Agenda. A chat with economic development friends

Transcription

1 October 24, 2016

2 Agenda A chat with economic development friends Introduction Economic development: Competitive global economy Important factors impacting investment decisions Today s discussion: Incentives overview Trends around the world International Domestic New GASB77 (reporting/potential impact) Key economic development takeaways Page 1

3 Incentives overview Page 2

4 Types of incentives Statutory: Automatic ( as of right ) Statutory: Pre-approval or Prior Certification Required Discretionary ( but for ) Statutory tax credits and incentives that are provided to companies as of right if they meet defined statutory requirements Statutory tax credits and incentives that require companies to meet additional approval qualifications within state and local regulations Customized financial incentive packages that are negotiated with state and local government agencies Pre-certification or prior approval not required General tax incentives R&D incentives Hiring incentives Property tax relief Green incentives Training grants Cash and cash-like Page 3

5 The top five Rs for incentives success Guiding principles Right fact patterns/story development/strategy Right state and local business climate Right relationships Right timing awareness of but for Right team HQ/facility others all aligned Page 4

6 Key incentive triggers: Communications to companies Business tax credits and incentives Page 5

7 Ernst & Young survey Page 6

8 Ernst & Young LLP survey Barriers Respondents reported a range of hindrances to capturing incentives, such as: Too busy to execute on the requirements Program requirements too burdensome Lack of timely information on transactions Company is in a loss position and cannot take advantage of tax credits Feedback for Governments/ Economic Dev. teams Address corporate challenges in C&I Develop more streamlined application processes Require less in terms of back-end administrative compliance Offer more in terms of sale, assignment, or transfer mechanisms 625+ respondents Mostly tax and finance professionals Primarily Fortune 1,000 companies Covers a wide range of industries Page 7

9 Tour around the world- international trends Page 8

10 Foreign direct investment In 2015, total capital investment in new and expanded US facilities announced by foreign companies exceeded $36 billion, accounting for 22% of investment 96% of all announced FDI belonged to the manufacturing industry Top sources of US FDI include Taiwan ($9.5b), South Africa ($8b), Germany ($4b), Austria ($2.8b), and Japan ($2.8b) Sharp upward trend of Asian investment spending in the US in recent years Page 9

11 Foreign direct investment (cont d) Factors affecting FDI in the US Exchange rates (strengthening US dollar) Competitive labor market Fewer regulations Proximity to customers and new markets Culture of innovation and access to world s best educational institutions Economic volatility elsewhere in world Failed attempts to stimulate the Japanese economy Asset bubbles and a halting transition to consumerism in China Uncertainty in Europe (Brexit implications, etc.) Sharp decline in commodity prices affecting many economies Page 10

12 Tour around the world- domestic trends Page 11

13 Key credits and incentives trends Many states are focused on eliminating/reducing income tax Alternate revenue sources focused on sales tax (Ex.) State income tax credits Rise in non-income tax incentives Rise in tax credit transferability and monetization Page 12

14 Current US industry trends Resurgence of automotive manufacturing Manufacturing re-birth and high levels of investment Increase in M&A activity Increased focus on US economy for foreign investment Incentives landscape is evolving Shift away from as of or strictly legislated programs to more discretionary incentives Flexible and creative new opportunities (customized) Growth in sustainable/green incentives State ED foreign direct investment recruitment Page 13

15 Company preferences in the new economy Cash grants or cash equivalents Above the line savings Non-income tax benefits, including exemptions/rebates of transaction taxes Unique/creative responses addressing specific business drivers Economic benefits associated with win-win result Strategic target industries Benefits to company, community, workforce, and state Anticipate performance requirements Front-end planning by all parties Page 14

16 Incentives negotiations: A seat at the table Page 15

17 Value of stakeholder collaboration inside the company Global sourcing Accounting/ Finance Payroll tax & benefit accounting Energy, utilities Consultant Federal State Human resources Property Company Tax C&I Sponsor Sales and use Real Estate Corporate engineering Supply Chain Tax Local mfg. plants Page 16

18 Top success factors Major company considerations Cash/cash equivalent incentives or SAVINGS Innovative/reinvestment capital spending matters (business case) Regional impact - auto example Economic impact (direct, in-direct, induced)-jobs/wages Impact to local economy small/medium businesses Jobs retention and expansion/replacement jobs Environmental/green reinvestment Overall tax contribution (modeling) Page 17

19 Savings derived from Credits & Incentives Sample scenario $100m investment Companies often manage internal rate of return (IRR) of investment on a pretax or budgeted basis. However, the tax-effective rate of return can provide a true picture of costs and its use is becoming more widespread among companies. $10m Budgeted investment $76m $176m $-35m Indirect taxes incurred on investment over 15 years -$35m Tax/non-tax reductions through grants, exemptions, abatements, planning, filing positions, etc. over 15 years Total investment cost $141m Tax-effective investment Page 18

20 New GASB 77 reporting requirements and potential impact How many of you are familiar the GASB 77? How many of you are actively participating in GASB 77? Page 19

21 Polling question At what stage in the process of implementing GASB 77 are you? Page 20

22 Polling question result At what stage in the process of implementing GASB 77 are you? Page 21

23 Overview of GASB 77 Page 22

24 Tax abatement disclosures What? The Governmental Accounting Standards Board (GASB) issued Statement 77, which requires disclosures about a government s tax abatement agreements Why? Information about revenues that governments forgo is essential to understanding financial position and economic condition, interperiod equity, sources and uses of financial resources, and compliance with finance related legal or contractual requirements When? Effective for periods beginning after December 15, 2015* * Applies to notes to the financial statements for all periods presented Page 23

25 Tax abatement disclosures What is not required? POSITIVE ECONOMIC IMPACT! Page 24

26 What is a tax abatement? A reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which: One or more governments promise to forgo tax revenues to which they are otherwise entitled. The individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments. Page 25

27 Statement 77 scope Applicable to transactions that include four key characteristics:... substance over form 1. Existence of an agreement 2. Agreement precedes recipient performance 3. Tax revenues are reduced 4. Economic development or beneficial purpose Page 26

28 Required disclosures Page 27

29 Required disclosures Page 28

30 Polling question Which office in your organization will ultimately be responsible for accurate Statement 77 disclosure? Page 29

31 Polling question result Which office in your organization will ultimately be responsible for accurate Statement 77 disclosure? Page 30

32 Risk of delayed or non-compliance Audit implications Risk of restatement (additional cost and public scrutiny issues) Timing and potential delays Bond rating implications May decrease or be re-evaluated if tax abatements are not correctly reported Covenants related to bonds or debt instruments May require GASB standards Public Scrutiny Additional attention if not fully disclosed May be the first time this level of detail is reported Insufficient ability to craft positive message regarding the impact of abatements Other Individual states may have requirements or may enforce compliance with GASB-established GAAP Page 31

33 Polling question In considering the required GASB 77 tax abatement disclosures, what do you foresee as being the greatest challenge? Page 32

34 Polling question result In considering the required GASB 77 tax abatement disclosures, what do you foresee as being the greatest challenge? Page 33

35 Key takeaways Economic development continues to impact investment decisions Focus attention on growth sectors (i.e. manufacturing) Expansion of US Foreign Direct Investments Companies are looking for innovative ways to derive C&I savings US is focusing more on building flexibility into C&I strategies (discretionary incentives) GASB 77 Be proactive Be prepared Be aware Consider positive economic impact! Page 34

36 Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 35

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