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April 14, 2015 – As the economy continues to accelerate, many organizations plan to grow by entering into new markets in the years ahead, reveals the first ever BDO USA, LLP
Tax Outlook Survey. Fifty percent of respondents – 100 tax directors at $1billion-plus public companies - say their organizations are planning to enter new geographic areas in the U.S. during the next three years, and 63 percent of respondents say their organizations are planning to enter or expand to international markets during the same period.
These growth strategies are being implemented with careful tax planning and preparation. In fact, BDO's survey finds that only 10 percent of tax directors identify that their primary concern is that business decisions are being made without robust tax planning, strongly indicating that many organizations are focused on their tax posture. This also aligns with what BDO is seeing in the marketplace as companies act to capitalize on tax opportunities during periods of expansion and growth.
According to Matthew Becker
, partner in the Tax practice at BDO USA, LLP
, “When seeking expansion opportunities, integrating tax planning in the early stages of that process can have a positive impact on both the organization and the jurisdiction in which it will operate. We're seeing financial executives and tax directors focused on this early-stage planning to ensure they're able to effectively navigate today's increasingly complex tax environment and optimize growth opportunities for their businesses.”
Incorporating state and local tax planning into corporate growth strategies is especially useful in helping organizations make smart domestic expansion plays. For those respondents that say their organizations will likely expand to new U.S. geographic areas over the next three years, 45 percent say income or franchise tax credits and exemptions would have the greatest impact on their decision to enter new markets, followed by property tax abatements and exemptions (32 percent).
Tax Directors Focus on Generating Efficiencies In Response To Rising Compliance Costs
In conjunction with optimizing tax strategies for growth, organizations continue to focus on generating increased efficiencies in the face of an evolving tax landscape. A majority of respondents (75 percent) say the cost of compliance within the tax and financial regulatory environment has increased over the past three years. Another 45 percent say uncertainty about foreign, federal and state tax legislation is the primary tax issue they face at this time. To manage these challenges, organizations are squarely focused on developing better and more efficient processes to streamline compliance programs and manage costs.
For organizations with operations outside of the U.S., the proposed regulations from the Organisation of Economic Co-operation and Development (OECD) on base erosion, profit shifting, transfer pricing and increased disclosures emerged as a primary issue for tax directors, with a majority of respondents saying their level of concern about the recommendations is high to moderate (36 percent and 42 percent, respectively). At the same time, many financial executives and tax directors recognize that the proposed rules, if implemented, may help to provide clarity around previous areas of tax ambiguity, allowing for better transparency and guidance when developing complex tax strategies.
“In a business environment in which companies are seeking growth opportunities as well as managing compliance in the face of increasing regulatory demands, tax directors and financial officers are focused on how to create efficiencies that not only reduce the cost of compliance, but also take advantage of strategic tax opportunities to better manage their overall tax liability,” says Paul Heiselmann
, National Managing Partner of Specialized Tax Services at BDO USA, LLP
Additional Findings of the 2015 BDO Tax Outlook Study of Tax Directors:
R&D Credits May Lead to Cash Flow Opportunities
In addition to physical expansion to new markets, many organizations are focused on innovation. Sixty-six percent of respondents say they are taking advantage of the federal R&D credit and 56 percent are claiming state & local R&D credits. For those organizations not claiming federal R&D credits, concern about being audited as a result of claiming the credit is identified by only 6 percent of respondents, while 59 percent say the reason for not claiming it is based on the assumption that they did not qualify.
“The biggest hurdle with the R&D credit is creating awareness around the activities that do qualify. There is a vast list of activities and job titles that often are eligible. While it's certainly on a case-by-case basis, companies that may be able to claim these credits should consider exploring their opportunity, as they can provide significant cash savings to help organizations continue to pursue innovation,” says Chris Bard
, practice leader for Specialized Tax Services Research and Development at BDO USA, LLP
Directors Fine Tune Transfer Pricing Practices
An overwhelming number of respondents (90 percent) are familiar with transfer pricing mechanisms. Of those familiar with them, 82 percent say their organization's current tax strategy includes transfer pricing mechanisms, with 44 percent noting that those practices caused an issue for their firm during an IRS exam within the past five years.
While the IRS may home in on transfer pricing mechanisms during a review, if implemented properly and in accordance with the arm’s length rule, an organization may be able to leverage the practice and be in full compliance. BDO's survey findings support this theory, as the large majority of respondents (90 percent) who say the practice caused an issue for their firm during an exam did not incur a substantial financial impact from the IRS examination, in terms of adjusted taxes owed, including penalties and fees.
“Transfer pricing activities have faced increased scrutiny by tax authorities around the world and within the United States. As such, many companies are seeking more guidance on how to best manage their transfer pricing life cycle,” says Bob Pedersen
, tax partner at BDO USA, LLP
. “It is important that companies develop a clearly defined process to manage and mitigate their transfer pricing risks.”
ASC 740 Challenges Indicate Opportunity for Proactive Planning
Thirty-five percent of tax directors say avoiding material misstatements of income taxes is most challenging to their organizations, followed by meeting deadlines for interim and annual income tax reporting (29 percent), staying up-to-date on accounting standards changes and proposals (22 percent) and recruiting and retaining professionals responsible for financial reporting of income tax (14 percent).
Reporting of income tax positions is complex and often requires even more attention during periods of growth. Organizations can better mitigate their exposure to ASC 740 reporting errors through a proactive approach to managing the process.
“Being proactive about financial reporting of income taxes is especially important during an expansion or a merger or acquisition. Transitional periods for organizations can create scenarios where companies are somewhat more susceptible to incorrectly reporting their tax position on their SEC filings,” says Yosef Barbut, tax partner at BDO USA, LLP
. “However, if companies continue to include tax planning as part of their due diligence, then they are well positioned to mitigate exposure to ASC 740, as well as other, reporting errors.”
The BDO Tax Outlook Study of Tax Directors
is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 100 tax directors, or those with tax director responsibilities, using a survey conducted within a scientifically developed, pure random sample.
About BDO Tax
BDO Tax, a division of BDO USA, LLP, delivers clients a wide range of fully integrated tax services in the U.S. and around the world, leveraging BDO’s global network of over 55,000 professionals. Having a depth of industry expertise, we provide rapid, strategic guidance in the most challenging of environments to achieve exceptional client service. For more information, please visit https://www.bdo.com/services/tax
About BDO USA
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 58 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,328 offices in 151 countries.
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