As global vice chair for tax at Ernst & Young, Kate Barton oversees the entirety of the accounting giant’s tax strategy and operations. Currently she’s monitoring developments around the Build Back Better bill, which contains key tax provisions but faces an uncertain fate in the U.S. Senate, as well as the ongoing rewrite of international tax rules and continued business challenges for EY’s clients from Covid-19.
Barton also is focused on what she predicts will be efforts in many countries to alter tax codes to address inequality made worse because of the pandemic while promoting greater sustainability, and she relayed concerns of business executives about taxpayer privacy in the aftermath of high-profile document leaks. Checkpoint recently spoke to Barton, who has an LLM from Boston University School of Law, about these and other priorities for her EY tax team and its clientele.
Thomson Reuters: Tax observers, among others, are scrambling to make sense of where the Build Back Better legislation is going. What’s your perspective?
Kate Barton: We’re reeling from the news that [Majority Leader] Chuck Schumer came out and said [Senate Democrats] are not going to put it to any vote before the new year. That’s a big, interesting development in terms of whether or not this goes forward. Whether it does or not will be really interesting to watch.
TR: What do you expect Congress’s failure to pass the BBB this year will mean for certain tax measures that the bill would have addressed? There are a number of so-called extenders for credits on clean energy and higher income taxes for certain payers that are expiring December 31. What will not having BBB in 2021 mean for the legislative picture?
KB: In the U.S., it gets really hard. At least as it relates to any provisions in tax, Build Back Better is written in a way so that there aren’t huge ramifications of raising taxes for people who make less than $400,000 [annually]. The average voter doesn’t want the tax code touched in the year heading into midterm elections in Congress. There’s a really narrow window here in January to get something like this done. It’s what the Democrats ran for office on—they were going to do a lot of this, call it “social infrastructure.” For the Democratic Party, it’s a real concern that they haven’t been able to get things done here as committed or as promised. And so their window, I think, is pretty narrow in January to do that. And then, before you know it, everybody will be going home to run their campaigns.
TR: What do you consider to be the policy implications for President Joe Biden’s administration as a consequence of the agreement on reforming global tax rules reached in October through the Organization for Economic Cooperation and Development?
KB: I wouldn’t underestimate the connection between Build Back Better and the OECD agreement. Joe Biden and [Treasury Secretary] Janet Yellen did promise, on the global stage, that they would be able to deliver legislation compliant with Pillar Two on the minimum tax [under the OECD-led deal among 140-plus jurisdictions]. There are some elements in the U.S. bill that would bring the GILTI [global intangible low-taxed income] rate of tax up to the 15% [minimum], after the corporate rate has been 21%. And then there are [questions about] deductions, and they’re trying to fix that. They were also trying to introduce this minimum tax of 15% on book income [of corporations]. There is an element of this bill that’s to fund domestic infrastructure, but there are also compliance issues with the commitments that Biden and Yellen made, too. Given this two-pillar agreement, we’re expecting next that there will be the big release from the OECD [on details fleshing out the October agreement]. Next will be the European Union, which, with its 27 member states, will likely come up with a directive right away to do their part to implement the minimum tax. However, I think a lot of countries might say, ‘My goodness, if the U.S. isn’t going to do it, why should we? Should we do this right now? Is this the right time?’
Is raising taxes in the middle of a pandemic, and the financial challenges that’s creating for companies, for employers, the right thing to do? Every country is revenue-starved, they’re desperate for tax dollars. That said, companies are the grand employers, and the science and the economics folks show us that, over time, if you raise taxes, usually it’s the wage earner that ultimately suffers. You just don’t have as much money to pay your employees.
TR: With the BBB being, at the very least, delayed, what does it mean for the OECD’s internal deadline of 2023 for having each jurisdiction that has signed on to the tax reform agenda to pass conforming legislation? Some U.S. tax practitioners have said that timeframe is unrealistic.
KB: It really doesn’t bode well because in the largest, most powerful country in the world, the president’s struggling to get his part of the OECD agreement done. That’s not great. We’re just going to have to watch this. It’s delayed for right now. We can’t say it’s over. I mean, they still have a window here, I think, in January. But it’ll be interesting to see how quickly the European Union acts. Will they hold and wait to see if Biden can do it in the U.S. and then quickly follow suit?
TR: Pillar Two has a provision saying the OECD’s agreed global minimum tax in any jurisdiction should be based on financial statement, or book, income, which has been criticized by some U.S. practitioners. What do you make of the provision?
KB: It’s hard because book income uses different depreciation tables than taxable income. For taxable income in the U.S., you might have bonus depreciation in book income, and [other jurisdictions] don’t have a concept of bonus depreciation, so you can have some really odd anomalies. The Build Back Better bill offers really a pretty complicated alternative minimum tax that companies are going to be subject to, and it’s very different from what we’ve seen in the past. And we don’t really see a version of this globally, either, though I know a lot of countries are looking at it and trying to mirror it. That’s what happens: The U.S. will come up with a new concept and then you’ll see it in several countries quickly. So it’s being discussed around the world, I can tell you, in a lot of countries and jurisdictions.
TR: Where do you stand on the question of whether, and to what degree, bilateral treaties involving the U.S. will have to be substantially altered in order to make U.S. tax law comply with the OECD agreement?
KB: That is a really tough one. It’s more of a legal question rather than a tax one. Even within my own national tax group, there are different thoughts on whether or not you can do this without amending treaties. I know the U.S. government thinks that you can.
TR: Statements from administration officials seem to indicate they’re pinning their hopes on the multilateral instrument at the OECD being the means with which to amend treaties in a streamlined fashion.
KB: I would have thought you’d have to change bilateral treaties, and that’s obviously not coming up. We haven’t gotten a treaty through the U.S. Congress in years. That’s a 60-vote process; I just don’t think that’s going to happen.
TR: Last year, EY conducted a survey among clients that focused on the Internal Revenue Service and its enforcement priorities. What’s the sense you’re getting from clients or fellow practitioners about where things stand now in terms of IRS enforcement, funding for which is tied up in the in the BBB?
KB: Our clients want to make sure that we have an efficient Internal Revenue Service. There is a feeling that we, for a developed country, could be doing more with technology and ensuring that, given the sophistication of the United States, we don’t have a black market, if you will, or a shadow market. We have one of the highest voluntary tax compliance systems in the world, but yet there’s still this feeling that people aren’t paying their full tax amount, which is bothersome. One of the big issues right now that folks are quite concerned about with the IRS is the data leaks and the fact that there hasn’t been any commentary by the IRS. I’ll tell you, that really is upsetting a lot of businesspeople across the United States. I’m sure you’ve seen the letters from [Republican] senators that have gone to the [IRS] commissioner. The fact that we don’t know if it’s because of a cyberattack or if it’s because of a disgruntled employee, it makes trust in the government decrease. It’s always been thought that your tax return was sort of private, to you and the government, and now people’s information is being disclosed.
TR: You’re referring to the leak of tax return data of rich individuals that occurred starting in June?
KB: Yes, this ProPublica reporting, where somehow they seem to have access to high-net-worth individuals’ tax data. There has been a series of articles that are coming out, that just normally wouldn’t be privy to that type of information unless it’s being leaked. I don’t know where it’s coming from, but it’s quite controversial. And it has a ripple effect, with [clients] saying, ‘What is the Internal Revenue Service going to do with additional funding?’ They should make sure that their data, people’s private data, is secure, and that it’s not leaked inappropriately.
TR: Do you have a sense of whether privacy issues may be addressed at all in the in the BBB?
KB: I think the idea is to fund the Internal Revenue Service so they can have better technology. But I guess we’re all speculating, and I don’t know what the root cause of this issue is yet, whether it’s because of a cyberattack or not. We’ll have to just see how this unfolds.
TR: What else are you keeping tabs on regarding either U.S. or international tax policy?
KB: I think tax codes around the world are going to be used to deal with the social inequities that have only been exacerbated because of Covid. The rich got richer; the poor got poorer. You are going to see tax codes be used to redistribute that wealth. I also think we’re going to see tax codes serve as either carrots or sticks, incentives or disincentives, on the sustainability front. What’s in the Build Back Better bill that a lot of folks haven’t really focused on are some new, environmentally friendly credits. So it’s more of an incentive approach in the U.S.: If you do certain things, you might be able to qualify for new green credits. So that’s something to look at. And so, I think you’re going to see that trend be global, and more and more countries take a look at that type of pending legislation.
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