Tax planning in financial services

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It’s been three decades since the US last saw successful, meaningful tax reform, but the long wait is now over. The Tax Reform Act of 1986 simplified the tax code, wiped out tax shelters, and broadened the tax base. It was a masterful achievement of revenue neutrality and bipartisanship. The 2017 tax overhaul was decidedly more one-sided, and it comes with a 10-year price tag of nearly US$1.5 trillion, excluding higher economic growth. It’s complex, but firms may find a lot to like in the final law.

A look back

A perfect storm. Financial institutions experienced a “perfect storm” in 2017, with shifting proposals for US tax reform, Brexit starting to unfold in the UK and Europe, and a new administration in charge of administering regulations in the US. After designing tax-efficient strategies for an existing set of rules, many firms suddenly found that they needed a “Plan B.”

Reforms and cuts. President Trump signed into law the first major tax reform bill in the US in decades. Some key features: lowering the corporate tax rate from 35% to 21%, removing the corporate alternative minimum income tax, and changing from global to a territorial tax system. Other key provisions include the structure around the one-time repatriation of earnings back into the US and limiting business interest expense deductions.

Freeze! As details of the new law emerged, tax practitioners in most US financial institutions raced to deal with year-end issues. For firms with international operations, this included new treatment of ‘global intangible low-taxed income’ (GILTI) and a ‘base erosion and anti-avoidance tax’ (BEAT). Some firms issued updated earnings guidance, as deferred tax assets are written down. We also saw some companies announce additional bonus payments in response to tax reform.

Financial services tax planning

The road ahead

Start with a clean sheet. Many firms could find that they need to make sweeping changes to their financial reporting in the wake of the new law. This will likely mean a continuation of work that started in December, with a push to revalue deferred assets and liabilities. And, the push to update quarterly earnings forecasts will almost certainly broaden, reflecting a new effective tax rate, the revaluations, BEAT and GILTI, and more.

Into the weeds. Tax departments across asset management, insurance, and banking will start poring over the details. For example, insurers need to change how they measure reserves for both life and non-life insurance, and how they capitalize the expense for acquisition of some types of policies. Also, banks with assets between US$10 billion and $50 billion face a phase out of deductions for premiums paid to the Federal Deposit Insurance Corporation.

Managing costs. The wrangling over taxation in 2017 highlighted pressures building for years among tax functions across financial services. In 2018, we’ll see firms looking at how to reduce costs and complexity, address talent gaps, move teams from reporting to higher-value strategic work, and more.

What to consider

What’s the plan? To comply with the law, firms will need a lot of granular data, and many could struggle. Just to evaluate if they’re subject to BEAT or GILTI tax treatment, firms will need transaction-level data. The new tax law could lead to revisions to funding models and the way earnings are booked. It could even lead to structural changes in how entities are organized. We encourage firms to develop a comprehensive, end-to-end workplan around adapting to the changes. The good news: this is likely to support digital transformation efforts, too.

Let’s make a deal. The new tax law could have key implications for those acquiring or divesting businesses. Business interest expense deductions will now be generally capped, and this could raise the after-tax cost of debt. There will be new treatment of net operating losses and provisions that will affect specific sectors, such as insurers and mortgage issuers. This and more may lead to revised valuations for deals in process.

Change outside, change inside. With all the changes, there’s an opportunity for insurers, asset managers, and banks to reconsider how they approach their internal tax operations. In the face of rising complexity, firms are increasingly asking if their processes, technology, and staff are up to the task. You may want to consider how a variable cost model could help you retain advanced capabilities while managing costs.

“Tax reform will likely be seismic for many of our clients. Of course, there are issues with deductibility that could be game-changers. But they’re looking inward, too. How effective are their own tax functions?”

- Gina Biondo, US Tax Financial Services Leader


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How PwC can help

Our teams in asset and wealth managementbanking and capital markets, and insurance are helping our clients tackle the biggest issues facing the financial services industry. With professionals across taxassurance, and advisory practices, we can help you find ways to thrive even in a period of uncertainty. Whether you're preparing for regulatory changes, putting FinTech/InsurTech to work, or rethinking your human capital strategy, we work together with you to resolve complex issues, identify opportunities, and deliver value to your business.

Contact us

Gina Biondo
Financial Services Tax Leader, PwC US
Tel: +1 (646) 471 2770

Marie Carr
Global Growth Strategy, US Financial Services Practice, PwC US
Tel: +1 (312) 298 6823

Cathryn Marsh
Leader, Financial Services Institute, PwC US
Tel: +1 (720) 931 7836

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