Our Experts Weigh In on Western Digital’s $1.6-billion Tax Bill
Remote work has its advantages, but it has taken its toll on our watercooler chats. Still, some industry happenings are so interesting, they’re worth a Zoom face-to-face to hash it all out. Western Digital’s recent $1.6-billion tax settlement is one of them. But then we’ve never been able to keep our educated opinions to ourselves, so we’re sharing a back-and-forth between two of Exactera’ transfer pricing experts, Mike Desimone and Hasker Hoogenberg. Here’s what they have to say about Western Digital’s tax troubles.
MD: Western Digital’s recent 10k filing indicated that they “reached a tentative settlement with the IRS to resolve the hard-drive giant’s challenge against a $1.6- billion tax bill, which stemmed from disputes over the pricing of transactions with foreign subsidiaries, according to the company’s financial filings,” for financial years 2008 through 2015. The settlement has not been finalized and could change, and there is no mention as to potential exposure for the years starting in 2016 to now.
HH: This will likely start a flow of MAP procedures that will take years to close (if at all) assuming they want to minimize the (economic) double taxation that will be triggered by the settlement. It’s always challenging how to account for such a settlement; do you consider a (partial) offset against MAP relief and thus account for the cost on a net basis or account for the gross amount of the settlement?
MD: That is an interesting issue, but it may be moot since the countries affected may have these years closed and will probably not entertain any claim for relief especially for a negotiated settlement between the company and the IRS. Of course, this could be a full employment situation for lawyers and accountants at the firms working with Western Digital. Transfer pricing controversy, the gift that keeps on giving.
HH: A final settlement is almost always the last stop on a journey that started with a challenge, resulting in a revised assessment that is followed by filing a notice of objection, etc. The main rule is that the taxpayer needs to submit its MAP request to the competent authorities within three years following the first notification of the action resulting in double taxation. This might already be as early as when the IRS issued their first initial written conclusion that they will challenge the position. If the tax team at Western Digital did their job correctly, they likely will have filed the proforma MAP requests years ago to protect their rights.
The actual accounting debate on the amount of the reserve to book already may have taken place before that first notification (i.e., when they did their FIN48 analysis of each of the positions). If they concluded it was not “More Likely Than Not” (“MLTN”) to sustain the position back then, they would have to book the (net) reserve already. However, if they were caught by surprise, the head of tax will have had an unpleasant discussion with the CFO.
MD: I love your optimism! The cynic in me is remembering how a MNE blew the deadline for appealing a multi billion adjustment with the tax court, so I am proceeding on the O’Toole corollary to Murphy’s Law, to wit, “Murphy was an optimist.” Western Digital may have done all of the protective filings but as the saying goes, “One never knows, do one.”
HH: Missing an appeals deadline is something that likely will cause some sleepless nights for a tax department. I always joke that writing out a check request with 10 significant digits would have my tear stains on it—while I try to remember how to spell “resumé”.
