Week in Insights: US Should Stop ‘Phoenixism’ Before It Starts

A tax evasion scheme called “phoenixism” is on the rise, according to a UK National Audit Office report.

The practice occurs when a company accumulates tax debts, declares insolvency, and quickly re-establishes itself as a nearly identical new entity. This allows the business to continue operating, leaving unpaid taxes and other liabilities behind. The result is a cheated tax system and unfair tax landscape for compliant businesses.

This contrived insolvency practice was found to be particularly prevalent in small UK retail businesses, such as souvenir shops. The fraudsters leaned on backlogs created by pandemic insolvencies—with so many businesses declaring bankruptcy, it’s difficult to spot fraud patterns in a sea of legitimate filings.

For tax years 2022 and 2023, His Majesty’s Revenue and Customs estimated £500 million ($657 million) in tax revenue may have been lost annually to phoenixism. That figure would represent about 15% of tax debt losses for that period, a significant contributor to tax revenue loss in the UK.

The ease with which companies can be dissolved and re-established in many jurisdictions, coupled with the rise of e-commerce and digital business models, suggests phoenixism could spread beyond the UK. Like any other “business model,” successful tax frauds and schemes are often replicated, with mutations, outside their initial borders. For example, the first “zapper” in North America—a device used to suppress retail sales and abscond with collected sales taxes—was found in Quebec, and the devices have now spread throughout the US.

Countries grappling with the fallout from economic disruptions must be vigilant and monitor evolving and emerging frauds. Phoenixism may be ravaging UK coffers today; tomorrow, it could be pilfering from Canadian or US revenue authorities.

US and state authorities should note these developments and consider how to strengthen regulatory frameworks and oversight to ensure this particular phoenix doesn’t fly stateside.

—Andrew Leahey

Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts analyzed Loper Bright’s potential impact on Section 482 of the tax code, state conformity decisions given the Tax Cuts and Jobs Act’s expiring provisions, and more.

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Insights

Morgan Lewis’ Thomas Linguanti and Drew Cummings analyze the rise in IRS transfer penalty audits, saying taxpayers should consider parallel tracks to avoid litigation.

Moss Adams’ Josh Grossman and Glenn Walsh examine the TCJA’s impact on states, saying that expiring or continued provisions may prompt states to shift their tax policies.

DLA Piper’s Steve Dixon and Joseph Myszka weigh Loper Bright‘s implications for Section 482 of the federal tax code, saying that the validity of some of its rules is now precarious.

Stinson’s Karen Rippelmeyer explains the benefits of a community development tax credit, saying the program’s funding will expire in 2025 without congressional action.

Stout’s Lee Welborn says regulatory changes affect benefits, noting that firms can integrate cost segregation into financial planning.

Yale University’s Aneesh Raghunandan says students want to understand climate risks, noting that courses teach how financial and ESG accounting are related.

University of Delaware’s Lawrence Cunningham writes that as SEC Chairman Gary Gensler’s ESG agenda stalls, companies may choose to slow efforts to comply with those proposals and take a more tailored approach.

Columnist Corner

Technically Speaking design by Jonathan Hurtarte/Bloomberg Tax

An IRS online encyclopedia of tax fraud schemes could help taxpayers avoid unknowingly engaging in fraud, Andrew Leahey writes in his latest Technically Speaking column.

“Informing the taxpaying public of fraudulent schemes solely via the Dirty Dozen list is akin to policing solely via the FBI Most Wanted list,” Andrew argues, adding that current guidance on fraud is too technical and difficult to access. Read More

News Roundup

Treasury Proposes Rules on Corporate Alternative Minimum Tax

The Treasury Department and the IRS proposed long-awaited regulations to clarify how the new corporate book-income tax will be applied and calculated. Read More

EU Court’s $14 Billion Apple Tax Decision Slammed by Tax Panel

A panel of tax academics slammed the recent EU top court ruling in the Apple and Ireland state aid case, saying it went against prior court decisions and opened the door to EU meddling into member states’ domestic tax laws. Read More

Puerto Rico to Pay $680,000 for Next Phase of Minimum Tax Plan

The Puerto Rico Treasury Department signed a three-month contract worth $680,000 with a consulting firm that brought in a former OECD official to develop a plan for implementing a 15% minimum tax on large multinational corporations. Read More

Companies Weigh Their Weaknesses to Model 2025 Tax Cliff Impact

Corporations are essentially cramming for a test, reviewing tax proposals that could gain new life during a looming heated debate over the 2017 GOP tax cuts expiring at the end of next year. Read More

Tax Management International Journal

As tax regulators start to address the risks and compliance burdens created by permanent establishments with little substance, companies face balancing exposure and tax risk while supporting business strategy and growth, Grant Thornton’s Richard Tonge says.

Canada has implemented Pillar Two’s IIR and QDMTT through the Global Minimum Tax Act and released a draft UTPR with a treaty override to ensure that the relevant GMTA provisions aren’t prevented under any of Canada’s bilateral tax treaties, Osler’s Patrick Marley, Kaitlin Gray, and Ilana Ludwin say.

Tax Management Memorandum

The Financial Accounting Standards Board says no to the suggestion that IP can be recorded as intangible assets in compliance with US GAAP, but here’s how it could say yes—and thereby address a significant competitive disadvantage for US companies, Christopher J. Leisner says.

Career Moves

Caroline Le Jeune joined RSM UK as a private client tax partner in London.

Michael Puzyk joined McCarter & English as a partner in its tax and employee benefits team in Newark, N.J.

Simon Skinner joined Latham & Watkins as a tax partner in London.

John Kwak and Doug Suh joined Baker McKenzie & KL Partners Joint Venture Law Firm in its tax practice in Korea as partner and senior adviser, respectively.

If you’re changing jobs or being promoted, send your submission to TaxMoves@bloombergindustry.com for consideration.