With Election Day behind us and former Vice President Joe Biden projected to become the next President of the United States, there are still many unknowns regarding the outcomes and implications of November’s elections. In the midst of uncertainty, one question remains for tax leaders: What questions and conversations can the C-suite engage in now?
While the media has called the Presidential election for former Vice President Biden, the election remains under recount in many states and under litigation from the Trump campaign. In Congress, it is now clear that the Democrats will retain control of the House of Representatives.
The outcome of the Senate is what is driving much of the uncertainty for businesses. Both Georgia Senate races will likely require a runoff election in the first week of January, as no candidate in either race received over 50% of the vote. Democrats would have to unseat both incumbent Republicans in order to gain 50-50 control in the Senate (with Vice President-elect Kamala Harris as a tie-breaking vote).
So, what does all this mean for US companies and foreign companies doing business in the US?
Without a Democratic Senate, major legislative changes to the tax code proposed by President-elect Biden on the campaign trail, such as increasing corporate tax rates, appear less likely. The most likely legislative changes would be those where solid bipartisan consensus can be found, such as incentives for investing in US production, R&D, and rebuilding the US workforce. Nevertheless, companies should still be modeling these provisions as compromise legislation over the next two years could encompass some of the proposals.
In addition, unlike the Presidency, much of Congress changes on a two-year basis so companies should be mindful that the balance of power in 2021 could shift in 2023, after the 2022 midterms (as we saw after the 2018 midterms).
After considering the implications of the election, the overarching question remains: -How should tax leaders start the conversation with the C-suite about tax policy today?
First, tax leaders should apprise the C-suite regarding what’s on the immediate horizon for the end of 2020 and beginning of 2021. There is the continued need for Phase IV (‘COVID cleanup’) legislation, in addition to the need for legislation regarding government funding, which is set to expire December 11, 2020. There are also certain tax provisions that will either expire at the end of 2020 or change in 2022 (e.g., CFC look-through, R&D expensing, interest expense limitation).
Second, while there are still unknown factors, businesses should not fall into “analysis paralysis.” Continuing to plan for the future through modeling and scenario-planning remains vital.
There are some upsides to having time before the immediate future of tax policy is known; most notably, executives now have a chance to take a step back and plan for the longer term.
The international provisions of the TCJA, many of which were recently finalized in regulations, present many complex issues that companies have more time to focus on now. That said, a new administration means a new Treasury Department, which could yield regulatory changes that have significant implications for businesses.
Finally, the C-suite should continue to consider the international tax landscape. Developments in the OECD’s BEPS 2.0 project, digital services taxes (DSTs), and trade tensions will continue to be important in the coming weeks and months.
Bottom line? Tax leaders should proactively engage with the C-suite: continue to model foreign tax and trade risks; continue to focus on supply chains, the company’s global footprint, and the location of critical people and functions. Finally, tax leaders should keep a close pulse on the continuing changes in the political landscape and evaluate how those changes may affect the timing and implementation of business decisions.