Subterranean homesick blues: Changing winds of corporate tax planning

In 2016, the U.S. Department of the Treasury announced plans to remove President Andrew Jackson from the face of the $20 bill. A reexamination of Jackson’s history as a slave owner and proponent of the Indian Removal Act led some to question whether he was the right person to appear on the front of the $20 note. Corporate taxpayers these days are also feeling the ground shift as notions of what comprises a proper taxpaying citizen are changing.

Today’s senior tax advisors, including tax directors at large companies, were raised on Judge Learned Hand’s quote from Gregory V. Helvering: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” As a result, the distinction between successful yet “edgy” tax planning and tax evasion often came down to a judicial decision.

There is an emerging trend, though, that suggests large corporations are required to pay some tax to be considered good corporate citizens. How much tax is debatable, but it seems clear that tax strategies that result in untaxed, “stateless” income are the hallmark of poor corporate citizenship. These changing social norms are influencing the tax strategies of large public corporations — witness GE’s sell-off of its credit arm, which was the focal point of much of its tax planning.

Public sentiment also influences the political class. Both the House Republican and Trump tax plans call for eliminating the deferral of foreign corporate earnings from U.S. tax regulations. This tax deferral has been a feature of the Internal Revenue Code since its creation in 1918. Changing public views may ultimately doom this nearly century-old principle of tax law.

Learned Hand’s influence hasn’t yet been completely purged, though. Tax planning based on and aligned with business strategies and based in countries that simply have lower tax rates will continue to stand. Tax advisors and corporate tax directors hoping for a continuation of aggressive tax planning without much business substance should consider Bob Dylan’s words: “You don’t need a weatherman to know which way the wind blows.”