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Q&A: Ex-Microsoft Tax Adviser Mike Bernard On Data And The Digital Economy

05 April 2018

Mike Bernard, former Microsoft tax counsel, talks to ITR about his experience at Microsoft, how the tax department functioned, and how he will help MNEs use data to be audit-ready in his new role at Vertex.

4 April 2018

When Mike Bernard joined tax technology company Vertex in March as its chief tax officer, he had a specific goal in mind. "I think tax departments need to gain control over the information they need for reporting and analytical work," Bernard told International Tax Review in an exclusive interview. "I want to help them store that data in an audit ready way."

The Seattle-based Bernard spent 28 years in Microsoft’s corporate tax department working on everything from M&A; to income tax to property tax. "Pretty much any tax matter you’d encounter at a large corporation," he said. In his new role at Vertex, he wants to help corporates transition to his new employer’s cloud-based products. He shared his views with ITR’s Michael Scaturro on managing tax risks, US tax reform, Tump, tariffs, the digital economy, dealing with data in a corporate tax department, managing the changes from the BEPS Action Plan and digital tax proposals, and various tax matters.

Michael Scaturro: How does a company like Microsoft evaluate and manage its tax risks and opportunities?

Mike Bernard: Most companies today in the corporate environment are focused on making sure they get their accounting and their compliance in their tax department done properly. Intriguing planning is still around, but what most audit committees, test auditors, internal audit functions, CFOs, etc. are interested in today is to make sure risks are being managed properly, and that the amount of risk is minimalised.

Today, audit committees and test auditors are really focused on getting the accounting and the reporting done right. They want to be able to defend whatever has been done. They also want to be certain that tax positions will sustain challenges by tax authorities. The blocking and tackling can be more important today than the planning, as important as that is.

MS: How are multinationals evolving under the US tax reform?

MB: The tax reform addressed a tension that existed between US-based domestic companies – companies like Walmart and Costco – and folks in the technology space, like Facebook, Google, Microsoft.

The multinationals – the IP guys – were mainly interested in assuring they could defer their profits overseas. They were willing to take almost a higher tax rate in order to gain deferral. The domestic companies wanted to a lower rate. Both were trying to gain mindshare in Washington over the final bill. Ultimately, everyone was surprised that the rate ended up being 20%, as everyone was prepared for the 25% range. I think it was good that the rate was lowered to where it is now, because it’s an extremely competitive rate relative to the rest of the world. Even with forced repatriation, a lot of that money could be used to pay bonuses, hire more people, engage in buy-backs, retire debt.

Overall, it’s been a good thing for companies. There are likely to be technical corrections that will be worked out over the next year. In the end, the bill benefits both US multinationals and the US domestic companies.

MS: Will the Trump tariffs on China have an impact on tax?

MB: One would hope there wouldn’t be. Many of China’s taxes are local and entail dealings with local officials. A lot of times, they’re independent from the national system. My view would be the Chinese will try not endanger any kind of employment or continued employment in their country on the part of US multinationals. The most important thing to them, as is the case globally, is jobs. If there is some aggressiveness on the tax side that would impact business decisions at US multinationals as to whether they believe they should put further functions and jobs in China. My guess is the Chinese are very aware of that.

MS: What are your views on the BEPS project and country-by-country reporting?

MB: I think we are in round one – companies will be filing those reports over the next couple of years, and tax authorities will react.

Most multinationals filed country-by-country reports last year. There’s just been so much effort in getting the reporting done that they are now settling in and want to understand what the next round of reporting will look like.

There’s somewhat of an agreement or perhaps an understanding between the companies filing these reports and the countries receiving these reports that that the national tax authorities will look at trends before they start contacting companies to ask them for more information in addition to country-by-country reports.

That said, a lot of multinationals are concerned that the information is going to be used to setup formulary apportionment. Rather than using transfer pricing practices to determine how much profit goes to each country, formulary apportionment may be used to setup additional assessments.

MS: Which countries will be most or least aggressive on BEPS?

MB: Countries with good transfer pricing divisions within their revenue departments – such as the UK and Japan – will be in a better position to analyse information because they have the personnel and IT tools to do it. They also understand what these things mean and what’s being paid to their country.

Other countries will be less likely to consider the trends – countries like Australia [and] New Zealand. Most US multinationals would agree that both are aggressive in terms of defining what their own methodologies are.

And then there’s Western Europe, where one sees all different kinds of results. France, Italy, probably Germany, are in between. The Netherlands will be more on the wait-and-see side of things. In Europe, Italy could be more aggressive. It’s hard to tell in France – they come out strong and tough in audits but you can usually gain resolution, though that appears to be changing.

A lot of companies have multilateral rulings establishing their transfer pricing policies with various countries in Europe. The country-by-country reporting simply gives countries more information that companies didn’t give them before when they originally made their rulings. To that end, there’s going to be a substantial review over the next couple of years of any company that has either a unilateral of a multilateral agreement in Europe. Those rulings are going to be looked at and possibly challenged. That work has probably already started.

Of course, most multinationals saw this when the BEPS project kicked off, and they planned around it by putting in what are called limited-risk distribution models into a country. The structures are already in place in a number of countries.

In the BRIC countries, we will probably see tax authorities making their own determinations as to what companies will pay in those jurisdictions.

MS: What do you think of the OECD’s and EU’s proposed frameworks on digital taxation?

MB: Companies felt that there was going to be a hold on treating the digital economy as different than the non-digital economy. BEPS had actually stated this in the action plan. It appears they are moving forward with something different rather than studying the issue further, as they had promised they would in the actual BEPS plan. [He offered to fill this in a bit more if we want]

MS: What changes do you anticipate among corporate tax departments?

MB: Tax data will be important – the idea that tax departments should own and control their own data.

Historically, IT departments have owned the data that tax departments need. If you needed data, you had to get your ad hoc reports done by the IT groups. But what you’re seeing today is that IT departments are throwing the data into data lakes and tax departments are getting that data as they need to do their reporting and analyses. That’s one of the reasons I came to Vertex, which I thought had a forward way of thinking about tax departments using their own data. I think that’s going to be the next big wave over the next five years.

MS: What will you be focusing on in your new role?

MB: I’d like to be a voice and an advocate for customers. I think tax departments need to gain control over what information they need to do all of their reporting and analytical work, and to store that data in a way that’s audit ready. I’d like to provide leadership around helping companies achieve automated processes that would eliminate the need to touch the data. The more you touch the data, the more risk there is. I’d also like to help them understand that this will be a key component of their future success. Tax departments can’t be going back and asking the IT group to provide them infrastructure and ad hoc reporting. Finally, I’d like to help companies understand that if they move to the cloud, they’ll benefit from automatic updates and the shifting of data management responsibilities that come with using the cloud.

Over the last five years or so, a lot of businesses – and Microsoft is really no different in this regard – have tried to build out an e-commerce space in their companies. If you were at Microsoft and you wanted to buy something directly, five years ago you really couldn’t because everything flowed through a partner network. What we knew we had to do at Microsoft was take that business and, basically, build a back office that could handle that. Companies in the retail space had been working on this, but we at Microsoft hadn’t been up until then. From a tax department perspective, we were thinking about how we could properly report and remit transaction taxes as a part of the solution for the whole back office business in addition to provisioning and shipping or digitising products. We thought Vertex was the perfect solution for us. We worked with the business groups at Microsoft to understand what kind of products and in which stages they were going to release. Different products have different transactional taxes associated with them. That’s how I got involved in providing solutions to tax departments. But that bolts nicely with what my role will be at Vertex, which will be to continue to do the latter with companies like Microsoft as well as with Vertex’s customers.

MS: What do you when you are not thinking about tax?

MB: I’m an avid skier and hiker living in Seattle with my wife of 35 years. I also enjoy golfing. I’m originally from Nebraska and am involved in a family farm that we’ve owned for over a 100 years. I’m always looking for chances to get outdoors!

The above article was published on www.internationaltaxreview.com on April 4 2018 and has been republished with the approval of the Publisher.

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