News Archives - Page 11 of 56

U.S. House Passes Budget Resolution

Posted on September 2021September 2021 by info

The U.S. House of Representatives on August 24 voted 220-212 in favor of a $3.5 trillion budget resolution that allows congressional committees to draft legislation that would expand Medicare, invest in education, and allocate funds to combating climate change, as well as enact other spending priorities of the Biden administration. The legislation is also likely to include tax increases to pay for the spending package.

The Senate has already passed the budget resolution, which was adopted on a 50-49 party-line vote on August 11. The resolution does not require President Biden’s signature; rather, it unlocks the reconciliation process so that Democrats can write tax-and-spending legislation that can be passed without Republican cooperation.

The legislative process now turns to the congressional committees that will transform the budget blueprint into a detailed package of measures to enact President Biden’s agenda. For example, Senate Finance Committee Chair Ron Wyden (D-Ore.) and fellow Democrats Sherrod Brown (D-Ohio) and Mark Warner (D-Va) released today a draft of a proposed overhaul of the U.S. international tax regime that they would like to see included in the budget reconciliation bill.

The draft legislation is expected to follow along the lines of the proposals outlined in the “Green Book,” the 114-page document the Treasury Department issued on May 28 to provide details regarding the administration’s tax proposals. Among those proposals are an increase in the corporate tax rate from 21% to 28% and an increase in the top marginal individual income tax rate from 37% to 39.6% for taxable income over $509,300 for married individuals filing jointly ($254,650 for married individuals filing separately), $481,000 for head of household filers, and $452,700 for single filers. Another proposed change would tax long-term capital gains and qualified dividend income of taxpayers with adjusted gross income of more than $1 million at ordinary income tax rates.

On the international tax side, the draft legislation is expected to include proposals to reform the global intangible low-taxed income (GILTI) regime and increase the rate, repeal the foreign derived intangible income (FDII) provisions and replace the base erosion and anti-abuse tax (BEAT) with the more stringent SHIELD (Stopping Harmful Inversions and Ending Low-Taxed Developments) regime.

In keeping with the administration’s two-track approach to enacting its “Build Back Better” agenda, House Speaker Nancy Pelosi (D-Ca) issued a statement committing to pass the budget resolution’s sister legislation–a $1 trillion infrastructure package the Senate approved on August 10—by September 27.

The timing of legislative action on the two packages may pose a challenge to the Democrats’ plans, and congressional leaders will have to perform a delicate dance to ensure the support of their members—all 50 Democratic Senators, and virtually all House Democrats need to vote in favor of the legislative package to pass (assuming little to no Republican support). Progressive House Democrats favored passing the broader budget resolution before the bipartisan infrastructure package, whereas moderate Democrats insisted that the infrastructure deal be taken up first. This impasse threatened to derail the administration’s plans; the final vote dodged what would have been a setback for the administration.

Republicans oppose the budget resolution on the grounds that such large spending would trigger significant inflation and a surge in the federal deficit.

M&A Transactions: How to Avoid Consequences & Save Money

Posted on August 2021August 2021 by info

The state and local tax (SALT) treatment of M&A transactions can have a major impact on negotiated sales prices and after-tax values of deals. Whether you are contemplating a buy-side or sell-side transaction—or reorganizing your existing corporate structure— planning for the potential SALT consequences at the beginning of the process is crucial. Failure to consider these consequences until the tax return preparation stage often leads to unintended and expensive results that reduce the return on the investment.

New York S Corporation Elections

Many states have nuanced rules that need to be identified up front to help prevent unwelcome surprises in the future. One example is the New York state S corporation election. A federal S corporation that wishes to be treated as an S corporation for New York state income tax purposes must make a separate New York S corporation election. However, even if the New York state S corporation election is not made, the corporation may still be deemed to be an S corporation under New York state tax laws if an often overlooked “investment ratio test” is satisfied.

A recent New York State Tax Appeals Tribunal decision highlights the importance of understanding the New York S corporation rules. In Matter of Lepage (May 17, 2021), the shareholders, all nonresidents of New York, sold their stock in a federal S corporation that did business in New York but that did not make a separate New York S corporation election. At the time of the sale, the shareholders and the buyer jointly made an election under the federal tax code (a Section 338(h)(10) election) to treat the stock sale as a sale of the S corporation’s assets for federal income tax purposes.

Since no separate New York state S corporation election was made, the shareholders treated the transaction as a sale of stock for New York state income tax purposes. Further, the shareholders sourced their capital gains outside of New York (i.e., to their respective states of residence). However, the Tax Appeals Tribunal deemed the corporation to be a New York S corporation by applying the investment ratio test. The deemed New York S corporation election caused the transaction to be treated as a deemed asset sale for New York tax purposes with the shareholders’ gains sourced to New York, resulting in additional tax for the shareholders.

Other Traps for the Unwary

There are other jurisdictions that do not conform to federal pass-through entity tax treatment (e.g., D.C., New Hampshire, New York City, Tennessee, and Texas) or that also require a separate state-only S corporation election (e.g., New Jersey). Here are additional state-specific considerations when analyzing the tax effects of M&A transactions:

The effect of an acquisition on the acquirer’s state tax liabilities (in particular, the acquirer’s pre-transaction state nexus and apportionment factors);
Whether gain on a sale is treated as business income or nonbusiness income;
Given differences between federal consolidated stock basis and E&P calculations compared to separate return states, whether intercompany distributions qualify as dividends and possibly exceed separate entity stock basis and result in gain;
Whether a post-transaction dividend distribution qualifies for intercompany elimination in a state that requires unitary combined reporting;
Whether a state requires gain to be recognized currently or deferred on intercompany transactions that take place in an internal reorganization;
Whether a state imposes sales tax on a transaction and which party is liable for the payment; and
Whether there are state-specific rules that limit net operating loss and other tax attribute carryovers.

We understand state taxation of merger and acquisition transactions can be complex, and the rules vary from state to state. State rules and elections do not necessarily follow federal tax treatment and should be carefully reviewed when analyzing the tax consequences of a potential transaction. Further, depending on the specific circumstances, acquiring a new business can change where and how the acquirer’s income is taxed. Reorganizations of existing corporate structures can also have current or deferred state tax consequences. Our experienced team of advisors are here to help guide you through this M&A transaction process so that these state and local tax consequences can be avoided.

SEC Approves Nasdaq’s Board Diversity Disclosure and Recruiting Proposals

Posted on August 2021August 2021 by info

Under newly SEC-approved Nasdaq rules relating to required disclosure of board diversity, beginning in 2023 listed companies will be expected to have at least two diverse directors – one female and one under-represented racial or LGBTQ+ individual – and in 2022 publicly disclose certain board diversity statistics. If they do not have two diverse directors, listed companies will be required to explain the reasons why. To help provide access to diverse directors, Nasdaq is offering free board recruiting services for one year to certain companies.

Summary of Rulings

On August 6, 2021, the SEC approved Nasdaq Stock Market LLC’s (“Nasdaq” or the “Exchange”) proposed rule changes related to the Board Diversity Disclosure and Board Recruiting Service Proposals. All Nasdaq-listed companies, unless subject to certain exceptions, are required to have at least two diverse board members or explain why they do not. The new listing standard will also require disclosure, in an aggregated form, of information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the company’s board.

The rules provide for certain cure measures and periods if a company fails to comply with the new disclosure requirements.

In addition to the disclosure rule, the board recruiting service proposal gives certain companies access to Nasdaq’s and their partners[1] board recruiting services for one year, on a complimentary basis. This is intended to provide access to a network of board-ready diverse candidates for companies.

Required Disclosures

All operating companies listed on Nasdaq’s U.S. exchange will need to use the Board Diversity Matrix (pictured below), or a format substantially similar, to annually disclose board-level diversity data. Companies will provide this disclosure in the company’s proxy statement or its information statement (or if the company does not file a proxy, its Form 10-K or 20-F), or on the company’s website.

Note: For Foreign Issuers, demographic background would reflect underrepresented individuals in the home country jurisdiction and LGBTQ+.

View examples of acceptable (i.e., same or substantially similar) and unacceptable (i.e., substantially different) disclosures by Nasdaq.

Additionally, a company that does not have at least two diverse directors, as defined above, is required to disclose why it does not meet the diversity objectives. Nasdaq will verify whether the company has provided an explanation but will not assess the merits of the explanation. That is, there is no “right or wrong” reason that a company may give for not having at least two diverse directors.

Effectiveness, Exemptions and Transitions

Disclosure of board diversity data similar to the data above will be required annually and companies have until the later of August 8, 2022 or the date the company files its proxy statement or information statement for its annual shareholder meeting during 2022.

With respect to the requirement to have diverse board members or disclose why the company does not meet the diversity requirements:

Based upon the company’s listing tier:
Nasdaq Global Select Market or Global Market companies are required to have (or explain why they don’t have) one diverse director by August 7, 2023 and two diverse directors by August 6, 2025
Nasdaq Capital Market companies are required to have (or explain why they don’t have) one diverse director by August 7, 2023 and two diverse directors by August 6, 2026
All companies with boards that have five or fewer directors are required to have (or explain why they don’t have) one diverse director by August 7, 2023
Smaller Reporting Companies can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented minority or LGBTQ+.
Newly listed companies (e.g., including IPOs and direct listings) and SPACs (including the post-merger registrant) have special phase-in rules.
Foreign Issuers can meet the diversity objective with two female directors, or with one female director and one director who is an underrepresented individual based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the country of the company’s principal executive offices, or LGBTQ+.

SEC Approval

Many feel that this is step in the right direction to advance board diversity, which has been top of mind for investors. In approving these rules, SEC Commissioners Allison Herren Lee and Caroline A. Crenshaw issued a joint public statement indicating “NASDAQ’s proposal should improve the quality of information available to investors for making investment and voting decisions by providing consistent and comparable diversity metrics.” SEC Chair Gary Gensler stated that he believes that “these rules will allow investors to gain a better understanding of Nasdaq-listed companies’ approach to board diversity, while ensuring that those companies have the flexibility to make decisions that best serve their shareholders.” However, there is also dissent among SEC Commissioners Hester M. Peirce and Elad L. Roisman who, while supportive of Nasdaq’s board recruitment services and the goal of expanding diversity within the boardroom, question the legal basis for proposed disclosure requirements and delisting implications and whether the proposal is actually within the scope and purpose of the Securities Exchange Act of 1934.

Insight:

This ruling will have significant impact for years to come on investor information. Board-level diversity statistics are currently not widely available on a consistent and comparable basis. By providing this level of detail, investors and prospective investors will have more access to information about the board’s composition.

These rulings are the latest effort in the push for board diversity. They come on the heels of California enacting a law in September 2020 requiring any publicly-held organization headquartered in the state to include board members from underrepresented communities. Other steps taken previously include updates made by proxy advisors to their voting guidelines to recommend against boards without racially or ethnically diverse members as well as rules – e.g., California – already put in place around gender diversity.

As stated by the SEC, Nasdaq’s rule proposal is “designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest.” It is important to note that the disclosure ruling establishes a disclosure-based framework and not a mandate. This is “a comply or explain rule.” If the board does not meet the diversity requirements, it can issue a public statement explaining why it does not.

It is also important to keep in mind that information underlying these rules is based upon voluntary self-identification of a company’s directors for such disclosed information. A company that provides disclosure indicating that directors’ diversity characteristics are not disclosed would still be in compliance with the rules.

In addition to the disclosure, allowing companies to have access to recruiting services of firms that are partnering with Nasdaq gives smaller public companies a chance to compete with larger public companies for the best talent and broaden their range of expertise.

The opportunity in this ruling is to identify candidates who have a diversity of background and thought and will be able to drive the overall success of an organization through their perspective and experience. When looking to fill gaps in board composition, boards should stive to find candidates who possess both diverse perspectives and needed skillsets. Coupling these will help boards navigate company priorities with agility and creativity, leading to a more sustainable business model.

What’s Next for Board Diversity

According to BDO’s 2021 BDO Winter Board Pulse Survey, boards are enhancing their Diversity, Equity & Inclusion (DE&I) strategies. BDO’s pulse survey collected results on corporate strategies in four priority areas related to DE&I:

In addition to these important advancements, the recent reckoning around social justice has furthered the push for greater diversity on boards. Board directors (55%) are signaling plans to focus on building a more diverse board and leadership team in the next 12-18 months. Six months ago, 50% said building a more diverse board leadership team was at the top of their long-term ESG priority list. The SEC’s approval of the Nasdaq rules underscores the need for board diversity and the importance of reporting as a short-term priority for Nasdaq listed organizations.

Moving forward, incorporating hiring and human capital advancement practices into business processes and protocols cannot just be a human resource responsibility. It is also the duty of the board and management teams to ensure maximum efficacy and integration into the organization’s overall business strategy. Historically, business leaders have turned to their networks to identify potential board members. The new disclosure rules may upend this tradition and encourage leaders to look beyond their established networks to identify candidates with diverse skills, experiences and perspectives to help grow their organizations. Organizations whose missions are to further the recruitment of diverse boards will be a crucial resource when it comes to providing companies access to a larger pool of diverse candidates to move beyond the limits of traditional networks and thinking.

Major institutional investors, including BlackRock, State Street and Vanguard, all called for increased board and management diversity in external communications ahead of last year’s shareholder meeting season. This pressure from institutional investors remains high. It remains to be seen if other exchanges will follow Nasdaq’s lead, whether imposing diversity requirements or penalizing those companies that do not act to diversify their boardrooms.

While unprecedented within the U.S. listing exchanges, this type of ruling has been anticipated since 2020. The investing community has significant power to create change. Investors are seeking accountability from management and the board. They also want boards to create an environment for board effectiveness based on the corporate strategies and priorities. Diversity, both on boards and management teams, has been proven to lead to better returns and increase long-term value, a win for both organizations and shareholders. It also has the benefit of minimizing reputational risk – a more diverse board comes with a broader range of perspectives, allowing organizations to identify areas of risk that may have otherwise been overlooked.

Learn More

Nasdaq provided an FAQ publication on its new diversity rules and intends to host several live webinars to help companies understand key elements of the rules and access a variety of free board recruiting services. Register for the first program on August 17, 2021.

[1] To date, Nasdaq has established partnerships with Equilar, Athena Alliance, and the Boardlist to aid Nasdaq-listed companies that have not yet met the diversity objectives and would like assistance doing so. The services offered are complementary and are not mandatory. Here’s how your company can gain free access to Equilar’s BoardEdge Platform and Equilar Diversity Network, Athena Alliance’s community of women leaders, and the Boardlist’s premium talent marketplace.

[CM1]This footnote must be printed with any Alliance Firm re-use.