How are businesses navigating tax reform across different industries?

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By: Ty Kanaaneh, PwC’s TMT Tax Leader, John Livingstone, PwC’s Industrial Products Tax Leader, and Eric Shin, PwC’s Consumer Markets Tax Leader (Originally published on Medium on March 29, 2018)

Tax reform continues to be a priority for business leaders across industries. How are they managing the changes? How are they feeling? How should they navigate the road ahead? Following PwC’s recent tax reform sector roundtable series, we asked three of our leaders for their insight.

1. Looking back, what was the sentiment shared among your sector when the 2017 tax reform act (Act) was signed into law?

John Livingstone, Industrial Products* — Though my sector is fairly broad, there are a lot of manufacturing entities who shared a common excitement around aspects of the Act when it was signed into law, such as the reduction of the corporate rate to 21 percent and the ability to access foreign cash in a tax-efficient manner. We also have a lot of exporters in the sector, particularly in aerospace and defense, and they expect additional rate reduction benefits from from the foreign derived intangible income (FDII) provisions. There was also a lot of positivity around the expensing provisions, which are key in a sector with manufacturing entities. Under the law you can immediately expense the cost of equipment you purchased and installed in factories. Still, there were definitely trade offs, such as the one time toll charge that cost more than what clients originally anticipated. In the grand scheme of things, most businesses were willing to make that trade.

Eric Shin, Consumer Markets** — Right out of the gate, we shared a similar positivity as well. Tax reform is giving companies plenty of reasons to take a pause and reconsider their existing operating models, including having the US serve as a hub of intellectual property to take advantage of the rate and FDII. Tax reform also encourages companies to take a deeper look at their global profiles, not only from a tax perspective but also to see what their operating expenditures look like, and to consider whether there is an opportunity to reduce costs by restructuring the supply chain to lower cost jurisdictions while optimizing the tax posture. While this may require a transformational level of effort, the upside could be significant.

 Eric Shin discussing tax reform at PwC’s Consumer Markets tax reform roundtable 

Ty Kanaaneh, Technology, Media and Telecommunications (TMT) — We balance a few perspectives within our bucket of sectors. Telecom is a predominantly domestic industry, so they are generally positively impacted by tax reform. It’s definitely something they need to deal with, but so far it’s not proving to have as big of an impact as it is having in the Tech sector. Within Tech, tax reform is incredibly important. There is a sentiment that, given tech companies’ global footprint and significance of intellectual property in their business, that much of the bill significantly affects this sector. Our clients are responding to tax reform in very different ways.

2. Eyes remain on Treasury and the IRS as they work to provide guidance and implement the provisions of the Act. What are the biggest challenges your clients are facing now?

Eric, Consumer Markets — Despite the welcomed opportunities tax reform is bringing to the majority of our clients, certain skepticism remains. It’s one thing to activate modeling exercises and complete cost-benefit analyses, but in the back of a lot of our clients’ minds, there are concerns over the permanence of the legislation. With mid-term elections on the horizon, possible technical corrections, and further guidance, businesses are certainly cautious about whether they are going to make significant changes — such as moving locations or changing structures — while there is still significant uncertainty on certain items. It’s a real dilemma.

Ty, TMT — Many clients we work with are concerned over the Global Intangible Low Taxed Income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) provisions. The way the new rules are structured around intellectual property aren’t as beneficial as they used to be. Tech is a sector that has become dependent on their intellectual property structures, which are likely negatively impacted by GILTI and BEAT.

Ty Kanaaneh kicking off the 2018 tax reform roundtable for TMT 

John, Industrial Products — Many clients initially thought that most companies in our sector wouldn’t owe tax on GILTI. As tax professionals have spent more time with the law — particularly the expense allocation provisions — GILTI has become a big concern for a large number of companies in the sector. Companies are discussing these issues with Congress and Treasury to express concern that the way the law was written seems counter to the policy objectives of the law. Similarly, when the BEAT provision was enacted, it was viewed primarily as an issue for inbound clients. However, a number of US multinationals, given the global nature of their businesses, are being negatively impacted by the BEAT. There’s concern about the go-forward impact of the rules, and how businesses should structure themselves to mitigate the impact of these provisions.

3. Considering the challenges, and other uncertainties, how are you advising clients moving forward?

Ty, TMT — Honestly, we’re doing a lot of listening because no one has all the answers yet. With so many unknowns, including a potential shift in political power, we’re advising clients in our sector to go after the low hanging fruit that will help improve their tax footprint, but to be very thoughtful about structural long-term commitments. As an example, think about how you can change your intercompany arrangements versus redomiciling your international headquarters to a new jurisdiction. In certain cases, businesses need to get comfortable with the uncomfortable. Repeat disruption is the new norm.

Eric, Consumer Markets — I think it takes a bit of a mentality change. It’s not news to say that market conditions change every day. All businesses have ups and downs. Tax reform should not be treated simply as a tax event, but should be treated as any other business event. What do you do when you have an upside? Every single company should have a strategy to allocate capital. What do you do when additional capital is available? Does it change the overall strategy or does it help to accelerate the predefined one? The businesses that can navigate the uncertainties of tax reform, identify the key opportunities, and are agile enough to act on them quickly before others will be the true winners.

John, Industrial Products — As I mentioned, there’s a lot of focus in the sector around whether certain provisions that are perceived to be counter to the underlying growth policy will be addressed in the coming months. The jury is still out on whether any meaningful changes will occur, but in the interim we haven’t seen many companies react in terms of evolving their business plans, like operating models. Given the uncertainty, we are recommending that companies pursue the fixes in Washington, but also start considering what they might do if nothing does in fact change. The new rules are going to impact a variety of decisions — where they own intellectual property, M&A, and beyond. We had the same tax laws for 31 years, but today is different. A wait and see approach will only be viable for so long.

John Livingstone onstage at PwC’s tax reform roundtable for Industrial Products

4. Last question: In one sentence, what was your biggest takeaway from your respective sector roundtables?

John, Industrial Products — It was definitely the issue I just highlighted — should companies wait for clarifying guidance or should they start taking actions given the interpretations that currently exist?

Ty, TMT — Overall, tax reform will have a positive economic impact on clients in the TMT sector, but it has created significant incremental complexity and uncertainty that will put more demands on already oversubscribed tax organizations.

Eric, Consumer Markets — Today’s tax directors have extremely challenging jobs. How can you plan under such a dynamic and uncertain environment with so many unanswered questions and unintended consequences resulting from tax reform? Yet companies can’t afford to do nothing when competitors are looking to gain an advantage.

*PwC’s Industrial Products sector is comprised of companies in the following categories: Aerospace & Defense, Forest Paper and Packaging, Metals, Chemicals, Automotive, Engineering & Construction and Industrial Manufacturing.

**PwC’s Consumer Markets sector is comprised of companies in the following categories: Hospitality & Leisure, Transportation & Logistics, Retail & Consumer Products.

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Ty Kanaaneh

Technology, Media and Telecommunications Tax Leader, PwC US

John Livingstone

Global Industrial Manufacturing & Automotive Tax Leader, PwC US

Eric Shin

Consumer Markets Tax Leader, PwC US

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