In today’s constantly changing market, what are the top concerns of manufacturing CFOs? Tax reform, foreign investment and risk management are three important issues weighing on their minds, as revealed in a lively discussion during Grant Thornton’s new Manufacturing CFO Exchange.
Tax reform topped the list of topics, with CFOs expressing cautious optimism that the Trump administration and the Republican-controlled Congress will come through on a pledge to lower corporate tax rates. President Donald Trump has proposed trimming the current 35% corporate tax rate to 15%, while the House GOP wants to lower the rate to 20%.
Enthusiasm among CFOs is tempered because of the uncertainty of success following the GOP’s failure to repeal and replace the Affordable Care Act (ACA). Repeal of the ACA was intended to free up funds to help make tax reform revenue neutral. Failure of the repeal plan also suggests that Republicans are far from united and may have trouble passing tax reform legislation without help from Democrats.
CFOs said the uncertainty of tax reform makes it difficult to accurately value their merger and acquisition (M&A) activity, given that a potential partner could be taxed at a rate as high as 35% or as low as 20%, and could be affected by proposals to limit deductions for interest and imports.
“Anyone who is active in M&A, you really have to think about how you value the target if there’s a potential range of income tax rates going forward between, at the extreme end, 20% versus 35%. That could swing your value incredibly, and it seems like this could have a chilling effect on M&A,” one CFO said.
Dustin Stamper, Grant Thornton’s director of the Washington National Tax Office, told the group that despite the lull in Congress, Republicans could still move forward tax reform legislation in late 2017 or early 2018.
Among the biggest concerns raised was the potential tax implications of either retaining foreign earnings abroad or “repatriating” those earnings back to the United States.
The Republican proposals call for a one-time tax on all foreign-based earnings held by U.S. companies. The House GOP blueprint calls for an 8.75% rate on cash and cash equivalents, such as stocks and bonds, and 3.5% for other assets. Trump’s most recent tax reform outline includes no specified rate, but his campaign platform proposed a 10% rate.
Some expressed support of the repatriation proposal, which would allow them to bring home foreign-held cash and invest it in domestic operations.
“Of the various tax provisions, the thing we are most interested in is the potential holiday provision that we could repatriate cash on a lower cost basis than we could under the current policy,” one CFO said. “From a cash standpoint, it would be nice to have the cash funds with greater access.”
Others were less enthusiastic, as their companies have invested in foreign plants and other hard assets, with no intention of returning them to the United States. They would simply have to pay the 3.5% tax on non-cash assets.
Uncertainty was a prominent topic of discussion and the participants identified a broad range of risks, among them, loss of key management, insurance and health care costs, environmental regulations, worker safety and compensation, and product liability. Clearly, whatever the risks, CFO’s are playing a key role in this process.
Some companies have a centralized risk management function, which include top executives, the corporate board and other key personnel. Others have a decentralized risk management process, and expressed the need for a more formal assessment system.
Several CFOs advocated the use of a risk management “heat map,” in which various risks are assessed and charted, with rankings by range of severity and probability.
“We share concepts and ideas to try to capture the universe of potential risk ... What are all the things [risks] that might be out there? What are the unknowns that we haven’t thought about?” one CFO said. “We have a heat map that includes probability, severity and a third dimension that is entitled velocity, which is described as either it’s [the potential risk] coming toward us or going away from us.”
The opportunity to discuss issues and share ideas is what makes the CFO Exchange valuable, said discussion leader Jeff French, Grant Thornton’s national managing partner of manufacturing.
“The Manufacturing CFO Exchange offers executives the opportunity to focus on important and timely topics, provide a forum for CFOs to ask questions of their peers, and learn from their peers,” French said.