Tax reform was top of mind in the business community long before it was signed into law in December 2017, and it will not be going away anytime soon.
In fact, US businesses are already feeling the first effects of the new US tax law. With the reduction of the top corporate tax rate from 35 percent to 21 percent, many organizations are freeing up cash flow to invest in other strategic areas. Economically, most signs are trending positive, too.
But there are challenges ahead. Rather than debating the merits of the law, the conversation in the tax department now centers on the challenges of implementation. Given the speed at which the bill went through Congress, some aspects of the law are not only lacking in detail but full of ambiguity, leaving CTOs searching for more clarity. This is particularly true of an array of provisions related to international taxation, which, taken together, significantly expand the base of cross-border income subject to US taxation and may actually increase costs for some US companies.
To plan for the future, stakeholders — from the CEO and CFO to the board and audit committee — need informed insights about what the new law means for their businesses. How will different provisions affect current revenue projections? How can their companies seize potential tax benefits? What changes to their current business and operating model will best position them for long-term growth? But CTOs are struggling to find the answers. Reliably forecasting the implications of the tax bill is incredibly difficult amid such complexity.
While the current political climate in Washington makes it highly unlikely Congress will pass a technical corrections bill in the near term, which would require bipartisan consent, regulators are currently working to address a wide range of issues in the new law. Further guidance will set off cycles of regulatory proposals, taxpayer comments, and refinement to the rules that gradually settle the state of the law.
Given expectations for greater clarity, many organizations are taking a “waitand-see” approach and pausing mitigation actions for now. Of course, some companies — driven by a clear need — are forced to act despite the current levels of uncertainty. For example, organizations facing significant tax consequences may choose to forge ahead and address immediate tax issues to avoid any business disruption. Ideally, an organization facing such a situation would implement a straightforward solution that could be enhanced or even reversed once regulators resolve some of the law’s ambiguities.
Consider how two different multinational organizations could approach international tax planning.
One company that is looking to reduce its debt burden in response to the law’s newly expanded subpart F provision, which is intended to stop US companies from deferring taxes through the use of offshore, low-taxed entities. Anticipating a significant global intangible low-taxed income (GILTI) charge arising in 2019, the company could work to reconfigure the taxation of its foreign earnings before the rules will apply.
In contrast, another multinational organization could accept a relatively manageable near-term GILTI payment in hopes that adjusting further down the road — when more guidance is in place — will ultimately result in a better longterm solution.