Tax Executives See Tax Reform Ahead Under Trump

International tax planning is executives’ top of mind issue, BDO USA survey finds

All tax executives at U.S. public companies think tax reform is somewhat likely under the Trump administration, and 60% said reform was very likely, according to the annual BDO Tax Outlook Survey.

However, 51% of tax executives said congressional gridlock would be the primary barrier to tax reform over the next four years, while 19% pointed to conflicting legislative priorities, 13% to public opposition to proposed reforms and 12% to international actions related to multinationals.

“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,” Matthew Becker, partner in BDO USA’s national tax practice, said in a statement. “It takes time and effort to change course.

“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.”

Executive interviewers at Market Measurement conducted a national telephone survey for BDO USA, speaking directly to 100 tax executives at public companies.

Asked which tax policy changes were on their wish list, 40% of tax directors hoped for a reduction of the 35% corporate tax rate, according to the survey. Other desired changes:

  • Tax incentives to repatriate foreign earnings: 20%
  • Shift to a territorial tax system: 17%
  • Simplified tax code: 12%
  • Lower tax burden on capital gains: 9%

Just 2 percent cited changes to the tax treatment of carried interest, which both presidential candidates discussed during last year’s election campaign.

In addition, 34% of respondents said planning for federal tax reform was their primary tax concern in 2017, up from 21% in 2016.

BDO USA said that given comments by both Republicans and the president on reforms — ranging from cutting investment income taxes to enacting a border adjustment tax — businesses would likely be adapting to a changing landscape throughout the coming year.

International Tax Planning

The survey found that major efforts on the international stage remain a source of anxiety for tax executives. Eighty-two percent of the companies polled conduct operations outside of North America, and 54% reported plans to enter or expand into international markets this year.

Thirty-five percent of tax executives said international tax planning was their chief tax issue in 2017.

This will not be easy, BDO USA said, especially since the Organization for Economic Cooperation and Development published an action plan in 2015, designed to address tax base erosion and profit shifting (BEPS) — tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.

BEPS recommendations around transfer pricing generate the greatest concern among tax executives, cited by 51% of survey respondents.

Their concern is valid, BDO USA said, as 76% of respondents currently include transfer pricing mechanisms in their tax strategy.

Strategies for responding to the initiative vary, according to survey findings. Fifty-seven percent said they were proactively moving toward implementation based on the Action Item drafts.

At the same time, 35% said they planned to wait for individual countries to implement BEPS measures before acting — undoubtedly aware of recent criticism from China and other countries that the rules may not be appropriately tailored to the developing world.

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. Ninety-one percent of tax executives said they expected to meet 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,” Paul Heiselmann, national managing partner of specialized tax services at BDO USA, said in the statement.

“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.”

Other Findings

Given the glacial pace of federal and international tax reforms, tax executives said they looked to state and local incentives to reduce their tax burden.

Ninety-one percent of respondents cited income or franchise tax credits and exemptions, while 88% use sales tax refunds and exemptions and 86% rely on property tax abatements and exemptions.

Fifty-two percent benefit from training grants, and 37% take advantage of financing programs.

The Protecting Americans from Tax Hikes Act of 2015 permanently extended the federal research-and-development tax credit.

The survey found that in the year following implementation of the PATH Act, 82% of tax executives surveyed made use of some form of R&D credit, up from 75% in 2016.

Sixty-four percent said they used both federal and state credits, while 33% claimed only the federal credit.

--- Check out House, Not Trump, Is Leading on Tax Reform on ThinkAdvisor.

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