Five questions on the possibility of corporate tax reform — and the risks it could introduce
An interview with Jonathan Traub, principal, Deloitte Tax LLP, and managing principal, Tax Policy Group and Washington National Tax.
Debating the future of tax policy is not uncommon during a presidential election year. But recently, the tone of the national conversation about tax reform has subtly shifted. Many observers believe that support for corporate tax reform that results in a lower statutory rate while potentially modifying or even eliminating certain tax expenditures is beginning to grow, and passage of such a package may become reality in the next year or two. Any shift in the tax code introduces new risks that must be managed. But more sweeping changes could present more fundamental risks.
In this environment, many business leaders are already beginning to prepare for a range of potential tax reform scenarios. In this Risk Angle, Jonathan Traub offers his thoughts on some questions commonly asked about this important issue. Then, Rita Benassi, partner, Deloitte Tax LLP takes a closer look at how a Risk Intelligent approach can help companies prepare for the prospect of corporate tax reform.
|Should we really be worried about this now? Aren’t we getting ahead of ourselves?||
It seems very possible that tax reform will happen in the next two years. But even if you think reform won’t happen during that period, it’s not too soon to become an active participant in this discussion — not just in your organization, but in legislative circles as well.
More importantly, tax-writing committees in Congress are reviewing options now; companies that wait until action is more imminent to engage may find that it is too late to change the direction of tax reform or to position themselves to best manage the impact of legislative and regulatory changes.
|Wouldn’t a simpler tax code reduce risk rather than create more?||
Simplifying the tax code will not necessarily simplify your business operations. Any changes to the tax code, even those made in the name of simplicity, could in fact result in significant new complexity — and add a layer of risk.
For example, multinationals could be operating under significantly different rules than those they follow today — moving toward a territorial system may sound good, but it could have a direct impact on cash flow.
|Given that we can’t know what tax reform might look like, much less whether it will actually happen, how can we prepare for it now?||
It’s true that the discussion so far has mostly focused on the big-picture issues — lowering rates, eliminating or modifying tax expenditures, and significantly reforming international tax rules — rather than the details of how to structure and implement these changes. But some key statutory provisions have been released for comment, most notably the international tax reform draft released by Ways and Means Committee Chairman Dave Camp (R-MI) last fall. And even where specifics are yet to be unveiled by policymakers, it should be possible to model your tax position in the face of a range of likely scenarios. In fact, many of the business leaders I talk to every day are already creating those tax models to inform their planning.
|No matter how complicated it may be, how could a lower rate be anything but good?||The prospect of a lower corporate tax rate may sound appealing. But it’s important to remember that the tradeoff for a lower rate could involve significant changes to — or even the elimination of — popular tax expenditures like accelerated depreciation, LIFO inventory accounting, the section 199 deduction for manufacturing, low-income housing credits, renewable energy incentives, and more. That’s a risk that should be built into a company’s modeling of what a corporate tax overhaul might mean to them.|
|Isn’t there a risk involved in planning at this level if tax reform never happens?||
An important step in preparing for tax reform involves analyzing your specific situation and understanding how your business operates under the current tax law — including how the benefits or burdens of the current system impact tax planning or business decisions. So even if tax reform doesn’t happen at all, or doesn’t happen within a few years, companies should be able to derive real value from such an internal examination.
At the same time, unlike some tax risk issues, this may not be a place where it makes sense to begin changing organizational behavior and processes in anticipation of a reformed tax system before new policies are enacted, as passage of comprehensive reform will remain in doubt up until the President’s signature goes on the bill.
So there is a need for a balanced approach. But if you resolve to address this only when and if reform is enacted, the bigger risk is that you will leave a lot of value on the table.
A Closer Look: Tax risk management and financial reporting
Rita Benassi, partner, Deloitte Tax LLP and National Leader of Deloitte’s Financial Accounting & Reporting – Income Taxes group as well as U.S. Tax Leader for Deloitte’s Governance, Risk and Compliance and International Financial Reporting Standards practices.
Since tax reform may not appear to be imminent, it may seem to warrant a wait-and-see approach. Meanwhile, however, the issue of business risk has never seemed more pressing. Tax reform has the potential to expose all types of organizations to new risks. In short, tax risk can have a direct impact on organizational strategy, operations, and even reputation. So sitting this one out might not be the right approach when the risks — and opportunities — are so significant.
If you’re concerned about your organization’s potential tax risks as a result of reform, it may help to take a Risk Intelligent approach: Acknowledge that these risks may not be avoidable, and then work to anticipate and manage them in a way that creates competitive advantage. So what does that mean when it comes to tax reform?
Recently, mature tax departments have begun to identify and manage the underlying sources and potential effects of tax risks — including the risk of tax reform. They’re embracing and customizing some of the tools of enterprise risk management (such as risk mapping) in order to better understand, manage and communicate tax risk to non-tax stakeholders. And that’s just the start. These organizations are using many different approaches to understand and plan for the potential impact of reform, including:
- Modeling alternative tax scenarios
- Analyzing risk and contingency plans
- Strengthening forecasting, analytics and tax modeling capabilities
- Developing investor communications plans
- Reviewing employee recruitment and retention policies, as well as tax and compensation planning for both executives and employees
- Evaluating the impact of tax law changes on product and service offerings
Financial reporting challenges cause many executives to wonder what impact reform could have on their overall effective income tax rate. How it could affect the total amount of taxes they need to pay, if alternative taxes are included in reform efforts. How and when to disclose. Whether and how deferred tax assets and liabilities would be affected. And more. These are thorny concerns that can have a big impact on the whole organization — which is one reason many companies are getting a head start on their planning efforts today.
Download the Risk Angle above.