Despite the loss of political momentum in Congress for tax reform, corporate tax leaders are still making plans in case it happens, according to a new survey.
The survey findings, released Thursday at Ernst & Young LLP’s Ninth Annual Domestic Tax Conference in New York, found that uncertainty caused by legislative gridlock and the temporary nature of many tax code provisions continue to be top concerns about today’s corporate tax structure affecting businesses.
While the prospects of imminent tax reform have stalled since last year, 27 percent of the survey respondents see it gaining traction. Nearly half of the 1,200 attendees polled at the conference, or 47 percent, indicated they are either engaging or taking preliminary steps to engage in the process, a 10 percent increase over last year. Among the survey respondents, 31 percent have modeled the proposal by House Ways and Means Committee Chairman Dave Camp, R-Mich., to determine its impact on their business. Though the changes show winners and losers, overall the two are roughly balanced, with 10 percent expecting to fare better, nearly 11 percent expecting to be worse off and almost 11 percent about the same.
Looking ahead five years, 37 percent of the poll respondents indicated they expect to see a lower corporate tax rate with a territorial system, as suggested by the Camp proposal, followed by 27 percent who expect a lower corporate tax rate under the current worldwide system. Another 28 percent anticipate the status quo: the same corporate tax rate and worldwide system.
Increases in communication between the tax department and CEOs, COOs, the audit committee or board members demonstrates the increased understanding that tax has far-reaching corporate implications.
“Just a few years ago, tax directors were most likely to say they spoke infrequently with corporate leadership, but tax reform, increased regulatory demands and scrutiny, technology needs and reputational risk have created a lot of attention,” said EY Americas vice chair of tax services Kate Barton in a statement.
The tax areas cited as important to corporate leadership grew steadily among the poll respondents. More than half (52 percent) said they saw interest among corporate leadership in tax legislative developments such as tax reform (a 20 percent increase over 2013). In addition, 38 percent said they saw more interest in tax policy and controversy, such as increased transparency from governing organizations (16 percent more than in 2013); and 34 percent saw interest in regulatory developments, such as uncertain tax positions (11 percent more than in 2013).
While the 64 percent of survey respondents who say they communicate frequently with corporate leaders is on pace with last year, the ad hoc nature of previous communication is turning toward regularly scheduled meetings, such as joining audit committee meetings. Over the next two years, 21 percent of tax professionals expect that communication to continue to become more frequent.
International Tax Concerns
In terms of international tax issues, 82 percent of those surveyed expect at least some part of the Organization for Economic Cooperation and Development’s project on Base Erosion and Profit Sharing Action Plan to become law. However, 35 percent of the poll respondents do not anticipate all the proposals to be adopted and 36 percent expect some individual countries to adopt proposals, but not all. Of those following the impact of the OECD BEPS project recommendations, 61 percent are somewhat or very concerned about the impact.
“Controversy in the U.S. has grown, but international controversy is causing many sleepless nights,” said Barton. “We all watch the progress of global agreements and proposals that could affect regulations here and around the world, such as BEPS, possibly causing double taxation and more confusion if they are not incorporated consistently.”
Top Tax Challenges
Similar to last year, tax accounting continued to present the most challenging and time-consuming function in the tax department to 36 percent of survey respondents, followed by compliance (31 percent), planning (20 percent) and controversy (13 percent), though tax controversy and risk is considered the issue that would most impact the organization.
Despite the comparative infrequency of controversy, a separate tax risk survey by EY this year found that 90 percent of U.S. companies with revenues of $5 billion or more have experienced an accelerating focus on cross-border transactions by tax authorities in the last two years, 69 percent of whom said tax audits have become more aggressive in the past two years. As a result, more organizations see potential reputational risk related to tax, leading 54 percent of survey respondents to coordinate tax and communications functions.
New demands combined with increased attention may explain a reported increase in tax budgets, with 29 percent of respondents reporting an increase in excess of 5 percent—or 7 percent more than those in 2013—with another 30 percent expecting further increases in 2015.
Adding to the need for budget increases, survey respondents said they would prefer to spend less time focused on risk and compliance, and more time on value-added initiatives. Sixty-one percent of respondents indicated they are looking for process improvement, followed by 27 percent focused on improving technology, 8 percent on R&D credit opportunities and 4 percent on property tax incentives.
In terms of process, 52 percent of those surveyed believe improved operational efficiency and effectiveness of processes would be the key driver for a finance transformation, far outpacing those who consider improved financial/transactional systems (20 percent) or cost savings (16 percent) the key driver.
New software for data gathering and analysis represented the key tax technology investment by 43 percent of those surveyed, while 18 percent are centralizing their tax system and 15% are making changes as part of corporate finance transformation.
Fifty-nine percent of companies have recently completed or are currently conducting a finance transformation, according to the poll. Among the companies involved in such a transformation, 43 percent of the tax professionals surveyed said they were part of the initial planning stage, with another 46 percent joining partway through the process.
“This increased recognition of the need to include tax in the transformation discussion is very important,” said Barton. “The amount of money, time and trouble saved by incorporating tax into the process is too significant for companies to ignore and too vital to the tax function for practitioners to stay quiet, especially if the transformation is based on a major corporate transaction.”
The biggest overall challenge to tax leaders in the coming year, according to the respondents, was “accomplishing everything with our staffing model,” reflecting the many challenges, functions and plans for improvements. Without proper staff, it will be difficult to stay on top of external forces of change while improving internal functions.