Steps chief tax officers and chief finance officers can take now to be better prepared for when the legislation arrives.
While it seems some progress is being made on the legislative front in pursuit of tax reform, the politics around the proposal between the House and Senate is still challenging, to say the least. It’s also unclear whether a popular groundswell for a tax code overhaul will emerge that could help overcome legislative reluctance to change the status quo. And even with broad support, Congressional budget reconciliation rules and basic math point to a number of hard choices that still lie ahead.
Among the questions to be answered: Which items could be permanent, and which only temporary? Will there be an additional tax bracket for high earners? And perhaps under the radar but certainly critical for many corporate taxpayers, what will be the transition rules between the current system and the new one?
While acknowledging the political and procedural hurdles that still need to be overcome before the framework could become legislation, the House is currently committed to presenting legislation by the end of October. With that in mind, there are some short, quick steps that chief tax officers and chief finance officers can take now to be better prepared for whenever the legislation arrives—and to help identify areas where they may want to engage with their representatives and help manage the potential impact on their organizations of any eventual legislation.
- Now that the outline of the framework has been announced, it’s time to model (or re-model) how different proposals might affect your organization. Consider the overall potential impact of a range of reduced overall corporate tax rates on the loss of deductions. As I’ve said before, tax reform isn’t just about a lower rate. Where you see vulnerabilities or gaps after your analysis, engage with policymakers to help them better understand the issues and share your insights.
- Use the opportunity to also discuss the transition framework for the proposals. Transition rules aren’t just minor details. For many taxpayers, a transition rule could be the make-or-break factor between being a winner or a loser at the end of tax reform.
- The framework raises the possibility that Congress will enact a rule requiring mandatory repatriation of foreign earnings. If your company has significant international holdings, you should begin analyzing your earnings and profits (E&P) calculations, so you can better gauge the potential impact that change could have on your organization. Also, be prepared to measure E&P in non-traditional ways, including possibly mid-year.
- Finally, remember that changes can affect operations far beyond your tax departments. Financial reporting and business planning also stand to be affected. For example, under accounting rules, if reform is enacted this year, companies will have to account for the law’s changes in their December 31, 2017 financial statements, even if the law itself isn’t effective until 2018. That’s why you should bring all parties to the table now to provide their perspectives and plan how they will respond.
Things could move quickly – or not at all. But the time you spend now planning your response and future position won’t be wasted either way.
Jeffrey C. LeSage is Americas Vice Chairman-Tax, KPMG LLP.