Tax Law And The FCPA’s Legislative History
To commemorate tax season, this post looks back to the FCPA’s legislative history and the tax implications of what Congress was investigating.
Upon discovery of the foreign corporate payments problem, Congress’s first task was to determine if the payments were adequately captured by existing law or whether a new law was needed. While certain existing laws did indirectly deal with various aspects of the problem, the prevailing view was that existing laws were deficient and that a new and direct legislative remedy was needed.
The primary focus of Congress’s investigation was whether the existing securities laws, tax laws, and/or antitrust laws adequately addressed the foreign corporate payments problem.
Tax Deductions For FCPA Settlement Amounts
A guest post today from Ropes & Gray attorneys Ryan Rohlfsen, Kat Gregor, Yana Grishkan, and Elizabeth Smith.
The amounts paid to the government pursuant to Foreign Corrupt Practices Act resolutions typically include criminal penalties and civil fines, including disgorgement or forfeiture of ill-gotten gains. Unsurprisingly, a significant question companies face when making payments to the government to resolve alleged FCPA violations is whether any portion of the payments is deductible for tax purposes.
IRS Concludes That Disgorgement Paid In An FCPA Enforcement Action Is Not Deductible
Approximately ten years ago, the SEC for the first time sought disgorgement in a Foreign Corrupt Practices Act enforcement action. Since then, disgorgement has become the predominate component of most SEC FCPA settlement amounts.
Non-FCPA disgorgement case law clearly holds that while the remedy of disgorgement “may well be a key to the SEC’s efforts to deter others from violating the securities laws … disgorgement may not be used punitively.”
Against this backdrop, it is most interesting to note that this recently released IRS Office of Chief Counsel Memorandum concludes that disgorgement paid in an FCPA enforcement action is not deductible because the “payment was primarily punitive.”