Ernst & Young LLP survey finds signs of US-targeted corporate investment and growth
New York, 4 October 2012 – Despite globalization, the need for tax reform, the upcoming election and economic uncertainty leading up to the proverbial fiscal cliff, corporate tax professionals foresee strong potential for US investment and growth in 2013. According to a survey announced today at Ernst & Young LLP’s 31st Annual International Tax Conference, 30% of tax executives in US-based multinational enterprises consider North America the most likely region for corporate investment, second only to Asia Pacific (42%) and twice as likely as Europe (14%). The Asia Pacific region includes China, India and Australia, among others.
“China’s continued expansion of its manufacturing presence and cultivation of a strong consumer market reflects the country’s shifting role in the global economy from an export base to a market hub. It’s interesting to see the focus on corporate investment plans also strongly supporting North America,” says Kate Barton, Vice Chair of Tax Services for Ernst & Young LLP. “International tax professionals from US-based companies are expecting their organizations to invest here at home despite these tumultuous times.”
From around the world, the companies represented in the survey have not always focused on US growth. On average, about half (51% mean; 50% mode) of their pre-tax income is currently earned outside the US.
Mergers and acquisitions also show signs of potential investment and activity. Almost two-thirds (65%) expect their company to conduct at least one significant corporate transaction in the coming year. Of those, 80% anticipate an acquisition, 44% a disposition and 16% a spinoff or split up.
“The level of expected acquisition activity also signals a turn toward growth considering most corporations have been in disposition and carve-out mode for the past few years,” says Barton. “But our clients still focus on the ability to compete internationally and cite the complexity of US compliance as a key concern.”
These growth sentiments exist despite the survey finding that the number-one tax risk is the uncertainty of US legislation and regulations.
Whether to support growth or to acknowledge growing tax complexity, 46% of survey respondents expect the tax function to hire in the next year, most of whom will add staff in North America (84%). Tax hiring may also be a result of increased responsibility. For example, 56% of respondents say that tax is responsible for indirect taxes, a growing trend.
Consistent with previous polls, the top three goals for tax departments in 2012 are effective tax minimization, cash tax savings and accounting for income taxes including the resulting implications on financial statements.
FOCUS ON INTERNATIONAL TAX REFORM
On average, survey respondents estimate a 23% effective tax rate on non-US earnings, while the US corporate income tax rate is 35% excluding state taxes, which could underline the frequent call for lowering the rate and expanding the base to remain globally competitive. As government leaders show signs of listening to that call, expectations have increased. Sixty-eight percent of US multinationals surveyed expect fundamental international tax reform. In principle, 80% would prefer a territorial tax system with the most important consideration being rules governing the transition from the current regime, including the treatment of prior accumulated Earnings & Profits; the second most important issue noted is the features of any additional anti-base erosion rules enacted along with the territorial system.
More than half (51%) expect international tax reform in 2014 and 31% in 2015. Only 11% do not expect to see international tax reform until 2016. Almost half (45%) believe each potential administration is equally likely to create reform. More than half (51%) say the prospect of fundamental international tax reform has already had an impact on their tax planning.
“Tax directors are analyzing the impact of a new tax regime on their companies and evaluating the cost of different planning scenarios under the current system through any transition, as well as the impact of operating under the new system,” said Jeff Michalak, head of International Tax Services for Ernst & Young LLP. “Among alternatives, certain planning scenarios may be most effective under the current tax rules, yet costly under a new regime, while others may be less efficient today, but more compatible with possible future rules.”
Among respondents who say tax reform has had an impact on their tax planning, 65% modified their planning to aim for consistency with possible reform, or at least become flexible to transition to consistent strategies. Thirty-seven percent pursued planning projects specifically in preparation for reform.
TRENDS IN CONTROVERSY
Within the last two years, 34% of respondents have addressed Permanent Establishment challenges by one or more foreign jurisdictions. Controversy is also prevalent in the transfer pricing area. Specifically, 54% of respondents currently face transfer pricing issues in four countries or more, and 12% of respondents currently face transfer pricing audit issues in ten countries or more. Transfer pricing of intellectual property is an issue in one to three countries for 87% of respondents.
Fifty-nine percent of survey respondents are currently operating or contemplating centralized supply chain functions, led by procurement (72% of those centralizing) and services (61%), followed by 48% who are centralizing manufacturing management functions such as demand planning and quality control. Another 37% are centralizing sales and distribution systems.
Given the substantial business change, it’s not surprising the 59% of respondents plan to evaluate the use and ownership of IP to align with the business. Currently, 43% is centrally owned in the US, with 32% of IP left in any of the countries where it is developed.
About the survey
Results are based on an online survey of 342 corporate tax and finance professionals representing companies headquartered in 23 countries. Seventy-six percent of respondents represent US-owned enterprises. The survey was conducted in September 2012.
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