For chief tax officers (CTOs), there are everyday worries, and then there are worries that keep them up at night—BEPS, changing compliance requirements, and increasing demands on their time, to name just a few. Tax Executive convened a roundtable to discuss in more detail the changing role of CTOs and what does, in fact, keep them up at night. Eric Johnson, vice president of tax at Ross Stores Inc.; Jim Kennedy, senior vice president and chief tax officer of OppenheimerFunds; and Judy Zelisko, vice president of tax and chief tax officer at Brunswick Corporation, participated in the discussion moderated by Senior Editor Michael Levin-Epstein.
Michael Levin-Epstein: So, what does keep you up at night?
Eric Johnson: Probably the thing that keeps me most awake at night is “what do I not know?” What’s happening in the business that I have not yet become aware of? What’s happening in the tax climate or the tax world that I might not have heard about? What’s potentially happening in my organization that I might not know about? So, I really think that obviously there are a lot of answers for what keeps a CTO up at night, but for me, it comes down to, what are the things that are happening that I might not know about? Then, the reaction is, OK, how do I ensure, either through myself or my staff, that we are properly and completely or accurately plugged in wherever we need to be? Are we as close to the business as we can get? Are we as close to the legislation in the federal, state, and non-U.S. jurisdictions that we care about? I think the follow-on to that is the second piece: if I’m doing my job, what’s keeping me up at night is whatever is keeping my CFO up at night and, ultimately, my CEO. So, being sure that I know where their heads are, what their concerns are, so that I can be worried about those things, too.
Jim Kennedy: I would certainly concur with the points that Eric made. I think his comments are spot-on. As far as my own situation, at this point in time there’s nothing that’s really causing me a loss of sleep, if you will. We’re just trying to figure out the best ways to handle things. I think I’m more concerned with what’s developing. As Eric had mentioned, there are things that are internal and external to the company. Internally, we’re always looking to see if we can have the process improvements and increase efficiencies and increase productivity from a P&L perspective. Obviously, people issues, trying to make sure that we have the cultural movements understood and the generational issues addressed as well as having the technical expertise in the workforce for the way business is evolving. Those are important. But I’d say the real concerns that I have are external. When you think about externalities, our industry has faced a number of pressures, being in financial services. There have been a number of information reporting requirements that have been placed on our industry that are quite onerous. The ability to resource these things adequately and wonder about what’s coming down next can cause a little bit of concern.
But more so than anything else, I think I’m concerned about what’s going on out in the governments that are looking at and implementing a variety of changes which could add to the risk environment to all of us. By the risk environment, I’m talking about retroactivity and the risk of double taxation. I think it’s manifesting itself in the international and the state realms. I think you see it in a variety of places. We’ve seen the headlines recently with the Apple state aid case by the EU. I think the OECD BEPS initiative from the last couple of years is certainly going to increase the risk of double taxation. The potential for retroactivity is something that we are concerned about in all of those areas. The same thing goes domestically on the state tax front. There’s a number of MTC [Multistate Tax Commission] cases that we’ve been involved with on the TEI SALT committee. Some of the committee folks, Jamie Fenwick, Margie Condon-Brown, and Vic Ledesma of Kimberly-Clark, as well as Pilar Mata of TEI, have done a tremendous job with the briefs on those cases. It’s very important because this whole, unbridled discretion that we see in retroactivity is just something that really inhibits your ability to plan. We’re just facing a very difficult environment if tax authorities are going to continue to go in that direction.
Judy Zelisko: With our company’s global footprint, I am always thinking, are we on top of legislative changes, whether in the United States or abroad? What are those law changes or new tax regulations, and how are we going to communicate these changes to senior management and to the business units, and, of equal importance, how are we going to implement these changes in a cost-efficient and effective manner? Whether it is the tangible property regulations, the BEPS proposals and an individual country’s implementing legislation, or the potential forthcoming Section 385 regulations, how are we going to synthesize these complex rules so our business partners understand the “why” and the “what” of these changes in the law? Furthermore, how can we be reasonable and practical in our implementation to ensure that we are always mindful of the workload on the tax department staff or the operating units? And, to step back, it’s important to keep the CFO and the CEO apprised of these law and regulatory changes, so that they have a heads-up of what is happening on the legislative front. My goal and objective are to ensure that the CFO, CEO, and business management leaders are not reading about a legislative, tax accounting, or tax regulatory change for the first time in the Wall Street Journal. They hopefully will have heard about it first from me or my team.
In addition, it is important that I put these legislative changes in context, which is what I have referred to as the “why” of the legislative or regulatory change. We might not like or agree with the change, but understanding the background and its context and implications provides perspective to those who are not knee-deep in the tax world.
Lastly, I am focused on the talent; how do I provide an environment which attracts and retains talent and keeps them motivated and engaged?
Johnson: I would layer onto that, throwing my tax accounting/financial reporting hat on, the volume of change in the tax area by the FASB in the last year, and their continued focus and their agenda. The FASB [Financial Accounting Standards Board] also has proposed multiple changes. One of the reasons I’m a little stressed out today is because we still don’t have a draft for our comment letter on ASC 740 disclosures. So, just another example of what seems to be a ramp-up in the activity around tax change, whether it’s non-U.S. governments, U.S. government, states, and the FASB and accounting organizations.
Kennedy: Eric, that’s a good point, talking about the financial reporting. You have the financial reporting implications or the P&L hits from things like state aid or retroactivity. How are you supposed to plan if you’ve gone ahead and you’ve gotten an advance pricing agreement or a qualified cost-sharing agreement and it’s been in place for a number of years, and then all of a sudden somebody comes and just sweeps that away? There’s a real P&L hit risk that you have to deal with.
Johnson: That’s right. Apple is a perfect example. I was just on a call this morning, and people are sort of reeling—there’s some indications, and I know Treasury is worried about what Apple’s going to do. Are they somehow going to bring back a supercharged foreign tax credit? But the people on this call were saying, “I have no idea how I’m going to account for this. What is this?” Other companies are looking at it and saying, “Huh. I never thought about whether I needed to book a reserve for existing law. It’s in the rules. I’m following the rules. I shouldn’t need a reserve. But now I’ve got this concern that some country could come in and retroactively change that rule, and do I need to reserve for that?” So, yeah, that’s just one of many examples, and you gave a few; that’s certainly a place where I spent a lot of time today.
“How are you supposed to plan if you’ve gone ahead and you’ve gotten an advance pricing agreement or a qualified cost-sharing agreement and it’s been in place for a number of years, and then all of a sudden somebody comes and just sweeps that away? There’s a real P&L hit risk that you have to deal with.” —Jim Kennedy
Zelisko: Retroactivity is anathema to how a business operates. Businesses want certainty. After all, we are a nation of laws. While there may be differences in the interpretation or application of a law, which is why we have an administrative and judicial court system, to resolve such differences, but for a government commission or a particular country to—after the fact—retroactively rescind a ruling that was granted to a taxpayer over ten years ago is egregious. It turns certainty and tax policy upside down. How can a company not rely on a ruling issued by a government which is democratic? This cannot be. We have trust in democratic governments and, when that trust is compromised, we have uncertainty.
Kennedy: Looking for a silver lining in this whole area, the Apple case you talk about, people are starting to speculate maybe the silver lining is that this finally has all constituencies, including the U.S. Treasury, focused, so perhaps it’ll enhance the opportunities for tax reform. That’s really where I think TEI has the opportunity to come in and to start taking its advocacy to another level. Start helping the membership by representing all of our interests, not just a particular industry. We can promote economic growth for the benefit of the United States and, commensurately, globally, by getting behind a tax reform initiative that would foster economic growth. And, I think, speaking of advocacy, we talked about OECD BEPS, we think that we’re going to be facing this risk of double taxation. We should really make a long-term TEI initiative to be working with the membership and to gather information so that as we start to see this, we can work with folks like the U.S. Treasury, or other governments, to point [to] the fact that, “Hey, listen, this is the impact of what you put in place” and try to deliver some benefits for the members that way as well.
Johnson: It’s funny. As I was thinking about this call, one of the things I was thinking about, not necessarily what keeps me up, but what’s my role, and I’ll liken it to, how quickly do you move through the five stages of grief? In the Apple case it’s, how quickly can we as CTOs move from “oh, crap” to “here’s a way that we can leverage this experience into something that’s good for the entire constituency”? Your advocacy is exactly right. Jim, you and I both sat in a room with Treasury, what, in February, and tried to tell them, “Hey, this is a political issue, and Treasury, you need to weigh in and get in front of this,” and whether they were just too busy or didn’t want to because it is a political issue, they didn’t, and here we are with Apple. And so, now we have an opportunity to go back to them and say, “See, we told you so. Now here are some things where we think you can help.”
Kennedy: There are lots of due process concerns here. We’ve talked a lot about the international, but on the state front, these cases with retroactivity, they’ve been going on for some time. The Hambleton and Dotford cases, and now the IBM case and the Kimberly-Clark cases, with the Multistate Tax Compact you end up with these legislatures overturning court cases or established law and just going way too far back under what the permissible standard is.
Johnson: We’re actively litigating cases based on retroactivity that are just not right.
Levin-Epstein: When did retroactivity gain so much traction as an important issue?
Kennedy: I would say it’s less than ten years on the state tax front. I’m sure that my state tax colleagues will correct me if I’m mistaken, but certainly in the last half dozen years we’ve gotten a lot of state court decisions upholding longer periods of retroactivity. The standard of how far tax authorities were going back just got more egregious.
“As I said, what keeps me up at night is what I don’t know. By being at meetings where people are first talking about a business idea, or a new market location, or a new distribution center, I can be far more well-informed and ahead of the game.” —Eric Johnson
Johnson: Right. I would have said that you had some early adopters, sort of five, six, maybe if you think about, like, North Carolina might be an example, or New Jersey, going back a little further. But what happened was the snowball started rolling down the hill, and what we’ve seen, I would say even in just the last eighteen months, is now the snowball is getting further down the hill and collecting a lot more snow, more and more states jumping in. And so, the pace or the growth is more exponential when you look at people pursuing market-based sourcing and combination or even the odd ones—Oregon deciding their own list of haven countries. I think that to sort of try and answer your question, you could go back maybe ten years, probably a little less than that, but what I have really noticed, or when it really became a concern to me, was in the last two years to eighteen months when it seemed like everyone decided, “Hey, we should all jump on this bandwagon.”
Levin-Epstein: Are the states getting together on this, or is it happening more organically?
Johnson: I don’t think they are necessarily colluding together. But certainly they are noticing what’s happening and saying, “Here’s an opportunity. We need money. How can we leverage this?” We’re talking primarily about separate-filing states. And to your point, Jim, when I get this back I’m going to have my state person read it, because she’s probably going to say, “What are you talking about? This has been going on for thirty years.” But, at least for me, it seems that the pace has quickened and more and more states are looking for alternatives. Gross receipts is another one. We’ve got Oregon, Texas, Nevada all considering options. A bunch of local jurisdictions are trying to throw in gross receipts–type taxes, so it’s not just, again, both retroactive and prospective, but just the volume to me of states looking for change is something I’m spending more and more time trying to understand and influence.
Zelisko: For states like Oregon and Montana to come up with their tax haven or blacklist of countries is an approach which on its face would seem to encroach on the federal government’s right and authority over foreign affairs—in other words, the foreign affairs doctrine. The foreign affairs doctrine preempts state laws that conflict with an express foreign policy or intrude on the foreign affairs of the United States, which is reserved for the federal government to exclusively administer. I harken back to my constitutional law class in law school and, if I recall correctly, state law that intrudes on a federal government’s foreign affairs power is preempted. I have not studied the state tax statutes to see if they pass muster under the foreign affairs doctrine, but it certainly makes sense to consider this standard when states seem to be encroaching on rights reserved for the federal government. All of this is another example of the complexity and breadth of issues CTOs need to be aware of and informed about, and be able to access and explain to our bosses. The relevance of the foreign affairs doctrine and state tax legislation—that is an intersection which raises constitutional concerns on issues we need to understand. While states have their right to legislate taxes within their borders, to migrate to the reaches of designating foreign countries as having tax policies which they deem as falling below some arbitrary standard, or some norm of acceptable tax policy, seems to me to go beyond their jurisdictional bounds. Are states with these types of tax haven legislation returning to some form of mandatory worldwide combination, which was abandoned in the 1980s under pressure from the federal government and foreign countries? A question, a trend we have to be mindful of. Sorry, I am on my soapbox, but understanding tax policy is a cornerstone of how CTOs add value to their businesses. It helps explain these tax changes and provides the basis for future arguments against such actions by the states.
Levin-Epstein: If you were advising the advocacy people at TEI about the Apple case, what would you say?
Kennedy: I’m not certain that there’s any advice to people from TEI. At the Executive Committee level that we have for the Board within TEI, we comment on a variety of initiatives, whether they’re statutory proposals, regulatory changes, court cases with amicus briefs. This is across the board in all jurisdictions and all different types of tax matters. So, presumably, the Executive Committee will decide whether to comment. Tax Notes is full in the last few weeks of what the analysis is from a number of different perspectives. But would we be saying anything different than what Treasury Secretary [Jack] Lew has said, or any of the technical commenters? I’m not sure that we say anything different, but I think the concern and the risk and the implications are along the lines of what we’ve talked about. The financial reporting risk is something that is there, and the inability to reliably structure your business operations and have the ability to anticipate what your after-tax income is going to be. That goes across all industries, all business lines. It’s a matter of great concern. And, of course, I’m sure the Executive Committee will consider whether or not to comment on that.
Zelisko: Given TEI’s membership of over 7,000 individuals representing more than 3,000 diverse companies, it is a challenge for TEI to advocate on a particular taxpayer’s situation. But TEI can speak and inform taxing authorities with thoughtful, reasoned comments regarding good tax administration, which is at the center of the retroactive nature of the European Commission’s findings, although they couched it in terms of state aid. TEI’s broad membership certainly gives it standing to comment about how the European Commission’s action impacts the broader tax community. Whether TEI will comment will be determined by the committee chairs and the Executive Committee of the Institute. We have a process to vet these issues. From my standpoint, retroactive legislation is harmful to companies and presents significant difficulties for companies in how to plan and operate.
Levin-Epstein: How does communication work in your organization among yourself, the CFO, and the CEO?
Kennedy: I have a scheduled meeting with my boss, the CFO, every week, and in addition to that we talk several times a week on other matters anyway, and periodically we do sit down with the CEO and talk about things that rise to a level of significance. Beyond that, being an asset management firm, I not only have responsibility with respect to the corporate tax matters for the company and its board, but also to brief the fund boards on fund tax developments as well, and that happens periodically. So, the combination of in-person, phone, email, presentations, the whole gamut, is used. Obviously leaders today, whether they’re CFOs or CEOs or boards, know that they must have good lines of communication with their chief tax officers or their tax functions.
Zelisko: I meet with the CFO and CEO for an hour or more each quarter to review what I call the “tax data update.” We discuss the quarterly tax provision, cash tax rate, and tax audits going on at the federal, state, and local levels, as well as specific foreign tax audits. In these meetings, we also discuss tax developments. So, for example, I presented a tutorial on the BEPS proposals when they first surfaced, as well as the more recently proposed Section 385 regulations. I also think it is helpful to review the structuring of an acquisition, so executives understand and appreciate why we have the legal entity structure that we have. Our CEO, who is from an engineering background, is engaged and has indicated that he finds our quarterly meetings informative and helpful. CEOs sit on other boards, and I want my CEO to be informed on taxes.
The CEO has monthly corporate staff meetings, which I attend. At these meetings, we go around the table, and I update the corporate leadership team on significant tax developments on the legislative front, and with regard to the company’s tax position. Our CFO has similar monthly staff meetings where the discussion around the table is more granular. I also meet with the CFO as needed. I follow the mantra “no surprises,” so I keep him posted on any “new” items or issues by phone or email or with a drop-in meeting to his office. We are not hierarchical here at Brunswick, so the senior management team is accessible and has an open-door policy. When I was working on the net operating loss carryback legislation during the recent downturn, I would send out a late Friday email weekly to the CEO, CFO, and the rest of the senior management team on the progress of our lobbying and legislative effort and what the cosponsor legislative count was. The message is that we need to keep our bosses and the business unit leaders informed so there are no surprises regarding the impact of taxes to the business.
“While we are expected to be available for that emergency situation, people here at Brunswick are pretty respectful of an individual’s time outside the normal workday. There are exceptions, of course; we have been in acquisition mode for the last couple of years, which means that the deal drives your timetable and availability.” —Judy Zelisko
Levin-Epstein: Are companies increasingly expecting CTOs to be “on call”?
Johnson: I would say that that hasn’t changed at least since I’ve been an executive, whether a CTO-level or a number-two-level person. There has always been that expectation, that especially in a multinational organization, something can come up at any hour of the day, and there is an expectation that you be available. I would echo that my communication with my boss, who is also a CFO, is very similar. We have weekly meetings. We email regularly. I sit next door to him, and we talk all the time. I probably talk to him about ten times a day. And to me, that’s really valuable. He values the email, texting communication far less, but certainly, if it’s seven-thirty at night and I’m at my son’s lacrosse game, it’s not uncommon to get a text from my staff that says, “Hey, I sent you an email, be sure you look at it.” Or an email from my boss with an urgent question he wants answered in the morning. I think that’s fairly common.
I wanted to answer a question you didn’t ask, which is not necessarily upward, but outward, and that is the importance of developing those communication lines not just with your peers in finance but with the business as well. One of the things I try to do is—it takes time, because a lot of times they don’t want to let a “tax guy” in the room—but I bet I spend probably an hour a week at least in meetings where I have no idea what the topic will be or if I’m going to add any value at all. In fact, most of the time I suspect I will not add value. But by being there, and spending the time to build that communication bridge, and keeping my mouth shut when I don’t know what’s happening, speaking up when I think of something, you begin to broaden your sphere of influence or just your information intake. As I said, what keeps me up at night is what I don’t know. By being at meetings where people are first talking about a business idea, or a new market location, or a new distribution center, I can be far more well-informed and ahead of the game as opposed to what unfortunately so often happens in tax, and that is reacting to something the business just did.
Zelisko: While we are expected to be available for that emergency situation, people here at Brunswick are pretty respectful of an individual’s time outside the normal workday. There are exceptions, of course; we have been in acquisition mode for the last couple of years, which means that the deal drives your timetable and availability. It is expected that you will be available at odd hours if the deal is in Europe or Asia because of the time zones, so due diligence calls or status calls with our outside advisors at five a.m. or eleven p.m. or on a weekend—depending on the time zone of the seller—is what you have to do to move the transaction forward. But when you see the executive team also working weekends and odd hours given a particular transaction, it sets the example for others. And there always seems to be a tax item or issue in a deal—just the nature of how tax impacts many aspects of a transaction. Tax is part of the M&A team, and to participate you need to be available. A sense of kinship that you are “all in” develops and spills over to the next transaction. Being available demonstrates your commitment to the team and to the company’s overall goals and strategic vision. And being visible by your presence and comments demonstrates tax’s collaboration with the M&A team—it is truly a team effort. Generally, the culture of your company determines whether it is a 24/7 atmosphere, or one with more balance that rises to an “all hands on deck” when necessary. The tone is set by the CEO and CFO.
Kennedy: When it comes to business developments and communication, it’s rare that an external matter would rise to the level of a midnight phone call to your CFO or your CEO, but there are business developments that go on all the time and simply at all hours. That’s the way it has been for some time, that’s just the way it is. And I think your other point about the business-line communication is absolutely essential. You really can’t be a value-added tax function unless you are integrated with the business. So, you have to understand the operations, you have to be involved with the development of strategy. You have to have the relationship and the lines of communication and be perceived within your company’s culture as value-added to be able to truly do your job.