Reducing Corporate Tax Rate Tops Tax Reform Wish List - BDO Survey

Sally Slater
Bliss Integrated Communication
[email protected]

CHICAGO – March 2, 2016 – Eight months before the 2016 presidential election, the tax reform debate has reached a boiling point, with candidates from both parties proposing significant changes to federal tax policy. Uncertain of the election outcome, one in five public company tax directors say planning for reform under the next president is their primary tax concern at this time, according to the second annual BDO USA, LLP Tax Outlook Survey.
When asked if the outcome of the presidential election will or will not result in significant tax code changes, 77 percent of public company tax directors indicated they believe tax reform will pass if the next president is a Republican. Thirty-three percent believe tax reform will pass if the next president is a Democrat.
Topping tax directors' reform wish list is reducing the corporate tax rate (41 percent), followed by a shift to a territorial tax system (20 percent) and a simplified tax code (19 percent). Just 2 percent cite lowering the tax burden on capital gains as a high priority.
According to Matthew Becker, partner in the national Tax practice at BDO USA, LLP, “The real challenge for businesses in an election year is planning for uncertainty. The recent vacancy on the Supreme Court has only heightened the partisan divide; however, the compromise to make permanent a number of important tax extenders reached at the end of last year may portend additional opportunities to find common ground."
Major tax reform efforts on the international stage are also a source of anxiety for tax directors as they look to optimize global growth, with 55 percent saying they plan to enter or expand international markets in 2016. Now that the OECD has finalized the Base Erosion and Profit Shifting (BEPS) initiative, they will need to prepare their organizations to meet new global tax rules and requirements. Nearly half (48 percent) of respondents say international tax planning, including BEPS, is their biggest tax issue for 2016. Of the 15 items listed in the BEPS Action Plan, the recommendations on transfer pricing (Action Items 8, 9, 10 and 13) pose the greatest concern, cited by 54 percent of survey participants. Transfer pricing is top of mind for good reason: 81 percent of tax directors say their organization's current tax strategy includes transfer pricing mechanisms.
BEPS has reporting implications as early as this year, with country-by-country reporting rules (Action Item 13) taking effect for tax years starting on or after January 1, 2016. Most tax directors (87 percent) expect to have completed the country-by-country analysis by the December 31, 2017 deadline for the first report.
While much of the BEPS agenda still awaits implementation, more than half (52 percent) of respondents are proactively taking steps based on the Action Item drafts. Another third are waiting for individual countries to implement BEPS measures before taking any action.
“BEPS is one of the most ambitious reform initiatives ever undertaken on an international scale,” says Paul Heiselmann, national managing partner of Specialized Tax Services at BDO USA, LLP. "Between the election in November and BEPS implementation in the U.S. and overseas, the tax regulatory and reporting environment is in a state of major flux. The BEPS recommendations may be applied differently by different countries, which is creating more uncertainty and confusion for multinational businesses. As we wait to see how implementation unfolds, businesses should closely monitor the adoption of BEPS to determine the potential tax consequences and review their internal compliance controls and procedures."
Additional Findings of the 2016 BDO Tax Outlook Study:
More Companies Benefit From R&D Credits
The landmark Protecting Americans From Tax Hikes Act (PATH Act) passed in December 2015 has put a spotlight on the federal R&D credit, which was made permanent and modified to benefit smaller companies as part of the extenders package. Fifty-two percent of respondents say they are taking advantage of both federal and state R&D credits; 23 percent are only claiming the federal credit.
For those organizations not claiming R&D credits, 52 percent say they made the decision based on the assumption that they did not qualify. With the passage of the PATH Act, other reasons cited for not claiming the credits will no longer be relevant for the 2016 tax year, including the alternative minimum tax bar (22 percent), the planning challenges of the annual renewal process (13 percent) and the assumption that an organization is too small to benefit (13 percent).
Tax Directors Weigh State and Local Tax Considerations
Looking beyond R&D incentives, tax directors are leveraging the following strategies to minimize their tax burden at the state and local level:

  • 89 percent claim income or franchise tax credits and exemptions.

  • 89 percent claim sales tax refunds and exemptions.

  • 82 percent claim property tax abatements and exemptions.

  • 46 percent take advantage of training grants.

  • 32 percent take advantage of financing programs.

Just under a fourth (24 percent) of tax directors expect their organization to enter a new geographic market in the United States in the next year. or franchise tax credits and exemptions" and "property tax abatements and exemptions" have equal weight in impacting their decision to enter new markets (50 percent each).
Financial Reporting and Tax Compliance Burden Looms Large
Thirty-four percent of tax directors say avoiding material misstatements of income taxes is the most challenging aspect of financing reporting, followed by meeting deadlines for interim and annual income tax reporting (27 percent), recruiting and maintaining professionals responsible for financial reporting of income tax (25 percent), and staying up-to-date on accounting standards changes and proposals (15 percent).
These financial reporting concerns contribute to the ever-growing tax compliance burden. Sixty-three percent of tax directors say the cost of compliance within the tax and financial regulatory environment has increased in the last year.
The BDO Tax Outlook Study is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 150 tax directors, or those with tax director responsibilities at public companies, using a survey conducted within a scientifically developed, pure random sample.
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