While global and US tax rules are constantly evolving, the scope of the changes underway and under consideration is unprecedented. The threat of disruption is increasing, creating an environment in which uncertainty is the status quo. These changes will have an impact on expansion plans, historic operating structures, and financial reporting. They merit C-suite level attention, as do the challenges to the international trade world order.
To prepare, executives should engage with their Tax and Trade functions early to understand the potential impact of upcoming changes on strategic priorities and be in a position to respond proactively.
We’ve identified seven top trends and developments that should be on your radar:
The 2020 elections may trigger a change in control of Congress and/or the White House, setting the stage for rethinking US tax policy. There was no Democratic support for the 2017 tax reform law, and many Democratic Congressional leaders and Presidential candidates have stated their intention to rollback 2017 cuts in both individual- and corporate-level taxes, and to impose new forms of taxation such as ‘wealth taxes.’ Meanwhile, many Republicans want to retain tax reform provisions and even pursue additional tax cuts, notwithstanding trillion dollar annual deficits and historic levels of publicly held federal debt.
Why it matters: Political divisions and fiscal challenges may lead to increases in overall tax costs and higher effective tax rates for financial statement purposes. While unified control of the White House and Congress is a predicate to policy swings, neither side appears likely to gain the super-majority level of support in Congress needed to enact truly radical change.
The IMF has identified uncertainty caused by trade tensions as the greatest threat to global economic growth. Tariffs – the United States’ prime source of federal tax revenue before the advent of the income tax – are affecting businesses large and small, as increased US tariffs on imports from China and Chinese retaliation have been a drag on both economies. Congressional action on USMCA may occur this year, paving the way for significant changes to tariff costs and associated compliance requirements for North American trade. Other global trade agreements are in flux as a result of unresolved developments such as Brexit.
Why it matters: There will be a chilling of trade activity and a rise in trade costs until outstanding issues are resolved. Tariffs will affect companies’ overall competitiveness, as well as their workers and families if the costs are not passed on to consumers.
Currently, there is uncertainty in Congress over how to advance legislation – so-called technical corrections – to address errors in the 2017 tax reform legislation, such as a correction relating to expensing for qualified improvement property costs.
Congress also must consider whether to revive taxpayer-favorable credits, deductions, and incentives that have expired, or will soon. An important example is the controlled foreign corporation (CFC) ‘look-through’ rule, which permits reinvestment of earnings among foreign subsidiaries without triggering US tax. There is bipartisan support for many expired or expiring credits that incentivize investments in new products and in areas like renewable energy.
Why it matters: Fiscal uncertainty regarding the tax treatment of specific activities and operating structures makes it difficult for businesses to plan for the future confident of the tax consequences.
Base-broadening provisions will result in higher US taxes if they take effect as scheduled. Key business provisions set to become more restrictive include:
Overall, these developments could have an adverse impact on debt-financed investments in the United States, deals valuation, the ownership of IP, and the location of research activities.
Why it matters: While there is bipartisan interest in revisiting some tax reform provisions that negatively affect business, legislative action is unlikely any time soon. Assuming the base-broadening provisions take effect as scheduled, the result will be larger tax bills for US businesses.
Treasury and the IRS continue to release regulatory guidance implementing US tax reform. While more than 2,300 pages of federal regulations have been released, open-ended questions remain and significant guidance has yet to be finalized. Adding to the complexity and uncertainty, many states continue to ‘go their own way,’ creating specific rules for whether and how to apply federal provisions.
Why it matters: There may not be clear answers on the tax treatment of cross-border operations, increasing the risk of unexpected costs.
Companies have relied on century-old international tax principles to determine their tax liabilities arising out of global operations. Governments are re-thinking these principles, however, during a time of public debate over whether companies are paying their ‘fair share’ of taxes. Although the debate surrounding ‘fair share’ has focused on ‘digital’ businesses, proposals to change the international tax system have extended beyond digital businesses.
Many products and services sold via digital platforms do not clearly fall within current state sales tax rules, which were put into place well before the digital economy. The US Supreme Court decision in Wayfair allows states to impose sales tax obligations on sellers even if they lack a physical presence in that state – a fundamental shift from historic principles. In response, US state governments are altering their tax rules to allow for a broader imposition of tax, particularly for the collection of tax on goods and services.
At the same time, states continue to focus on attracting business investment -- for example, by offering performance-based incentives tied to hiring a certain number of employees. Such state-level incentives may be supplemented by a federal tax incentive enacted in 2017 for investment in designated opportunity zones.
Why it matters: New approaches and obligations on the state and local levels could yield unexpected costs, such as additional withholding and sales taxes, as well as benefits from possible tax incentives.
Uncertainty stemming from constant change is the norm for executives to manage. What used to be an environment with more settled tax policy guideposts has shifted to a new, unfamiliar landscape at each level -- international, federal, and state and local. Navigating this turmoil will require more deliberate engagement between the C-suite and the Tax and Trade functions. The complexity of the current environment requires greater analytics and modelling – capabilities within reach of the modern Tax and Trade functions.
To avoid more significant challenges down the road, businesses can assess and plan for the potential impact of changing global, federal, and state and local tax policies. The task of planning in the face of uncertainty can be challenging, but the effort may help businesses realize their long-term visions for growth and value creation for all of their stakeholders.