Tax reform gains engagement by corporate tax leaders and C-suite despite loss of political momentum, according to EY annual survey
New York, 24 April 2014
C-suite and boards communicating regularly with tax function to manage uncertainty
Despite delays in expected tax reform, companies are engaging, modeling and planning in order to manage uncertainty, according to survey findings released today at Ernst & Young LLP’s Ninth Annual Domestic Tax Conference in New York. Overall, uncertainty caused by legislative gridlock and the temporary nature of many tax code provisions continues to be the top concern about today’s corporate tax structure affecting businesses.
Prospects of imminent tax reform stalled since 2013, yet 27% of survey respondents see it gaining traction and 47% are engaging, or taking preliminary steps to engage in the process – a 10% increase over last year. Among respondents, 31% have modeled the proposal by House Ways and Means Committee Chairman Dave Camp to determine its impact on their business. Though the changes show winners and losers, overall the two balance, with 10% expecting to fare better, almost 11% worse and almost 11% about the same.
Looking out five years, 37% of respondents expect to see a lower corporate tax rate with a territorial system, as suggested by the Camp proposal, followed by 27% who expect a lower corporate tax rate under the current worldwide system. Another 28% anticipate the status quo: the same corporate tax rate and worldwide system.
Drawing C-Suite Attention
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 Kate Barton, EY Americas Vice Chair of Tax Services.
The tax areas cited as important to corporate leadership grew steadily.
- 52% saw interest in tax legislative developments such as tax reform (a 20% increase over 2013);
- 38% declared interest in tax policy and controversy, such as increased transparency from governing organizations (16% more than in 2013); and
- 34% in regulatory developments, such as uncertain tax positions (11% more than in 2013).
Though the 64% 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% of tax professionals expect that communication to continue to become more frequent.
Most significant on the international landscape, 82% of those surveyed expect at least some part of the OECD’s project on Base Erosion and Profit Sharing Action Plan to become law. However, 35% do not expect all the proposals to be adopted and 36% expect some individual countries to adopt proposals, but not all. Of those following the impact of the OECD BEPS project recommendations, 61% are somewhat or very concerned about the impact.
“Controversy in the US 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.”
Tax Function Top Challenges
Similar to 2013, tax accounting continued to present the most challenging and time consuming function in the tax department to 36% of survey respondents, followed by compliance (31%), planning (20%) and controversy (13%), 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% of US 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% 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% 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% of respondents reporting an increase in excess of 5% -- 7% more than those in 2013 -- with another 30% expecting further increases in 2015.
Tax Function Improvements
Adding to the need for budget increases, respondents would prefer to spend less time focused on risk and compliance, and more time on value-added initiatives. Specifically, 61% of respondents are looking for process improvement, followed by 27% focused on improving technology, 8% on R&D credit opportunities and 4% on property tax incentives. In terms of process, 52% 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%) or cost savings (16%) the key driver.
New software for data gathering and analysis represented the key tax technology investment by 43% of those surveyed, while 18% are centralizing their tax system and 15% are making changes as part of corporate finance transformation. The modicum of technology for a transformation does not reflect a lack of activity, as 59% of companies recently completed or are currently conducting a finance transformation. Among companies involved, 43% of surveyed tax professionals say they were part of the initial planning stage, with another 46% joining partway through.
“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 as selected by 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.
The survey was conducted among the more than 1200 registrants for the Ernst & Young LLP 2014 Domestic Tax Conferences held in New York and Chicago.
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