2018 BDO TAX OUTLOOK SURVEY

Transcription

1 2018 BDO TAX OUTLOOK SURVEY

2 Contents TAX CHANGES IGNITE A BUTTERFLY EFFECT IN BUSINESS...1 AFTER REFORM, TAX STRATEGY ISN T ONE-SIZE-FITS-ALL... 2 SPOTLIGHT / STATE TAX, THE NEXT TAX REFORM FRONTIER... 3 MULTINATIONAL TAX REFORM GOES BEYOND THE WATER S EDGE... 4 TECHNOLOGY DOESN T HAVE TO BE TAXING SPOTLIGHT / A RESEARCH & DEVELOPMENT RESET... 7 LOOKING AHEAD: LIFE AFTER LEGISLATION... 8

3 2018 BDO TAX OUTLOOK SURVEY / 1 Tax Changes Ignite a Butterfly Effect in Business The 2018 BDO Tax Outlook Survey is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm. The firm s executive interviewers spoke directly to 150 tax executives or those with tax director responsibilities at public companies with revenues of over $1 billion. The survey was conducted within a scientifically developed purely random sample. Tax, one of the oldest functions in the business world, is experiencing an unprecedented level of disruption. The most significant reform of the U.S. federal tax code in decades the implications of which will resonate far and wide is driving this dynamic moment in history. And, while the ripple effect of U.S. tax reform is likely to be felt for years to come, it s not the only way the tax function is evolving. New standards for international taxation are beginning to take effect and state taxation will have to adjust in significant ways to align with the federal changes. The ramifications of changes in corporate tax rates are just starting to play out, crucial rulings in the taxation of online purchases are on the horizon, and tax professionals will soon face a world where technology can handle much of the heavy lifting, leaving them with the opportunity to fill a more strategic role. At this point of inflection, it s critical that companies recognize how taxation and tax strategy impact every aspect of their business and bottom line. Those looking to get ahead should lean into these shifts, and take proactive steps to transform and integrate their tax departments with their business as a whole. Given the complexities of domestic and global tax regimes, seemingly small changes in business approach can have wide-reaching consequences to the various tax liabilities of a business. Examining a company s total tax liability by considering all of its various tax dynamics is now a necessity for businesses looking to survive and thrive during this time of intense change. MATTHEW BECKER Managing Partner of BDO s National Tax Office

4 2 / 2018 BDO TAX OUTLOOK SURVEY After Reform, Tax Strategy Isn t One-Size-Fits-All The historic passage of the new tax law has generated an unparalleled opportunity for business transformation for American companies, and it all starts with the tax function. From parsing through thousands of pages of tax legislation and related explanation, to identifying how each provision impacts their business, to figuring out where to reinvest savings, tax executives must be mindful that the ramifications of reform will be unique to each business and may change as additional guidance and corrections are available. Last year, every tax executive surveyed in the 2017 BDO Tax Outlook Survey predicted tax reform would be enacted under President Trump. However, planning for the outcome was a difficult task given the lack of detail, especially considering the many changes the legislation underwent just hours before it was passed. Now that federal tax reform is law, implementing reform changes is the chief task at hand for executives for the foreseeable future. According to BDO s 2018 Tax Outlook Survey, 91% of respondents cite implementing tax code changes as their primary tax issue for Seventy-two percent are concerned with implementing federal tax changes, and another 19 percent prioritize tax code changes at the state and local level. TOP ISSUES FOR TAX EXECUTIVES 19% Tax code changes at the state and local level 72% Planning to implement federal tax reform changes 5% Technology changing the way taxation is imposed 4% Growing scrutiny on taxation of foreign earnings Respondents are nearly unanimous (97 percent) in saying that the reduced corporate tax rate will have the greatest impact on their business. Though executives may not have been planning for a specific rate reduction, in percent of executives put a reduced corporate tax rate at the top of their tax reform wish list. Following the bill signing, more than three quarters (78 percent) of survey participants have an optimistic outlook, expecting the tax overhaul will have a positive effect on their businesses net income. Overall, the tax overhaul s effect on a company s bottom line will be challenging to assess quickly, requiring proactive planning to ensure that every provision is carefully reviewed. Companies should keep in mind that federal reform is just one layer, and that states are in the process of making changes as well. For now, we re seeing states make reform-related decisions on a case-by-case basis. Some states, especially those with higher taxes like California, are beginning to chart a course to make it easier for resident taxpayers to navigate reform. The impact of tax reform is different for every business based on industry, legal structure, capital structure, geography, business objectives, and other details. Businesses should strategize around the untested tax code to decide where wins, losses, and opportunities may lie, and model how the butterfly effect of change may impact their company. Just as there are thousands of pages in the new tax law, there are thousands of possibilities when it comes to planning for a change of this magnitude. While it has always been important for companies to remain nimble and maintain a high care factor, both attributes are now critical in order for businesses to succeed in the post-tax reform environment. Companies can expect legislative technical corrections and administrative guidance to come down the pike, so it s imperative that they do what they can to plan today, and remain ready to respond to any further word on tax reform from Congress, the Treasury Department, or the Internal Revenue Service. TODD SIMMENS Partner in BDO s National Tax Office

5 2018 BDO TAX OUTLOOK SURVEY / 3 SPOTLIGHT State Tax, the Next Tax Reform Frontier No two states are the same, especially considering that regulations and guidance are constantly changing. Companies now must know how the changes caused by tax reform affect their home state. Those companies that have a presence in more than one state must ensure they re completing the appropriate due diligence to know they re protected on all fronts; in light of federal tax reform, that need has only grown. Some evolving regulations will transcend state lines, including the debate over state tax nexus, specifically the South Dakota v. Wayfair, Inc. case that will be heard by the U.S. Supreme Court. In this case, South Dakota is attempting to overturn the physical presence nexus standard for the collection of sales and use taxes, which could potentially impact online sellers ranging from small businesses to large entities like Amazon. Should the Court side with South Dakota, the implications are extraordinary for e-commerce, as it becomes more likely that states will be encouraged to enact similar sales and use tax economic nexus legislation. It is also conceivable that the Court could uphold Quill, sending the message to states that Direct Marketing Ass n v. Brohl is a useful roadmap for enforcing sales and use tax compliance. Alternatively, the Court could overturn Quill, but remand Wayfair back to the South Dakota Supreme Court for proceedings consistent with the Court s decision, while leaving it up to state courts to decide which economic nexus thresholds pass constitutional muster. With the passing of federal tax reform, we expect many states will enact new tax legislation in the coming months. As companies consider their total tax liability, state taxes will likely get more attention as they become a much larger percentage of companies overall tax structures. Given the many different state tax regimes that currently exist, it will be interesting to see how each reacts to the federal changes. ROCKY CUMMINGS Partner and National Leader of BDO s State and Local Tax Services practice

6 4 / 2018 BDO TAX OUTLOOK SURVEY Multinational Tax Reform Goes Beyond the Water s Edge Similar to last year, most U.S. tax executives (75 percent) currently conduct business outside North America, and more than half (53 percent) say they plan to enter or expand into international markets in the coming year. Seventy-three percent of those surveyed note that the mandatory repatriation of earnings as a result of U.S. tax reform will have an impact on their business, and 45 percent of those say this provision is very likely to have a significant impact. While U.S. tax reform dominates the conversation stateside, multinationals can t afford to lose sight of other important changes taking place on the international stage. Regulatory bodies like the European Union (EU) and the Organization for Economic Co-operation and Development (OECD) are establishing international norms for taxation. In 2013, the OECD published an action plan to address base erosion and profit shifting (BEPS). The goal of this action plan was to address the globalization of corporations, prevent the minimization of taxes in OECD jurisdictions, and ensure some standardization between international tax regimes. While the scrutiny of taxation on foreign earnings appears to intensify, only four percent of tax executives consider it a primary tax issue. With many BEPS deadlines passed or fastapproaching, more than half of those aware of BEPS (56%) are proactively taking steps to respond to the OECD based on Action item drafts. Meanwhile, 33 percent are waiting for individual countries to implement BEPS before acting, and eight percent are waiting for peer companies to respond to BEPS. Some country-by-country reporting rules came into effect for tax years starting on or after January 1, 2016, and 83 percent of tax executives met the December 31, 2017 deadline to complete the required country-by-country analysis. BUSINESSES RESPOND TO BEPS 56% Proactively taking steps to respond to the OECD based on Action item drafts 33% Waiting for individual countries to implement BEPS before acting 8% Waiting for peer companies to respond to BEPS 2% Other

7 2018 BDO TAX OUTLOOK SURVEY / 5 New international tax rules from the U.S. and abroad are particularly relevant to the 77 percent of tax executives who use transfer pricing as a part of their tax strategy. For the 23 percent who do not use transfer pricing mechanisms, reasons differ. This year 26 percent reported transfer pricing to be too complex, and another 26 percent lack the internal resources to implement. Others don t use the strategy because they re not highly familiar with transfer pricing mechanisms or are concerned by the regulatory restrictions. No respondents report that they are avoiding transfer pricing due to the fear of being audited. While companies weigh the options of global expansion, it s important to consider that the lower U.S. federal tax rate combined with the weakening dollar positions the U.S. to be a cost-efficient place for foreign businesses to operate. New foreign investment across industries and markets will likely heighten competition for workers and infrastructure in key sectors. As a result, executives will be seeking tax-weighted return-on-investment modeling to keep pace with the speed of the competition, with technology helping tax leaders assess this rapidly changing landscape. One glance at international tax news shows there s an increased interest in transparency around foreign earnings. How U.S. companies choose to implement important regulations like BEPS and repatriate funds in light of tax reform will color how they re perceived by bodies like the EU and OECD. Today s web of international tax law is more complicated and more highly scrutinized than ever before. Companies will have to use technology and data analytics to understand what they re dealing with and form effective strategies. Given the multitude of changes in the United States resulting from tax reform, as well as the changes occurring abroad like the OECD s BEPS initiative, companies must continually evaluate their organizational structure and transactions to quickly respond to these significant shifts. For this reason, it is essential that companies seek outside assistance from sophisticated global tax advisors to help them understand the implications of these new and often very complex rules. Then, companies can begin to determine the best course of action in light of this constantly changing tax landscape. JOSEPH CALIANNO Partner and International Technical Tax Practice Leader, National Tax Office For the latest on tax reform, be sure to visit BDO s Tax Reform resource page:

8 6 / 2018 BDO TAX OUTLOOK SURVEY Technology Doesn t Have to Be Taxing The world is becoming increasingly automated, and the tax function is no exception. While automation can assist tax executives in creating efficiencies, transformation is never easy. This year, 44% of executives indicate that resource issues like talent and infrastructure will pose the biggest challenge in tax-technology implementation. Other tech-related obstacles include the automation of routine processes, a lack of transparency and collaboration with other business functions, and a lack of access to actionable data. These tools aren t being avoided by preference many lack the budget and resources to implement tax technology like automation. However, as companies begin to see tax savings from reform, tax technology is an area where companies should consider reinvestment. While many might think of tax executives as laggards when it comes to technology, those looking to advance should focus on incremental change. It s important that companies walk before they run when implementing tax technology. Executives should identify where their business may see additional savings, as well as where tax-savings opportunities already lie. Incentives like research and development (R&D) tax credits are often a lucrative way to capitalize on innovation efforts businesses are already undertaking. More than 81 percent of those surveyed are already claiming these credits in some capacity. TAX TECHNOLOGY CHALLENGES 38% Adequate budget and resources 12% Identifying opportunities and benefits 16% Redefining roles, responsibilities, processes, and workflows 7% Having the skills to leverage data intelligence 3% Determining how to get started 24% Adapting existing technologies, such as integrating legacy infrastructure Implementing tax technology is a key step in efficiently and accurately assessing a company s total tax liability. However, technology is not the only answer. Thoughtful, tailored tax processes must be in place prior to implementing technology. To stay competitive, it s imperative companies get up to speed here, investing time and resources wisely before it s too late. And, as tax processes become automated, it s important to seize the opportunity to measure the impact of tax strategies outside of the tax department to get a holistic view of tax liabilities across a business and to identify tax savings opportunities. BARBARA TORZEWSKI Managing Director in BDO s Tax Transformation Services practice

9 2018 BDO TAX OUTLOOK SURVEY / 7 SPOTLIGHT A Research & Development Reset Though the federal R&D tax credit wasn t specifically touched during the reform process, several developments have greatly increased its value. The reduction in the maximum corporate tax rate from 35 to 21 percent, for example, increases the R&D tax credit s value by 22 percent, from 65 to 79 percent of incremental qualified spending. The repeal of corporate Alternative Minimum Tax (AMT) also increases the R&D credit s value. Generally, taxpayers couldn t use R&D credits to reduce AMT. With AMT s repeal, all taxpayers are now able to use R&D credits to reduce their tax liability, down to 25 percent of the amount of their net regular tax liability. Many of them, too, will be able to claim their R&D credits with more certainty that they ll be allowed on exam. IRS Directive LB&I instructs its agents not to challenge the qualified research expenses (QREs) of taxpayers with assets equal to or greater than $10 million when those taxpayers identify their QREs as the ASC-730 R&D expenses reported on their certified audited financial statements, with some adjustments being made for things like non-u.s. R&D expenses, for example. This Directive is a positive game-changer for the marketplace, allowing tax executives to plan for an R&D credit amount with greater certainty, even if they re examined by federal and, increasingly, state tax authorities. Despite the increase in the R&D tax credit value, the new tax law wasn t all positive for R&D. Since 1954 taxpayers have been able to elect to deduct currently their research and experimental (R&E) expenditures. For tax years beginning after 2021, taxpayers will no longer be able to do so, instead being required to capitalize and amortize R&E expenditures over a five-year period. Costs for research done outside of the U.S. will have to be amortized over a 15-year period. With the new provisions generally increasing the benefits of the R&D tax credit, taxpayers should evaluate how the changes impact their future tax position and how R&D credits can help minimize their tax liabilities. Regardless of the company or industry, if a company is devoting resources towards developing new products, processes, or software successfully or unsuccessfully it is eligible for some tax savings. CHRIS BARD Partner and National Leader of BDO s R&D Tax Services practice

10 8 / 2018 BDO TAX OUTLOOK SURVEY Looking Ahead: Life After Legislation After a dramatic and breakneck legislative process, U.S. tax reform is finally a reality. And while it will continue to make headlines, it s just one part of all the complex tax issues facing businesses. The greatest challenge for many companies will continue to be handling their total tax liability grasping where tax costs arise across their entire business and developing strategies to address areas that would have the greatest impact to their bottom line. With tax costs dispersed from country to country, state to state even to industry-specific taxes savvy businesses must consider tax from a holistic perspective and aim to develop comprehensive, data-driven solutions. ABOUT BDO TAX The Tax practice at BDO is among the largest tax advisory practices in the United States. With over 60 offices and more than 550 independent alliance firm locations in the United States, BDO has the bench strength and coverage to serve you. ABOUT BDO USA BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, and advisory 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 more than 60 offices and over 550 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 73,800 people working out of 1,500 offices across 162 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm s individual needs BDO USA, LLP. All rights reserved.

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12 For more information on BDO USA s service offerings, please contact one of the following regional practice leaders: MATTHEW BECKER National Managing Partner / mkbecker@bdo.com PAUL HEISELMANN National Managing Partner / pheiselmann@bdo.com CHRIS BARD R&D Tax Credit National Leader / cbard@bdo.com DONNA CHAMBERLAIN Global Expatriate Services National Leader / dchamberlain@bdo.com ROCKY CUMMINGS State and Local Tax National Leader / rcummings@bdo.com DAN FULLER Cost Segregation National Leader / dfuller@bdo.com ANDREW GIBSON Compensation and Benefits National Leader / agibson@bdo.com JEFFREY KANE Private Client Services National Leader / jkane@bdo.com MONIKA LOVING International Tax Services National Leader / mloving@bdo.com MARK SCHUETTE Transfer Pricing National Leader / mschuette@bdo.com BARBARA TORZEWSKI Tax Transformation Services National Leader / btorzewski@bdo.com MICHAEL WILLIAMS Income Tax Accounting National Leader / mwilliams@bdo.com CONTACT US: FIRST NAME LAST NAME PHONE SUBJECT MESSAGE SUBMIT