Tax leader insights

Businesses see increasing risks from tax policy uncertainty in the US and overseas

US and global tax rules constantly change, but the scope and pace of the global changes currently under  consideration or already underway are unprecedented. Just over half of tax leaders (52%) agree that growing tax policy and administration uncertainty in many foreign jurisdictions poses a greater challenge to US business than potential US tax policy changes.  

Uncertainty over global tax policy stems in large part from a global campaign to rewrite international tax rules by the G20 and OECD in order to develop a long-term consensus solution to tax challenges arising from the digital economy. At the same time, individual jurisdictions are resorting to unilateral tax measures that work against the OECD process. Add to this debate the pandemic and the increased budget costs to governments, and it’s easy to envision more aggressive audit and enforcement postures by domestic, local and global taxing authorities.  

Uncertainty over US tax policy may be related more to the high degree of political polarization evident in recent years in the United States with respect to tax policy and many other areas of public policy. 

While the global tax policy uncertainty challenges may seem higher because of specific actions being taken in Europe and other jurisdictions, the actual tax impact to a company will also depend on how the US responds with potential changes to US  international tax rules. US policymakers have signaled that a range of options are under consideration, including denying US foreign tax credits for the payment of certain types of foreign taxes. The US also has threatened to impose tariffs on goods and services from countries that implement unilateral policies seen as targeting US technology companies. A key challenge for business leaders will be guiding policymakers toward reasoned, pro-growth decisions that provide mechanisms to avoid double taxation and resolve intergovernmental disputes expeditiously. 

Taken together, these global tax policy developments have generated a “perfect storm” of uncertainty at the very same time that businesses are seeking to reassess their future plans and business models. As a result, tax leaders will need to communicate these global risks to the C-suite, develop a plan to engage with key stakeholders and take proactive steps to manage the risks.

Surtax on the foreign income of US companies will make US companies less competitive globally

Most tax leaders (82%) agree that a surtax on their company’s foreign profits would make them less competitive globally. While US businesses have sought to expand their businesses by entering foreign markets, policymakers have taken differing approaches to taxing the foreign profits of US multinational companies. Some proposals that seek to impose additional taxes on foreign earnings face the challenge of putting US companies at a disadvantage relative to their foreign competitors, which are not subject to US tax on their foreign earnings and also are generally not subject to tax in their home countries on their foreign earnings. 

Business leaders will need to weigh in on how proposed changes to the taxation of foreign income may affect their businesses. Understanding and quantifying the potential impact of such proposals on US economic growth and job creation could help the business community steer policymakers toward solutions that achieve the goal of tax fairness, while allowing US companies to remain competitive globally.

A growing US market is the greatest incentive for re-shoring 

The pandemic has highlighted business concerns related to supply chain and manufacturing disruption and also has renewed interest in proposals to encourage domestic manufacturing. Over two-thirds of tax leaders (68%) say rising demand for their product is the biggest factor in the decision to expand domestic production, while 32% say that tax provisions would have the greatest impact. 

Businesses evaluating potential changes to their supply chains may be considering increasing US domestic production, and tax will be one of the many factors that must be considered.

Views on global tax transparency movements 

With governments facing increased fiscal demands related to the global pandemic, an overwhelming majority (86%) of tax leaders expect an increase in demand for global tax transparency in the next few years, which could lead to greater reputational risk and increased tax controversy for businesses. 

Companies will need to increase the focus on risks and threats arising from demands for greater transparency of detailed tax data that may disclose proprietary business information to competitors. Furthermore, greater tax transparency is likely to increase tax disputes. The pandemic and its aftermath are likely to increase governments’ need for revenue at a time when many governments have expressed dissatisfaction with the current allocation of global profits. 

Unfortunately, the dispute resolution mechanisms needed to iron out conflicting governmental claims to global profits and provide business certainty are yet to be developed and agreed upon. Global businesses will look to manage risk through policies, procedures and controls around how they determine tax positions and work with tax authorities beginning with how they disclose and manage the information required to be disclosed. Transparency will necessitate a coordinated approach to tax audits and dispute resolution.

In light of the increased push for greater tax transparency, it is imperative for companies to assess the risks, communicate them to the appropriate stakeholders, including the board and management, and devise a plan to manage the risks.

CFOs and tax directors agree on where the tax function adds value

The economic effects of the pandemic have made liquidity a key concern for many businesses. It’s no surprise that CFOs and tax leaders alike agree that generating cash savings is the highest driver of organizational value for the tax department (37%). The tax function plays a critical role as companies focus on their cash strategy in a downturn economy. Some examples of how tax leaders can manage their cash taxes include accelerating deductions, obtaining refunds, and reducing or deferring required tax payments where permissible. Tax leaders also can work with their company’s treasury function to align cash repatriation strategies as well as with the finance function to align financing options to achieve liquidity for the company. The focus on liquidity also highlights the degree to which businesses see a continued need for additional fiscal assistance to bolster US economic growth and consumer demand.

Tax departments bring value in other ways, as well. Both CFOs and tax leaders say increasing earnings is the second highest value-driver for the business, followed by managing risk, and lowering the tax function operating costs. Overall, tax departments are being called on to do and contribute more to the overall strength of their businesses.