With many Americans engrossed in the ups and downs of a turbulent election season, tax directors are perhaps paying closer attention than most of us.
According to a BDO USA LLP phone survey of U.S. tax directors and executives, the prospect of the November elections clearing the way to meaningful corporate tax reform is among the leading issues as they plan for 2017 and beyond.
International tax planning and BEPs (the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative) topped the list of tax director concerns, followed by U.S. tax reform, attributional nexus concepts, growing scrutiny on foreign earnings, and other issues.
FEI Daily spoke with Matthew Becker, a partner in BDO’s national tax practice, about the topics dominating tax planning and tax executives’ to-do lists.
FEI Daily: Tax reform has been an issue for a while, so what’s changing the climate now?
Matthew Becker: What the survey revealed is that the coming change in administration has people again thinking about tax reform. If you look at what the survey found, 77 percent of those surveyed believe that we’ll see significant new tax reform with a Republican president, while 33 percent believe that will be the case if the next president is a Democrat. You can make any inference from that you would like, but given the things that tax directors are concerned about and our attention on the election, there’s growing hope amongst tax executives that we’ll see some kind of broad-based corporate tax reform.
If history is our guide, we should not be too optimistic, but none the less, I believe there is optimism. A reduced corporate tax rate is a huge item on the wish list, along with shift to a territorial tax system and a strong desire to see some tax incentives to repatriate foreign earnings. We think the Cadillac Tax is still a big issue for a lot of corporate tax executives dealing with the complications associated with that, hoping it will ultimately be repealed.
FEI Daily: There was a lot of legislative tax-related activity at the end of 2015, including the PATH Act. How did that change tax planning for U.S. companies?
Matthew Becker: What the PATH Act did was create some certainty. The R&D credit had previously not been a permanent part of the tax code, so it had to be passed again year after year through extenders. The PATH Act, among other things, made that R&D credit permanent, which provides some certainty for the future. If you look at some of the reasons tax directors didn’t claim the Federal R&D credit, one of them was the unpredictability of annual renewal and fear, if you will, of going through the process of claiming the R&D credit, or preparing to claim it, only to have it not be part of the tax law.
FEI Daily: With state and local budget challenges, are tax directors showing concerns about issues at those levels?
Matthew Becker: State and local tax considerations are weighing heavily on tax directors’ minds. If you look at state tax law in general, we’re seeing increasing complication because of states becoming more aggressive, probably because of their budget problems and thus businesses have to deal with more aggressive state taxing authorities.
In response, companies are trying to take advantage of everything they can, incentive-wise, in state and local tax law. The survey showed that 89 percent of those responding claim income or franchise tax credits or exemptions.
FEI Daily: If you look internationally, are companies getting ready for BEPS compliance?
Matthew Becker: Yes, the OECD’s 15-point BEPS action plan is something that companies are preparing for. The complicating factor is that while the action plan applies to all OECD countries, it has to be implemented separately by each, witihn their own political systems. There is some uncertainty in exactly how BEPS will be embraced in all the world’s major economies. Once we get beyond how it will be embraced, how it will be implemented is another major question.
Here in the United States, I’m not aware of any specific action yet in terms of changing tax law, but we’ve seen some policies begin to lean in the direction of compliance.
FEI Daily: In general terms, is there a difference in tax planning between public companies and private companies?
Matthew Becker: There’s one set of tax laws, so theoretically, no, but the reporting requirements for public companies are significantly greater than for private companies. The more complicated the tax accounting for a public company is, the more likely that a material misstatement of financial statements can come from income tax accounting.
In general, public companies are more concerned about properly reporting the tax planning they engage in than private companies, likely in large part because public companies need to consider public opinion more carefully than private companies do.
FEI Daily: How do companies address the challenge of dealing with uncertainty?
Matthew Becker: Uncertainty can often lead to inaction. Most organizations avoid spending resources to engage in planning that may not have a benefit. What I think uncertainty does is causes inaction in many cases and might cause U.S. corporations to fail to take advantage of congressionally intended tax benefits because of uncertainty around the longevity of those benefits. The R&D credit we talked about earlier is a perfect example.•