Article re SEC Focus on Reinvestment of Offshore Earnings

By Cydney Posner

The following article from Compliance Week discusses the SEC's efforts to expand companies' descriptions regarding reinvestment of offshore earnings abroad (which can allow companies to avoid U.S. taxes on that income). A number of large companies have received SEC comments (republished in the article) on their filings over the past few months related to their assertions that foreign earnings will remain offshore to be reinvested overseas and will not be repatriated into the U.S. to fund domestic operations. These companies were required to expand their disclosures to address U.S. and foreign liquidity needs, as well as the tax effect of repatriation of cash earned overseas for use in U.S. operations if that became necessary:

"Mark Shannon, an associate chief accountant in the SEC's Division of Corporation Finance, said at the recent Compliance Week 2011 conference that the staff is scouring all assertions about liquidity to assure companies are telling consistent stories about offshore versus domestic liquidity and the potential tax effect if any of those offshore earnings were to be repatriated (brought into the United States) to fund U.S. operations. Under U.S. tax rules, companies do not pay tax on foreign earnings until they are repatriated; if they are never repatriated, they are never taxed in the United States, which is notorious for slapping hefty tax rates on corporate earnings.

" ‘Lately we've been asking a lot of questions about the impact of repatriation on liquidity,' Shannon said. ‘We've seen a number of companies with very low effective tax rates for their non-U.S. operations.' The SEC staff is looking for quantified disclosures describing the total amount of cash and short-term investments that are held in subsidiaries where companies assert that those amounts are permanently or indefinitely reinvested. The staff also is asking companies to quantify amounts attributable to countries with very low tax rates.

"The goal is to give investors more information about where companies are holding cash and what tax and liquidity implications those holdings carry, Shannon said, especially when companies hold cash in countries with fragile political or financial issues. ‘We've gotten a lot of revised disclosures,' as a result of the inquiries, Shannon said."

In addition, the article reports that the SEC is also examining whether companies have a good basis for avoiding a tax liability. Under ASC Topic 740, Income Taxes, "companies are required to book a deferred tax liability when they have offshore earnings that haven't been brought into the United States but will be at some point in the future. They can avoid booking that liability, however, if they assert that those foreign earnings are reinvested indefinitely in those foreign operations, with no need or likelihood of eventually repatriating them." In that regard, the SEC wants to make sure that companies are updating their disclosures, not just copying last year's language without reconsideration of current events.

According to the article, the SEC is also looking at whether companies are properly carrying forward deferred tax assets: "the SEC is looking for evidence that companies are operating under the same assumptions when carrying deferred tax assets as they are when, for example, making forecasts with analysts or booking asset impairments." The issue is not just that disclosures should be "in sync, but that the facts are in sync."

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.