NWL Newell Brands Inc

By Richard Rubin and Theo Francis 

Consumer-products conglomerate Newell Brands Inc., facing $180 million to $220 million in taxes because of Treasury Department antiabuse regulations, isn't recognizing those costs in its financial statement, contending the new rules aren't valid.

The move presages a legal fight between companies and the government. Beyond tax revenue, the outcome may shape the government's ability to implement some of the most sweeping provisions of the 2017 tax law while Congress remains deadlocked over technical fixes.

Newell, which makes Sharpie markers, Mr. Coffee machines and Rubbermaid containers, told investors this month it was so confident the government's rules will fall that it didn't have to take an earnings hit. The tax cost would have swung the company from profit to loss in the second quarter. Maxim Integrated Products Inc., an analog chip maker, made a very similar disclosure to its investors. Neither company would comment beyond public filings.

Qualcomm Inc. said in a securities filing that the regulations affected deductions related to a 2018 intellectual-property transaction. The company agreed with the Internal Revenue Service to forgo benefits of that transaction and took a $2.5 billion charge. Qualcomm said it decided that complying with the regulation was in the company's best interest.

Other companies flagged the new rules -- which are retroactive to the end of 2017 -- in securities filings, though less clearly. LyondellBasell Industries NV, a chemical company, and IHS Markit Ltd., an information provider, disclosed that they may be affected. More may file public comments to the government before a mid-September deadline.

Accounting experts say that, in general, companies are expected to recognize expenses once they are quantifiable and sufficiently likely to occur.

"If it's probable and reasonably estimable, you're supposed to do it," said Janet Pegg, an accounting analyst with Zion Research Group. By concluding that the regulations are likely to fall, companies may be able to convince their auditors to sidestep recognizing the expense.

A spokeswoman for the Financial Accounting Standards Board, which determines U.S. generally accepted accounting principles, declined to comment on the companies' positions. A spokeswoman for the Securities and Exchange Commission and Treasury officials also didn't comment.

The corporations' complaints are the leading edge of a legal challenge to the temporary, retroactive regulations, which the Treasury released in June to stop and overturn what it saw as abusive transactions made during gaps created by the 2017 tax law.

The Treasury released the rules in mid-June, just days before the deadline for imposing retroactive regulations back to the enactment of the 2017 law. They resemble a January 2019 proposal from Rep. Kevin Brady (R., Texas), a chief author of the tax law. Congress hasn't acted on that or other changes because lawmakers disagree over what to include in a technical-corrections package and what other proposals to pair with it.

The U.S. Chamber of Commerce is examining the Treasury's regulatory authority and exploring options to ensure a business-friendly result, said Caroline Harris, the group's chief tax counsel.

"Treasury wants to make this whole statute work," said David Rosenbloom, an international tax lawyer at Caplin & Drysdale in Washington. "They're basically stepping in and doing the job that Congress didn't do."

One portion of the complex regulations aims at companies taking advantage of a timing gap in the law by shifting profits into a period when they could avoid U.S. taxes that would otherwise apply.

The 2017 law created a territorial tax system, so that U.S. corporations can send foreign profits to their domestic parents without paying U.S. corporate taxes.

However, the law also created a minimum tax on foreign income. That is intended to prevent companies from avoiding U.S. taxes on profits from places with low tax rates such as Singapore and Ireland.

Here's the catch: The territorial system started Jan. 1, 2018, but the minimum tax didn't. Instead, it took effect based on the fiscal year of companies' foreign subsidiaries, starting with the first tax year beginning after Dec. 31, 2017.

Because many foreign subsidiaries have fiscal years ending Nov. 30, 2018, they had a one-time opportunity. They had nearly a year when could earn low-taxed foreign income and bring the money home without paying U.S. taxes.

"Once you saw that mismatch, that was the main ingredient and environment you needed for the planning," said David Sites, an international tax partner at Grant Thornton LLP.

There is no public data on what companies did, though the Treasury rules said the government was aware of transactions that have the potential to substantially undermine the purpose of the tax law. Mr. Sites said some companies acted but the vast majority won't be affected.

Still, U.S. corporate tax receipts for tax year 2018 were unexpectedly soft, even considering the tax cut.

The Treasury's rules didn't attempt to tax all profits companies earned during the gap in the law. Instead, they focus on what the government deems extraordinary transactions, often achieved by selling intangible assets from one foreign subsidiary to another. Other parts of the rules apply more broadly.

Newell and Maxim both wrote in securities filings that they believe they have strong arguments in favor of their position, enough to conclude that they are more likely than not to prevail in any challenge to the tax position they have taken. A court case could turn on the government's regulatory authority to implement congressional intent, the viability of retroactive regulations and the question of whether the language of the statute was so clear that the Treasury and IRS didn't have any ability to act.

Both companies also cautioned that the outcome is uncertain. Maxim didn't estimate a cost and neither did IHS Markit. LyondellBasell said it was permanently reinvesting money in an offshore subsidiary because of the rules, preventing a $60 million tax cost.

"This will be litigated," Mr. Rosenbloom said. "This is not going to go down like chocolate sauce."

Write to Richard Rubin at richard.rubin@wsj.com and Theo Francis at theo.francis@wsj.com

(END) Dow Jones Newswires

August 30, 2019 05:44 ET (09:44 GMT)

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