With the implications of the 2016 General Election beginning to come into focus, tax directors are looking closely at the new administration to gauge how potential tax reform might impact their financial reporting strategies and ultimately their bottom lines. In fact, all the tax executives who participated in this year’s survey said that reform is at least somewhat likely under the new administration, with 60 percent of those saying reform was very likely, according to the third annual BDO Tax Outlook Survey.
Reforms aimed at driving growth of American business top tax directors’ reform wish list, with 40 percent hoping for a reduction of the 35-percent corporate tax rate, according to the survey. One in five (20 percent) of respondents point to tax incentives to repatriate foreign earnings as a top interest, while 17 percent cite a shift to a territorial tax code.
The portion of directors interested in lowering the tax burden of capital gains was nine percent, up from two percent in 2016. And just two percent cited changes to the tax treatment of carried interest, discussed by both candidates throughout the campaign, as their primary ask.
In addition, more than a third of respondents (34 percent) highlight planning for federal tax reform as their primary tax concern in 2017, up from 21 percent in 2016. Given talk from both the GOP and the president on reforms ranging from cutting investment income taxes to enacting a border adjustment tax, businesses will undoubtedly be adapting to a changing landscape throughout the coming year.
Despite the strong belief that reform will occur, most tax executives (51 percent) believe congressional gridlock will be the primary obstacle to tax reform over the next four years. Others point to conflicting legislative priorities (19 percent), public opposition to proposed reforms (13 percent) and international actions related to multinationals (12 percent) as potential roadblocks. Just five percent believe the outcome of the 2018 midterm election will stall reform efforts.
“Despite the widely-debated initiatives discussed during President Trump’s first months in office, steering federal tax reform is more like an aircraft carrier than a speedboat. It takes time and effort to change course,” said Matthew Becker, partner in the national Tax practice at BDO USA, LLP. “Any changes that do come to pass may look significantly different than what’s being proposed today, so businesses should stay abreast of how the potential outcomes could impact their bottom line and remain ready to pivot their tax planning strategies when important developments arise.”
While domestic tax reform continues to dominate headlines, major efforts on the international stage also remain a source of anxiety for tax executives. Unsurprisingly, 82 percent of the companies surveyed conduct operations outside of North America, and just over half (54 percent) plan to enter or expand into international markets this year.
As tax executives look to optimize global growth, international tax planning is top of mind. But navigating the waters of international regulations is never a simple task, especially following the publication of the Organization for Economic Co-operation and Development (OECD)’s action plan designed to address tax base erosion and profit shifting (BEPS) in 2015. The highest portion of those surveyed (35 percent) say international tax planning, including BEPS, is their primary tax issue for 2017.
In keeping with last year’s survey, BEPS recommendations around transfer pricing (Action Items 8, 9, 10 and 13) generate the greatest concern among tax executives, cited by 51 percent of respondents. Their concern is a valid one, as 76 percent of tax executives surveyed currently include transfer pricing mechanisms in their tax strategy.
While BEPS remains a critical issue for tax executives, strategies for responding to the initiative vary. A majority (57 percent) of respondents say they are proactively taking steps toward implementation based on the Action Item drafts. More than a third (35 percent), however, plan to wait for individual countries to implement BEPS measures before acting. Given recent criticism from China and other nations that the rules may not be appropriately tailored to the developing world, it remains to be seen how global implementation will shake out.
Despite implementation uncertainty, some BEPS reporting rules are already coming into play, with country-by-country reporting rules beginning for tax years starting on or after Jan. 1, 2017. Nine out of 10 (91%) tax executives anticipate meeting the initial country-by-country reporting deadline at the end of this year.
“When the OECD first released the BEPS Action Plan, implementation seemed far off in the future for most multinationals,” said Paul Heiselmann, national managing partner of Specialized Tax Services at BDO USA, LLP. “Now that the country-by-country reporting deadline is looming, businesses need to take steps to proactively adjust their financial reporting practices and prepare for future changes related to transfer pricing mechanisms.”
Additional Findings of the 2017 BDO Tax Outlook Survey:
Tax Executives Look to State and Local Incentives to Offset Tax Burden
Looking beyond slow-moving federal and international tax reforms, tax executives turn to state and local incentives to reduce their tax burden, as states themselves try to balance gathering revenue with attracting growth. When asked what programs they take advantage of in the U.S. market, 91 percent of respondents cited income or franchise tax credits and exemptions. Eighty-eight percent use sales tax refunds and exemptions, and 86 percent rely on property tax abatements and exemptions. Just over half (52 percent) benefit from training grants, and 37 percent take advantage of financing programs.
More Public Companies are Filing for R&D Tax Credits
The passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015 put an end to the tumultuous history of the federal research and development (R&D) tax credit after years of repeated expirations and renewals at the eleventh hour. In the year following the implementation of the PATH Act, the survey found that use of the credit grew. Eighty-two percent of tax executives surveyed make use of some form of R&D credit, up from 75 percent in 2016. The majority (64 percent) use both federal and state credits, while one in three (33 percent) claim only the federal credit.
The BDO Tax Outlook Survey is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 100 tax executives at public companies, using a survey conducted within a scientifically developed, pure random sample.