Keeping up with waves of tax changes can be an overwhelming task for corporate tax departments. Since 2001, the U.S. Congress has enacted more than 5,000 federal tax code changes — a number that doesn’t include thousands more local, state and international tax code revisions. At many companies, this complexity results in reactive tax positions. And because these legacy positions are rarely reviewed, CFOs end up with de facto tax “strategies” to address conditions that may no longer exist. At best, this leads to less-than-optimal tax positions; at worst, it puts businesses at risk.
These issues are compounded by a company’s changing business activities — mergers, investments, locations — and their impact on tax burdens. Too often these operational decisions are made without any consultation with tax professionals. CFOs, too, are often on the sidelines, according to Grant Thornton’s recent Value-Adding Strategies Survey
, which found that only 32% of CFOs have been involved with their company’s tax strategies.
“Companies need to look through their tax strategies and see what makes sense in today’s environment,” says Andrew Wilson
, Grant Thornton LLP partner, Tax Services, and Manufacturing Tax practice leader. “Sometimes decisions were made that no longer apply, and sometimes there’s excessive complexity, given the current situation. Simplifying it makes a lot of sense.”
Link business change to tax strategy
The drivers of a corporate tax strategy are business performance (e.g., revenues and profits) and business actions. Yet as a company grows and diversifies, analyzing the combined tax impact of thousands of distinct performances and actions becomes daunting.
Consider the tax implications from a number of common corporate actions:
Assess the current and future tax landscape
- Global expansion. The U.S. federal corporate tax rate is the third highest in the world, surpassed only by the United Emirates and Chad.1 CFOs may want to identify favorable foreign tax regimes in order to minimize the overall tax burden and optimize expansion (i.e., creating transfer pricing opportunities).
- Mergers and acquisitions. M&A activity can offer huge tax opportunities, depending on purchase structure, business location and the way in which integration is managed. In addition, offshore acquisitions can be structured as inversion transactions, although this has become less attractive to companies since the U.S. IRS and Treasury Department enacted new regulations in 2014.
- Supply chain. Many companies are reviewing their supply chains in pursuit of improved pricing, performance and relationships (e.g., sharing of resources, intellectual property). “Supply-chain changes can deliver significant tax benefits,” notes Kaiser. “If companies are revisiting their supply chain and suppliers, they should consider the tax savings involved, which can be comparable to the efficiencies gained through the rest of the supply-chain restructuring.”
- Employment levels. New hires often mean new tax requirements, as well as the potential for tax benefits (e.g., Work Opportunity Tax Credit). If hires occur outside the United States, the company’s tax strategy must address U.S. and host-country tax benefits for expatriate employees.
- Capital expenditures. The U.S. bonus depreciation for capital expenditures and R&D credits faces an uncertain fate each legislative session. Nearly two-thirds of CFOs indicate that bonus and accelerated depreciation is the most important federal tax benefit for the continued growth of their businesses.2 Wilson advises CFOs to make the investments that business strategy dictates, while monitoring how a potential extension of bonus depreciation could affect the timing of those investments.
- R&D expenditures. Some studies suggest that every dollar in R&D tax relief can prompt a business to spend an additional dollar on research.3 Multinationals may find R&D credits more attractive outside of the United States, because many other countries have a more lucrative R&D tax credit system.
Uncertain tax outcomes related to capital and R&D expenditures highlight the fluid intersection of tax policy and business activities, and illustrate the need for a flexible — and regularly updated — tax strategy. Savvy CFOs will model the tax impact of different scenarios, and incorporate flexibility where they can to accommodate unexpected events.
“It’s not unusual to find outdated tax positions that have failed to keep up with changed federal, state and international law,” says Wilson.
To ensure their company’s tax strategies remain up to date, CFOs should establish guidelines for regular review of the appropriateness of tax positions for current and near-term requirements, including:
- Tax rate changes
- International tax law
- Transfer pricing rules
- Bonus depreciation extension
- Research tax credit extension
- Changes to tax breaks and industry provisions
- Tax on foreign earnings and new inversion rules
- Potential repeal of LIFO
- Marketplace Fairness Act and state efforts to tax online sales
Tax strategies also should reflect the potential of longer-term trends, including U.S. politics, geopolitical events and prospects for the U.S. and global economies. “Tax strategy should look forward at least one to two years and, at most, three to five years,” says Wilson. “It really needs to be revisited regularly, because there will be change in that period, either in a company’s businesses or in the tax environment.”
It’s important to remember, however, that tax concerns should not supersede business objectives. “I am always dismayed when a company does something only for tax purposes,” notes Wilson. “Then taxes change, and often the company doesn’t adjust the business model. We've come into companies two or three years after a tax-driven decision was made, only to find that it wasn’t implemented correctly — or at all. They've wasted all the money to set up the strategy in the first place, and have put the company at risk in the event the tax position is ever challenged.”
Determine tax effectiveness and develop tax strategy
The bottom line is that manufacturers need to determine whether their tax strategies deliver results, in terms of both compliance and effectiveness. If the answer is no, it’s often the result of a disconnect between operations and finance.
“The financial side of the organization and the operational side need to be working together. Everyone needs to understand the strategy, and why certain things are being done in a certain way. Only then will the strategy work,” advises Wilson. “Within the supply chain, there are things you can and cannot do for tax purposes. For example, it may be that one entity has to take title to goods versus a different entity, or else you may not get the desired outcome.”
In high-performing organizations, financial and operations executives regularly identify internal tax drivers (corporate plans) and external tax drivers (near-term tax changes), and then assess their combined impact. They need to review current tax positions, revise or eliminate as needed, and communicate and execute the overall tax strategy throughout the organization. Tax strategy changes should achieve specific objectives, such as improved cash flow, streamlined filings and enhanced compliance. These objectives should be closely monitored against eventual outcomes.
CFOs who invest time and effort into this process find that the rewards go well beyond financial gains. “When we go into companies, we’re trying to simplify the business in addition to delivering tax savings,” says Wilson. “We are making it easier for them to run their businesses.”