[IMGCAP(1)][IMGCAP(2)]No matter who wins this year’s presidential election, CFOs and tax directors alike will wonder what changes are looming. Given the slim chance of a complete overhaul of our tax system, the short answer to our titular question is, “Probably not much.”
Is Tax Reform Likely?
The likelihood of either candidate successfully implementing tax reform as president without congressional alignment is quite small. The 435 representatives and 34 senators up for re-election this year also have a role to play in passing tax reform—and both parties have their own views on the right approach. Without compromise between Congress and the president, the Commander in Chief has limited power in this arena.
Until we’re closer to November 8, it’s going to be difficult to predict which party will hold majority power in Congress, limiting our ability to predict if there will be a blend of legislators who could assist in enacting a major legislative change.
Operating in Times of Uncertainty
Policy points aside, election years always entail some uncertainty, which makes year-end tax planning all the more important. Some CFOs or tax directors may be reticent to make concrete, proactive plans in the face of such unpredictability.
In actuality, a business’s 2016 taxes are going to be what they are regardless of the election outcomes, and being proactive sets you up for success in the long run. Most tax directors and CFOs have spent their entire careers operating in vague climates—in fact, many continued to pursue R&D activities under the assumption that the credit would be extended each year, even before Congress passed the PATH Act. So, in many ways, the tax environment should remain business as usual.
Tax Regulations beyond Total Reform
Rather than focus on future legislative proposals that may or may not come to fruition, companies should pay close attention to regulatory changes already in motion. For example, the Treasury Department has issued some significant guidance over the past year that could impact multinationals; most notably, temporary regulations aimed at curbing so-called inversion transactions, which have stopped some high-profile mergers—such as the Pfizer-Allergan deal—in their tracks.
The IRS has also published updated guidance surrounding IRC Section 385 that could cause some related-party debt transactions to be reclassified as equity, and requires additional documentation for entities making intercompany loans. These types of changes can lead to higher tax bills and, as a result, require careful preparation and attention now. Companies should not wait to see how a new administration may or may not change the rules that are already in process.
Meanwhile, the United States’ participation in the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting initiative, also known as OECD BEPS, will continue regardless of who our next president may be, with significant implications for multinationals. More important than the president’s policy proposals will be who he or she will choose to head up the Treasury and IRS. These individuals will be leading the BEPS charge from the U.S. side, and understanding their priorities will be essential for U.S. businesses looking to stay ahead of the curve on this issue.
But perhaps most immediately, businesses should be keeping a close eye on state and local tax reform efforts. With many companies incurring the majority of their tax burden at the state and local level, and with state and local legislation often moving at a faster pace than federal initiatives, changes to state and local taxes may be just as important, if not more important, than any hypothetical federal tax reform. For example, this November, Oregonians will vote on Measure 97, a proposed gross-receipts tax on large corporations that would place a 2.5 percent tax on corporate sales exceeding $25 million.
States and municipalities throughout the country are exploring such potential tax changes, including both ordinary changes (sales tax increases) and new initiatives (such as soda taxes), and these efforts often move independent of any election cycle. Savvy businesses monitor these developments year-round, and build them into their tax planning to avoid any unpleasant surprises regardless of what’s happening at the national level.
November 9 and Beyond
In the end, it’s important to look at the entire picture of election season—not just the sensationalized presidential race. This year’s presidential election is unlikely to yield major economic or business changes in the short term, and it’s questionable whether we’ll see meaningful changes—from a tax perspective, at least—in the medium term, either. A CFO’s best bet is to avoid the distraction of a contentious presidential contest, and instead identify the immediate and tangible opportunities and threats poised to affect his or her business.
Matt Becker is central managing partner of BDO USA’s Grand Rapids office, and Paul Heiselmann is national managing partner of specialized tax services at BDO USA's headquarters in Chicago.
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