Tax directors at many organizations anticipate their companies will grow by entering into new domestic and international markets in the years ahead, according to a new survey by BDO USA.
In a sign of an improving economy, 50 percent of the 100 tax directors at $1billion-plus public companies surveyed by BDO said their organizations are planning to enter new geographic areas in the U.S. during the next three years, while 63 percent of the respondents said their organizations are planning to enter or expand to international markets during the same period.
The companies’ growth strategies depend upon careful tax planning and preparation, BDO found. Only 10 percent of the tax directors polled said their main concern is that business decisions are being made without robust tax planning. Many organizations plan to capitalize on tax opportunities as the economy expands.
“When seeking expansion opportunities, integrating tax planning in the early stages of that process can have a positive impact on both the organization and the jurisdiction in which it will operate,” said Matthew Becker, a partner in BDO’s tax practice, in a statement. “We're seeing financial executives and tax directors focused on this early-stage planning to ensure they're able to effectively navigate today's increasingly complex tax environment and optimize growth opportunities for their businesses.”
Incorporating state and local tax planning into corporate growth strategies is especially useful in helping organizations make smart domestic expansion plays. For those respondents who said their organizations will likely expand to new U.S. geographic areas over the next three years, 45 percent said income or franchise tax credits and exemptions would have the greatest impact on their decision to enter new markets, followed by property tax abatements and exemptions (32 percent).
In conjunction with optimizing tax strategies for growth, organizations continue to focus on generating increased efficiencies in the face of an evolving tax landscape. A 75 percent majority of the survey respondents said the cost of compliance within the tax and financial regulatory environment has increased over the past three years. Another 45 percent indicated that uncertainty about foreign, federal and state tax legislation is the primary tax issue they currently face. To manage these challenges, organizations are focusing on developing better and more efficient processes to streamline compliance programs and manage costs.
For organizations with operations outside of the U.S., the proposed regulations from the Organization of Economic Cooperation and Development on base erosion, profit shifting, transfer pricing and increased disclosures emerged as a primary issue for tax directors, with a majority of respondents saying their level of concern about the recommendations is high to moderate (36 percent and 42 percent, respectively).
At the same time, many financial executives and tax directors admitted they recognize that the proposed rules, if implemented, could help provide clarity about some areas of tax ambiguity, allowing for better transparency and guidance when developing complex tax strategies.
“In a business environment in which companies are seeking growth opportunities as well as managing compliance in the face of increasing regulatory demands, tax directors and financial officers are focused on how to create efficiencies that not only reduce the cost of compliance, but also take advantage of strategic tax opportunities to better manage their overall tax liability,” said Paul Heiselmann, national managing partner of the specialized tax services practice at BDO USA.
In addition to physical expansion to new markets, many organizations are focusing on innovation. Sixty-six percent of the poll respondents said they are taking advantage of the federal R&D credit while 56 percent are claiming state and local R&D credits. For those organizations not claiming federal R&D credits, only 6 percent of the respondents said they are concerned about being audited as a result of claiming the credit, while 59 percent said the reason for not claiming it is based on the assumption that they did not qualify.
“The biggest hurdle with the R&D credit is creating awareness around the activities that do qualify,” says Chris Bard, practice leader for specialized tax services research and development at BDO USA. “There is a vast list of activities and job titles that often are eligible. While it's certainly on a case-by-case basis, companies that may be able to claim these credits should consider exploring their opportunity, as they can provide significant cash savings to help organizations continue to pursue innovation.”
An overwhelming 90 percent majority of respondents said they are familiar with transfer pricing mechanisms. Of those familiar with transfer pricing, 82 percent said their organization's current tax strategy includes transfer-pricing mechanisms, with 44 percent noting that those practices caused an issue for their firm during an IRS exam within the past five years.
While the IRS may focus on transfer-pricing mechanisms during a review, if implemented properly and in accordance with the arm’s length rule, an organization may be able to leverage the practice and be in full compliance. BDO's survey findings support this theory, as a 90 percent majority of respondents said the practice caused an issue for their firm during an exam but did not incur a substantial financial impact from the IRS examination, in terms of adjusted taxes owed, including penalties and fees.
“Transfer pricing activities have faced increased scrutiny by tax authorities around the world and within the United States,” said Bob Pedersen, a tax partner at BDO USA, LLP. “As such, many companies are seeking more guidance on how to best manage their transfer pricing life cycle. It is important that companies develop a clearly defined process to manage and mitigate their transfer pricing risks.”
Thirty-five percent of tax directors say avoiding material misstatements of income taxes is most challenging to their organizations, followed by meeting deadlines for interim and annual income tax reporting (29 percent), staying up-to-date on accounting standards changes and proposals (22 percent), and recruiting and maintaining professionals responsible for financial reporting of income tax (14 percent).
Reporting of income tax positions is complex and often requires even more attention during periods of growth. Organizations can better mitigate their exposure to ASC 740 reporting errors through a proactive approach to managing the process.
“Being proactive about financial reporting of income taxes is especially important during an expansion or a merger or acquisition,” said BDO tax partner Yosef Barbut. “Transitional periods for organizations can create scenarios where companies are somewhat more susceptible to incorrectly reporting their tax position on their SEC filings. However, if companies continue to include tax planning as part of their due diligence, then they are well positioned to mitigate exposure to ASC 740, as well as other, reporting errors.”
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