The Importance of Total Tax Liability And Global Outlook to Business Planning

August 2019

By Monika Loving and Damon V. Pike
This article originally appeared in Tax Notes International on May 20, 2019.

Globalization and digital technology have provided unprecedented growth opportunities for U.S.-based businesses. Tax executives at these companies have never been better positioned to help lead their corporation’s business strategies at home and abroad. However, our new survey shows that sweeping changes to the U.S. domestic tax code and volatile international trade relations are competing for the bulk of in-house tax professionals’ time and attention. Tax executives who focus on their business’s total tax liability and put systems in place to monitor and adapt quickly to external changes can maximize their roles as strategic business advisers.

The BDO USA LLP 2019 tax outlook survey1 polled 150 tax executives at U.S. public companies with $1 billion or more in annual revenues to find out how they’re handling both immediate challenges and forward-looking concerns. Although the future is murky, one thing is clear: Tomorrow’s tax professionals will need to strike a balance between responding to external shifts and playing a proactive role in the overall business strategy.

A key to unlocking a proactive stance is monitoring a company’s total tax liability and communicating it to the board and C-suite members. Analyzing the sum of all taxes (income- and non-income-based taxes) owed at the international, federal, state, and local levels allows tax professionals and their peers to make better business decisions — from mergers and acquisitions to hiring and establishing operations abroad. The need to analyze total tax liability is even more imperative considering that according to a recent National Association for Business Economics survey, more than 75 percent of economists predict the United States will enter a recession by the end of 2021.2 Findings from our survey support this sentiment — more than 1 in 4 tax executives think the economy will only grow for one to two more years. Strategic tax planning today will improve cash flow and better prepare a business for a future downturn.

The tax outlook survey shows that only slightly more than half (58 percent) of tax executives believe they have a “high” understanding of their organization’s total tax liability. Even those who feel like they do have a grasp on this critical metric may not be communicating it effectively to company stakeholders. According to BDO’s recent board survey,3 fewer than half of board members (44 percent) say they have a “strong understanding” of their companies’ total tax liability and its impact on corporate tax strategy, while 51 percent say they have a “moderate understanding.” These discrepancies present an opportunity for tax executives to concentrate on total tax liability and educate themselves and their board members about its implications for business decisions.
 

U.S. Tax Code Changes

One of the challenges keeping corporate tax executives from being more strategic and forward thinking is the ongoing interpretation of, and compliance with, U.S. tax code changes. With tax rules changing more in the last two years than in the last few decades, 46 percent of surveyed executives said adjusting to federal tax changes is their top issue in 2019. As senior tax professionals work through their first tax return filing season with most provisions of the Tax Cuts and Jobs Act (P.L. 115-97) in effect, they are challenged to keep up with the deluge of TCJA-related guidance on issues such as Opportunity Zones, section 199A, and global intangible low-taxed income. Half of tax executives surveyed claim that the time they spend helping their company adapt to U.S. tax reform has increased substantially since the enactment of the TCJA. Democrats’ regaining control of the House of Representatives this year means that additional changes to the tax code could be on the horizon.
 

Customs and Trade Developments

Many tax executives are watching Capitol Hill to see if it will approve the president’s plans to replace the 1994 North American Free Trade Agreement by ratifying the new United States-Mexico-Canada Agreement (USMCA). Disagreement over steel and aluminum tariffs imposed on Canada and Mexico, environmental and labor protections, and general political discord may prevent the deal from making it through a divided Congress. Also, the U.S. International Trade Commission4 recently released a report that found the USMCA would only increase U.S. GDP by an estimated $68.2 billion, or 0.35 percent. The modest estimated effect may sway on-the-fence lawmakers against the deal and could arm opponents with a quantitative argument for why a better deal needs to be negotiated.

Meanwhile, trade tensions with China are worsening. Because of China’s forced transfer of U.S. technology and intellectual property, the United States imposed tariffs on $250 billion worth of Chinese goods under section 301 of the Trade Act of 1974, spurring retaliatory measures from China. To date, nearly half of all Chinese goods brought into the United States have been subject to additional tariffs, many at a rate of 25 percent and the remaining at a rate of 10 percent. As negotiations continue and the future remains uncertain, many companies that had plants in China are moving manufacturing to Mexico5 and other countries to avoid the additional tariffs.

Even though nearly three-quarters of the businesses represented in the tax outlook survey must adhere to complex global tax regulations, only 12 percent of their tax executives name global taxes as their top challenge this year. This confirms that attention and resources are allocated to issues at home and highlights opportunities available to those tax executives who stay abreast of global concerns. However, trade tensions and tariffs will continue to play an important role. Corporate tax executives say they are pursuing several strategies in response to these issues, including:
  • reevaluating international supply chains and logistics (63 percent);
  • analyzing global import and export models (55 percent); and
  • altering strategic sourcing processes (43 percent).


BEPS Action Plan

Another global topic that is on the minds of senior tax professionals is the implementation of the OECD’s base erosion and profit-shifting action plan to address taxes in foreign jurisdictions. In 2013 the OECD published a plan to address corporate globalization, prevent the minimization of taxes in OECD jurisdictions, and ensure some standardization between international tax regimes. Compliance with the action plan and its corresponding domestic legal changes explains why 77 percent of tax executives surveyed say they have increased their focus on tax transparency, and 62 percent have increased their tax audit activity on transfer pricing.

While the jury is still out on whether the OECD plan is significantly curbing the shifting of profits from higher-tax to lower-tax territories, government regulators are increasingly scrutinizing digital taxation. As businesses become less brick-and-mortar and more cloudbased, governments worldwide are grappling with how to tax the companies that profit from selling services to their people and use their resources. Within Europe, France has taken the lead on digital services tax legislation, and other countries are certain to follow suit. However, 70 percent of executives responding to the survey say they are “only slightly” (31 percent) or “not at all” (39 percent) concerned with the United Kingdom’s DST legislation. The OECD is also on track to release additional details on its work on digital taxation by the end of 2019.

All these external forces, both domestic and international, could disrupt business growth. A potential downturn in the marketplace and continuing fallout from tax reform may stretch tax departments and hinder their ability to focus on global tax trends. Internal pressures to do more with less may mean less technology or fewer staff members to keep tax executives out of the daily minutiae and at the table making strategic decisions. If tax executives can demonstrate value through understanding and explaining their company’s total tax liability, they will be better equipped to play the role of business counselor and minimize their organization’s overall tax obligations, now and in the future.
 

CONTACT
 
Monika Loving
International Tax Services Partner & National Practice Leader
  Damon V. Pike
International Tax Principal, Customs & International Trade Services
 
[1] BDO, “BDO Tax Outlook Survey” (Feb. 2019).
[2] National Association for Business Economics, “Economic Policy Survey,” at 6 (Feb. 2019).
[3] BDO, “2018 BDO Board Survey” (Sept. 2018).
[4] U.S. International Trade Commission, “U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors,” at 4889 (Apr. 2019).
[5] Matt Townsend and Eric Martin, “In Light of US Tariffs, Chinese Manufacturers Move to Mexico,” Mexico News Daily, Mar. 27, 2019.