Strategy

Six Months into Tax Reform – Where Are We and What’s Next?


by Jeffrey C. LeSage

Today marks the six-month anniversary of the The Tax Cuts and Jobs Act of 2017 (TCJA). Here are five big questions on tax reform.

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KPMG’s 2018 CEO Outlook study shows that U.S. CEOs are bullish about the economy and their own growth prospects over the next three years, and tax reform has contributed to their optimism. Here are five big questions on the new law.

1. How is the new U.S. tax reform law being received by companies so far?

Overall, the new law has been well received by the business community – especially the reduction of the top corporate rate to 21 percent from 35 percent. Tax reform has made the U.S. corporate rate more competitive with the rest of the world while spurring investment and other economic activity. In fact, KPMG’s 2018 CEO Outlook study shows that U.S. CEOs are bullish about the economy and their own growth prospects over the next three years, and tax reform has contributed to their optimism.

That said, many companies are being challenged by the ambiguity, inconsistencies, and possible unintended consequences around certain provisions in the law. It’s not a perfect law. None are. But no one should be surprised that certain provisions need clarification or corrections. 

2. What are some of the uncertainties and unforeseen consequences, and how are they impacting companies?

U.S. tax reform layers new law on top of years of existing law – which inevitably results in a certain measure of complexity. Many but not all of the questions and concerns we’re hearing involve the complicated and interrelated international provisions in the tax reform bill.

These provisions – which include a tax on global intangible low-taxed income (GILTI), a base erosion and anti-abuse tax (BEAT), and reduced rates on certain foreign-derived intangible income (FDII) – create an unfamiliar new tax landscape for U.S. inbound and outbound multinationals.  

These international tax provisions can lead to surprising results in some instances. Take BEAT, for instance. While arguably focused on base erosion by inbound companies, the provision has a much broader reach. Companies are finding that the provision can apply to an extremely broad range of deductible payments to foreign affiliates, generally without any “offset” for inbound payments from those affiliates.  Companies providing services, including financial services, can end up being hit especially hard. BEAT also creates surprising interactions with other international tax reform measures, and the overall picture can be hard to understand without detailed modeling and scenario analysis.

Chief tax officers and chief financial officers have a lot of questions about how to implement aspects of these and other provisions. Some are concerned that new tax costs might unintentionally offset the savings their companies could reap from the tax rate cut. Top tax executives are also under pressure from senior management and boards to provide detailed analysis on how the new tax law could affect the business today and over the longer run. 

Until some of the uncertainties get resolved, however, tax departments are finding it difficult to provide detailed analysis. Many are even having trouble determining their companies’ effective tax rates (ETRs) precisely and have resorted to providing a range for their ETRs for now.

3. How and when may these uncertainties be resolved, and what can companies do in the meantime?

Fixes will need to come from the IRS and Treasury in the form of regulations or guidance, or from Congress in the form of technical corrections. Some guidance has come out already. But much more is needed, and it could take a while from what we’re hearing. Until this guidance is issued, companies may find themselves in a difficult spot as they try to comply with the new law. 

Historically, Treasury has provided a grace period for taxpayers to bring their transactions into compliance with final guidance without penalty, as long as they make a “good faith” effort to interpret the provisions. With that in mind, tax departments should do their best to determine a new statute’s meaning, take reasonable positions, use reasonable estimates, and be consistent. 

Similarly, companies should do their best to assess the potential implications of the law for their businesses and make the best decisions they can in light of that assessment. Taxpayers should also continue to work with their government affairs teams and industry groups to push for clarification and guidance.   

4. What potential opportunities and challenges does the U.S. tax reform law create for companies?

Businesses are still sorting through the impact of the tax reform bill, which is the first major tax reform we’ve seen in the U.S. since 1986. The law’s effects will play out in the coming months and years, as Treasury and the IRS issue and interpret new rules. We can draw two major conclusions about the law’s impact. 

First, the new law is clearly going to impact various sectors and companies differently.  There will be winners and losers, and perhaps, more importantly, relative winners and losers. There always are with highly complex pieces of legislation.

Second, the law will have implications, both positive and in some cases, negative, for many companies, especially multinationals, across their entire organizations – from tax, financial reporting, and compliance and technology to opportunities for M&A, enhanced value chain management, possible changes to their business structures and related HR. 

The new tax framework raises a host of important business questions for CFOs and other finance executives, as well as other members of senior management and boards, to consider. These include: 

  • Are the tax, finance, and IT functions working together closely to tackle the tax technical and reporting challenges arising from tax reform?  
  • What’s the best way to employ the additional cash that might become available as a result of the corporate rate reduction and mandatory repatriation? 
  • What’s the anticipated baseline impact of U.S. tax reform on the company, and what are the opportunities to mitigate certain tax costs? 
  • What’s the potential impact of new interest deduction limitations and anti-hybrid measures on existing financing arrangements?
  • Is now the time to consider altering value chains in light of provisions in the U.S. law favoring U.S.-based production and manufacturing, as well as global tax reforms emerging from the OECD’s Base Erosion and Profit Shifting initiative?
  • What’s the best location for IP and other intangible assets in light of U.S. and global tax reforms? 
  • How might the new U.S. law influence M&A calculations and the attractiveness of specific actions?
  • How might responses to U.S. tax reform from the EU and individual governments ultimately affect the business?

5.  What should CFOs and other finance executives be aware of as they respond to U.S. tax reform?

U.S. tax reform is complex, and its interrelated parts makes modeling and scenario analysis critical to understanding its potential impact. In addition, the scope and breadth of the new law will have a profound impact on almost every company. 

Finance executives must spend time with their CTOs and other tax executives to enhance their understanding of the law and its potential near- and long-term ramifications. Recognize that the new law could put pressure on their finance, tech, and even HR departments. And most important, actively seek out and consider the opportunities that this major rewrite of the U.S. tax code could create for organizations of all sizes. 

U.S. and global tax reforms will reshape aspects of the business landscape over time. As they do, business leaders should harness these changes as they strive to transform their businesses into true 21st century enterprises. This is an exciting, once-in-a-career opportunity to be part of something epic. 

Jeffrey C. LeSage is Americas Vice Chairman—Tax at KPMG LLP.