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Elizabeth Stevens and Peter Barnes Speak to Law360 on Financial Statements

August 14, 2020, Law360 Tax Authority

Recent U.S. Treasury Department regulations that ask taxpayers to use financial data to measure offshore profits are yet another example of a growing trend toward blurring the once-bright line between tax returns and accounting statements.

 . . .

"We're trying to evaluate whether [a controlled foreign corporation's] income has been taxed at a 'high' foreign rate. And to do that you'd want to try to capture, as best as you can, the foreign tax base," said Elizabeth Stevens of Caplin & Drysdale. "So applying U.S. tax accounting principles doesn't necessarily make sense there. You'd want to look at something that gets you closer to the foreign tax accounting principles."

. . .

"People think your financial accounting is a fixed set of books so that if you do yours and I do mine and we both come up with 100, then that's exactly right," said Peter Barnes, a professor of tax at the Duke University School of Law and a former senior tax counsel for General Electric Co.[Mr. Barnes is also Of Counsel to Caplin & Drysdale.] "Financial accounting standards around the world are not the same."

. . .

Stevens noted that the point of tax accounting rules is to "match the timing of items of income and deductions and really try to capture economic income in a given year." Financial accounting is doing something different, she said.

"It's not just to reflect the future state of the company but to help investors evaluate its prospects going forward," Stevens said. "So there are differences in the timing of when items are recognized. We have two sets of standards that are trying to do two slightly different things."

While book income may seem like a practical way to coordinate tax rules, Barnes warned that the nuances may be hidden to those outside the financial accounting world.

"Clearly there are a lot of tax people who understand financial accounting. But there are a lot of tax people who don't," he said. "People think, just take your financial reporting as if it's some dropped-from-the-heavens number. It's not. There are different rules in different countries and a lot of judgments that have to be made."

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