Kathryn Kaminsky and Wes Bricker lead PwC’s Tax and Assurance functions, respectively. Over the past several months, they have met with hundreds of CFOs and tax directors at companies across the United States and Mexico who are preparing for a new tax policy landscape. Together, they have seen the need for CFOs and tax directors to collaborate like never before. They put this report together with that in mind.
Tax policy is high on the Biden agenda. While it may not be the first order of business for the new administration, change is likely this year. Most business executives have been anticipating some sort of tax policy change this year, but many may not realize that with the right teaming and knowledge, you can navigate what lies ahead, together.
Rising US tax rates: The Biden administration is proposing an increase in the federal corporate income tax rate (as high as 28%) as well as changes to international tax regimes such as GILTI. Other provisions are slated to take effect automatically, including R&D expenditures that must be amortized (as opposed to expensed) starting in 2022. States also expect to make up for lost revenue by enacting measures to increase taxes.
Higher taxation on international operations: On top of rising US taxes, layer on the potential for other countries to rewrite many fundamental international tax rules, fueled by the OECD’s base erosion and profit shifting (BEPS 2.0) project. The OECD project aims for large companies — highly digitalized businesses as well as consumer-facing companies with cross-border activity — to pay a minimum level of income tax. In parallel, some countries could enact or propose their own unilateral digital services-type taxes.
These tax policy events could have critical and unexpected implications on your business. The bottom line is that your CEO, board and audit committee will want to know how tax policy will shape day-to-day operations, cash flow and investment decisions. They will also want to know how to best position themselves in this fluid tax rate environment. At the same time, because of the pandemic and other economic and social events, many companies are planning big changes — workforce, M&A and digital and supply chain transformations, for example — that may need significant alterations due to changing tax laws. Given potential impacts of tax policy changes on a host of business operations and financial decisions, the alliance between the CFO and the tax director is more important than ever.
Together, finance and tax leaders play a critical role educating other business leaders, the board and the rest of the company. CFOs have been focused on many pressing issues, such as maintaining healthy balance sheets, with year-end reporting and 2021 planning on the top of the list. Tax executives have the unique opportunity to bring a future-focused perspective to the table, helping their enterprises anticipate and plan for coming tax policy changes. Together, the CFO and tax director can make internal and external information about the changes on the horizon more front-and-center.
US federal tax policy likely will be formulated over the next six months. Now is a critical time for companies, before legislation is drafted, to model the effects of tax policy proposals and bring data to discussions with lawmakers. But don’t dwell solely on how potential legislation will shape your company’s tax costs. Data around the impact on headcount, job growth and domestic investment can help you and your team understand the broader social impact and make more fully-informed decisions.
Tax policy can be complicated and, particularly given the interdependencies of various US tax provisions (e.g., GILTI and BEAT) enacted in 2017, bottom-line impacts may not be in plain sight. The delivery of real-time insights to the C-suite that translate this complexity into bite-size, actionable communications focused on priorities such as ETR impact and cash flow will be an important piece of the puzzle over the next six to 18 months.
Other issues beyond tax policy also require a cohesive partnership between finance and tax leaders. For example, many CFOs are prioritizing environmental, social and governance (ESG) disclosures, some of which may include total tax contributions. As part of that effort, tax executives also can help their CFOs understand tax transparency expectations. This is in addition to the risk management and incredible efficiency gains achieved by sharing digital tools and automation strategies as well as developing tax-ready data flows.
Historically, tax policy may not have been a regular discussion item for board meetings, but now’s the right time for CFOs and tax leaders to work together to get it on the agenda, confirming their boards have clear visibility to what may come this year. CFOs and tax leaders have a time-sensitive window to provide critical insights and scenario plans to the C-suite and board — and an opportunity to help shape policy in Congress and elsewhere.
With all the change that’s coming, a strong alliance between your finance and tax leaders is more important than ever. It can put your enterprise in a more secure position and help you proactively tackle whatever arises in 2021 and beyond.