will be available to litigation adversaries.

The IRS has appealed this case to the U.S. Court of Appeals for the First Circuit. FEI’s Tax Committee and Committee on Corporate Reporting filed an amicus curiae “friend of the court” brief on April 4th in support of the District Court’s decision.    

The Committees argue that the lower court decision appropriately balances the competing interests of the IRS, the investing public, and the fairness considerations that protect attorney work product.  This appropriate balancing should permit companies to share candid assessments of potential litigation claims with their outside auditors, for example, without fear that such information would be accessible by competitors or adversaries.

"Running the Numbers: Maximizing CPM for Small and Medium Size Enterprises," presented by Grant Thornton at FEI's CPM Conference, September 2008:

/eweb/upload/FEI/Grant%20Thornton%20Performance%20Management%20Sept%202008.pdf

Power Point Presentation on “Microsoft Biz Sharp” Peter Bull, Group Program Manager, Microsoft March 2006 CFIT meeting: http://www2.FinancialExecutives.org/rf/download/BizSharp_Overview.ppt

Power Point Presentation on “Integrated Performance Management” David Pleasance, Partner, Deloitte Consulting March 2006 CFIT meeting: http://www2.FinancialExecutives.org/rf/download/Integrated_Performance_Management.ppt

Power Point Presentation on "Financial Governance,"presented by John Van Decker, Research VP for Gartner, to CFIT at their June 2008 Meeting:

../../eweb/upload/FEI/Gartner%20Financial%20Governance%20June%202008.ppt 

Power Point Presentation on "Automated Information Controls," presented by Sumit Nijhawan, Group Leader for Product Development for Infogix, Inc. to CFIT at their September 2008 meeting:

../../eweb/upload/FEI/Automated%20Information%20Controls%20Sept%202008.ppt

"COSO Update" by Russ Gates of Dupage Consulting LLC, presented at September 2008 CFIT meeting:

../../eweb/upload/FEI/COSO%20Update%20Sept%202008.ppt

Power Point Presentation on “Microsoft Security: Progress and Strategy” Andre Mintz, Chief Security Strategist and Director of Trustworthy Microsoft Corporation March 2006 CFIT meeting: http://www2.FinancialExecutives.org/rf/download/Microsoft_Security_Strategy.ppt

"How XBRL Transformed Fujitsu's IT Platform," presented by Hanaoka Kazuhiko, Corporate VP, at the 18th XBRL International Conference in Washington, D.C., October 15, 2008:

../../eweb/upload/FEI/XBRL%20at%20Fujitsu%20Oct%202008.ppt

XBRL International Update by Tony Fragnito, CEO, presented at March 2008 CFIT Meeting:

../../eweb/upload/FEI/XBRL%20International%20March%2013%202008.ppt

XBRL US Update by Mark Bolgiano, CEO, presented at March 2008 CFIT Meeting::

../../eweb/upload/FEI/XBRL%20US%20Progress%20Report%20March%202008.ppt

XBRL Reference Guide: Guidance for the Application and Conversion Capabilities of XBRL:
DynamicPage.aspx?site=_fei&webcode=ferf_pub_detail&prd_key=8cae666e-6bba-40f8-9090-70f5621cba49

Power Point Presentation on “XBRL and Assurance Services”
D. Keith Wilson, Associate Chief Auditor
Public Company Accounting Oversight Board (PCAOB)
December 2005 CFIT meeting:
http://www2.FinancialExecutives.org/rf/download/wilson_12_9_05.ppt

Power Point Presentation on “XBRL Data: Real Life Solutions”
Greg Adams, CFO and COO, EDGAR Online, Inc.
December 2005 CFIT meeting:
http://www.FinancialExecutives.org/download/CFRI_XBRL_Adams_11_05.ppt

Power Point Presentation on “XBRL As Interactive Financial Data”
Taylor Hawes, Microsoft Corporation, and Greg Adams, EDGAR Online, Inc.
December 2005 CCR meeting:
http://www2.FinancialExecutives.orghttp://www2.FinancialExecutives.org/rf/download/Hawes_12_9_2005.ppt

Power Point Presentation on “SEC’s Voluntary Filing Program”
Taylor Hawes, Controller – Global Platforms & Operations
Microsoft Corporation
Current Financial Reporting Issues Conference, November 2005:
http://www.FinancialExecutives.org/download/CFRI_XBRL_Hawes_11_05.ppt

http://www2.FinancialExecutives.org/rf/download/pwc_12_8_05.ppt