Tax Executives Primed for Potential Federal Reforms

March 2017

With the implications of the 2016 General Election beginning to come into focus, tax executives are looking closely at the new administration to gauge how potential tax reform might impact their financial reporting strategies, cash taxes and ultimately their bottom lines.

Last year, BDO’s annual Tax Outlook Survey found that 77 percent of tax executives believed that significant tax reform would occur if a Republican won the presidency, and post-election, this belief continues to hold strong. All the tax executives surveyed in 2017 think tax reform is likely to some degree under the Trump administration, with 60 percent noting it to be “very likely,” and a just under a third of respondents (32 percent) believing it is “somewhat likely.” Only eight percent of respondents believe tax reform is only slightly likely.

While a barrage of executive orders took center stage in the opening weeks of Donald Trump’s presidency, the administration has consistently positioned itself as pro-business, which may bode well for tax executives in the long run. The majority (60 percent) of tax executives feel the cost of compliance within the tax and financial regulatory environment has increased in the past year, and many will be looking to the Trump administration to reverse that trend.

Reforms aimed at driving growth of American business top tax executives’ reform wish list, with 40 percent hoping for a reduction of the 35-percent corporate tax rate. One in five (20 percent) of respondents point to tax incentives to repatriate foreign earnings as a top interest, while 17 percent cite a shift to a territorial tax code. The portion of executives interested in lowering the tax burden of capital gains was nine percent, up from two percent in 2016. And just two percent cited changes to the tax treatment of carried interest, discussed by both candidates throughout the campaign, as their primary ask.

Despite positive signs for the likelihood of tax reform, the process will undoubtedly be complex, and tax executives are concerned about the uncertainty of how the developments will unfold. More than one in three respondents (34 percent) highlight planning for federal tax reform as their primary tax concern in 2017, up from 21 percent in 2016. Given talk from both the GOP and the president on reforms ranging from cutting investment income taxes to enacting a border adjustment tax, businesses will undoubtedly be adjusting to a changing landscape throughout the coming year. Tax reform, however, is subject to an often slow-moving legislative process and will require compromise on the part of both the president and Congress. More than half of tax executives (51 percent) believe congressional gridlock will be the primary obstacle to tax reform over the next four years. Others point to conflicting legislative priorities (19 percent), public opposition to proposed reforms (13 percent) and international actions related to multinationals (12 percent) as potential roadblocks. Just five percent believe the outcome of the 2018 midterm election will stall reform efforts.

“Despite the widely-debated initiatives discussed during President Trump’s first months in office, federal tax reform is more like an aircraft carrier than a speedboat; 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. 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.”  – Matthew Becker, partner in the national Tax practice at BDO