While Capitol Hill is currently experiencing gridlock, policy in other arenas continues to change quickly. What we’re talking about today may not be what we’re focused on next week. Amidst such unprecedented times, tax departments must stay on top of ongoing developments. They must be prepared to speak about them, so business leaders have an understanding of their potential impacts.
In our most recent Tap into Tax podcast entitled, “US election and global reform: is your tax department ready”, we discuss the election and tax policy scenarios most top-of-mind, but here’s a quick primer as we see it:
In addition to the race for President, there are a multitude of elections at the federal and state level set for November that will have an impact on the overall political landscape. Key to remember, however, is that the conversation shouldn’t only focus on who wins the White House, but who takes or maintains control of the Senate and House. The old Capitol adage remains true: the President proposes but Congress disposes.
Today, few analysts think Democrats won’t maintain control of the House. The question then becomes, who wins the White House, who controls the Senate, and by how many seats. History has shown that even a narrow majority can overcome a Senate filibuster to advance tax measures using the budget reconciliation process. This is the same tool used most recently by Republicans for the Tax Cuts and Jobs Act in 2017 and Democrats for the Affordable Care Act in 2009. In this scenario, what provisions are included in the legislation that reaches the president’s desk depends on the more moderate members who are generally the least willing to make unilateral partisan changes.
Tax departments of globally-engaged companies must always operate with more than just their headquarters’ jurisdiction in mind. When considering the previously mentioned possibilities of White House, House and Senate controls, each of those scenarios need to be considered with respect to major international tax and policy provisions at play, including the US rules on Global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII), as well as the evolving OECD digital project, to name a few.
The takeaway here is this: Tax policy developments in the US and overseas can impact your company’s overall tax burden, potentially giving rise to double tax on the same income and significant tax controversy. Tax authorities talk to each other. Spend time thinking about how your business operates globally and the impact of tax policy changes across jurisdictions. Presenting a consistent narrative to tax authorities with respect to how your business is organized and how profits arise is a key to avoiding tax controversy and -- just as importantly -- avoiding unpleasant tax surprises for senior management and shareholders.
When administrations change from Republican to Democratic or Democratic to Republican, certainly leadership within each cabinet agency, including the Treasury Department, will change. The staff by and large, however, does not. In addition, many decisions made in any regulatory process are not necessarily political in nature. If we look carefully at the regulations that have come out since the TCJA was enacted, it’s clear that most of them could just as easily have been the product of a Democratic Administration as a Republican Administration. So, although political rhetoric may change significantly depending on the outcome in November, regulatory policy may fluctuate less dramatically.
A key value of your tax department will be its ability to think across the range of possible outcomes, scenario plan, and report back to leadership, audit committees, and boards on the effects. As new scenarios arise, don’t discount them solely based on whether a Republican or Democratic majority is plausible. Instead, as new tax proposals emerge, and details come to light, use them to develop your business’ story and path forward.
In the world of tax planning, it’s always better to ask yourself “what if” rather than “what now.”