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How are political and economic disruptions impacting the tax landscape?
In this episode of the Better Finance podcast, Marna Ricker, EY Americas Vice Chair – Tax, talks about the disruptions in the economic environment and their impact on tax landscape.
Governments around the world have responded swiftly to the economic fallout from COVID-19. This response to the current economic crisis has been largely financed by debt, with the Congressional Budget Office estimating that the 2020 US federal budget deficit will be $3.7 trillion dollars, which as a percentage of GDP would make this year’s deficit the largest since 1945. What business leaders need to know is that while COVID relief may continue in the short term, it likely will not continue on the scale we have seen to date. Additional relief will likely focus on providing economic stimulus to help advance the recovery, rather than a bridge of support.
Podcast host Myles Corson welcomes Marna Ricker, EY Americas Vice Chair – Tax. In addition to discussing the depth of the US government response to COVID-19, they cover the implications of the CARES Act and what finance executives should prepare for.
They also explore the impact the 2020 US presidential election will have on the tax landscape and overall economy. To manage through these political uncertainties, finance leaders can prepare with modeling and understanding the provisions in both candidates’ tax plans.
The discussion also analyzes the role that technology has played in tax during COVID-19, and the types of technology and software CFOs and tax executives are seeking out to help them access more data at a faster pace.
Key takeaways:
Governments could look to tax and trade policies that further a post-COVID recovery agenda, specifically focused on job creation and targeted incentives to bring people back to work.
Changes in the Administration and the Congress during this election cycle are likely to be very impactful on the tax policy agenda.
Finance leaders should take a comprehensive approach as they look to the next 12 – 18 months and shift their focus to sustainable, long-term changes.
Technology is transforming the way companies do business, and their overall tax strategy and planning must keep up with new business models and new digital assets.
For your convenience, full text transcript of this podcast is also available.
Myles Corson
Hello and welcome to the Better Finance Podcast, a series that explores the changing dynamics in the business world and what it means to finance leaders of today and tomorrow. I’m Myles Corson from EY, and I’m your host. Today I’m joined by Marna Ricker, EY Americas Vice Chair - Tax. I’m delighted to have Marna here to discuss some of the disruptions in the current economic and political environment and their impact on the tax landscape. Marna, welcome.
Marna Ricker
Thanks, Myles, happy to be with you.
Corson
As we kick off, perhaps you can share some perspectives on your career journey and your role at EY.
Ricker
It is my pleasure to be here. I am the Americas Vice Chair of Tax and I oversee our overall tax strategy and offerings for all of our client services for 17,000 people across the practice. That’s from the tip of Chilé all the way to the top of Canada. My job is to engage and inspire that team to deliver distinctive client experiences and create digitally enabled solutions, really that address our clients’ most complex business challenges and specifically around tax.
I’m international tax partner by technical expertise and a client-server at heart. And I really remain very active, serving our clients around the Americas every day. I spent nearly my entire professional career here at EY, so that’s almost 26 years now. And I have to say I do — I am very biased — I do believe a career in tax is without a doubt the most enjoyable and dynamic, I’d say, job on the planet.
And I say that because it’s really, really dynamic, because you are studying the global tax code around the world. It’s constantly changing, it is incredibly material to the P&L and the balance sheet, as our finance executives know. It really drives fiscal and monetary policy around the world. We’ve really seen that more recently with the pandemic and the economic stimulus. And it’s always been a C-suite conversation important to the strategic direction of businesses and informing businesses.
I also have the privilege of being a member of Americas Operating Executive, which enables and executes the global strategy for the Americas and member firms here. And then also I sit on the US Executive Committee, which is the governing body for the US partnership here at EY.
And so, in addition to that in my personal life, I do two big things. I am first and foremost a mom of two sons, who are 10 and 12. And then I also in my free time contribute back to the community as a board member of Junior Achievement USA, which is a nonprofit youth organization, and we are dedicated to really giving young people the knowledge and skills that they need to own their own economic success and really plan for their future in an economically responsible way.
Corson
Clearly your passion for what you do shines through, and I guess that’s pretty important in the environment we find ourselves in right now with all the disruption and change around us. As you kind of look around how governments around the world have responded, particularly to the economic fallout from COVID-19, what do you think business leadership are expecting next?
Ricker
It’s really been an unprecedented response from the government with respect to COVID-19, something we’ve really never seen.
And so here in the US, just to give perspective, that is about $3.7 trillion of stimulus. We’ve almost reached 100% of GDP. That is the largest we’ve seen since 1945 when we were fighting World War II. We were at about 80% before; that’s really accelerated a decade worth of debt onto the US balance sheet.
So, look, I think that business leaders need to know that while relief may continue in the short term, as we again try to deal with the pandemic first and then deal with getting the economy back running, I wouldn’t expect to see it continue at this scale. And I would think that we’ll start to pivot and start seeing it being around recovery rather than just a bridge of support. So, we’ll look to tax and trade policies without a doubt, but I’d say that we’ll be specifically focused on jobs and not just the extension of unemployment benefits but looking at bringing people back to work.
And then I’d also expect governments to start to look for incentives. We’re starting to see that in the elections, which we’ll come to, but incentives around resiliency, specifically around supply chains, the vulnerable supply chains, bringing those back inside domestic borders in manufacturing related to health and around an infrastructure, certainly energy infrastructure.
Corson
You mentioned the impact on the US economy specifically and given the size of that market, perhaps you could talk about some of the specific implications of the CARES Act because that’s going to be a topic of big concern from many of our finance executive listeners. What should finance leaders be doing to prepare for that and to respond?
Ricker
Yeah, some really significant provisions in the CARES Act for finance execs. And again, those were to give significant tax relief and much needed liquidity for businesses right away back in late March. And look, a big piece of those benefits were first around the employee retention credit to keep jobs to try to really help employees in America. And then the other big positions were around cash and liquidity, and the largest cash tax benefit was from refunds received for lost carrybacks.
In addition, there were other big pieces that were relief for interest deductibility limitations. There were qualified improvements that companies could take for expensing or write-offs. And then there was a suspension of the 80% limitation of deductions for NOL, so carryback of those NOLs.
Those CARES Act provisions create significant interactions among domestic and US taxation of foreign income. So, those provisions from the TCJA in December of 2017 that was enacted. There’re really complex interactions with the CARES Act and those provisions. A lot of modeling needs to be done because it impacts group losses and credit attributes, and so finance executives are working with their tax executives on those, so you don’t want to be surprised about what those interactions are.
And then also, you need to be evaluating your estimated taxable income for tax years ’18 through 2020, so we’re almost through 2020 here. We’re coming up on the last quarter. And taking into account those latest company forecasts with the CARES Act changes and those TCJA interactions and provisions.
And then you have to move to financial reporting and looking at the need to reevaluate all the realizability of your deferred tax assets up and down the balance sheet. And then last but not least, you need to get all of that reflected on your tax return, your tax compliance requirements, and that ultimately will feed into and provide your tax planning opportunities to continue to look at cash flow and liquidity.
That is really what came out of the CARES Act, so really good things on employee retention credits, then moving into things like the NOL carryback interest deductibility and qualified improvement in deduction expensing. All intended to save jobs, all intended to create cash for companies that needed it at this time.
Corson
You did a great job of summarizing a lot of complexity there again, and key takeaway in terms of the need to collaborate and stay engaged with stakeholders.
You kind of alluded to the fact and we’re recording this early in October 2020 and again, coming back to the US, clearly one of the big topics is the forthcoming presidential election and some very significant potential consequences on tax landscapes based on the outcome. And I’ll say it obviously impacts the overall economy. What sort of impacts are you potentially seeing and how, again, should we be thinking about preparing?
Ricker
From a preparing perspective, I’d say modeling and understanding the provisions particularly in the Democratic nominee’s provisions is the first thing to do. There is absolutely no doubt that the election outcome of the administration and the Congress, particularly the Senate, will have a very impactful outcome on the tax policy agenda. And that true impact is going to be dependent on whether or not we have a change in the president and the Senate together or status quo is retained for both.
For example, the Democratic presidential candidate, Joe Biden, has proposed higher taxes, including an increase in both the corporate and the top individual income tax rates. And those changes are estimated to raise nearly $4 trillion over 10 years. It’s likely really that a Democratic Senate would also be needed to bring that type of package to fruition, so you’d really need a Democratic sweep to make that happen.
Let me highlight a few of those corporate provisions that will be relevant given the audience that we’re talking about. And of that $4 trillion, about $2 trillion of those proposed tax increases are to the corporate base. So, the Democratic priorities on business changes include an increase of the corporate rate from 21% to 28%, so a 7% increase; a minimum tax of 15% on book income greater than $100 million; an increase of the GILTI tax rate, so that’s global intangible low-tax income, so that’s to reduce incentives for evasion and outsourcing — that’s currently roughly around 13% for most companies, so that’d be increasing by about 8%, so from 13% to 21%. And then there’s lots of incentives for, again, bringing manufacturing back into the United States, that nearshoring and supply chain piece.
Depending on the outcome of the election and given the scale of the deficits, we could see additional sources of revenue coming too. Things that we’ve heard in the presidential campaigns that I want to make sure the finance executives here keep their eye on too are things like wealth tax, financial transaction taxes and even carbon taxes. Those aren’t proposed; those are just things we’ve heard throughout the campaigns as it’s unfolded.
So, no matter who wins the White House, I think the thing that we’re certainly seeing is companies modeling their tax outcomes now so they’re prepared, and they understand the provisions of the status quo vs. these proposed Democratic presidential candidate provisions.
Corson
You referred to a number of the uncertainties that are very difficult to predict and the importance of modeling. Are there some other examples you can provide for the audience in terms of how to manage a bit of uncertainty?
Ricker
I think the number one thing we’re seeing is that all you can do is control what you can control. We can’t predict where the next uncertainty is going to come from. So, primarily what we’re seeing is a lot of analytics, a lot of modeling, happening and optimizing the current portfolio or the current business that you’re in — focus on gross margin and gross profits and working capital. So, cash is king or queen, however you want to term that.
We’re certainly seeing a really comprehensive approach as you look to the next horizon. Whether that next horizon, depending on how you view the pandemic and the economic crisis is 6, 12 or 18 months, you want to look at what’s sustainable, what long-term changes that you want to make that will really allow you to accelerate out of the pandemic and the economic crisis even stronger.
The three big questions that really we’re seeing companies ask themselves — the first one, is are you thinking like an investor, an investor that would want to invest into your business? And are you evaluating all the value levers as an investor? The second one is, are you really rigorously tracking the value and linking the program results of that value to your financial results? How are you linking those two together to ensure the outcomes? And then the last one is, does each member of your management team share the same goals? Once you’ve done those two things, do each member of your management team share those same goals? And do you have a governance in place to hold everyone accountable to drive that behavior change to produce those outcomes and those results?
So, those are the three big questions we’re seeing — control what you can control, gross margins/gross profits, working capital. And then do you have a vision for your future and how are you aligning that around those three questions to ensure you’re producing those outcomes in your financial statements.
Corson
That’s a very helpful summary again, and I think that point on alignment is so important in these kind of disrupted times. The leadership teams, the management teams, that they’re able to be agile and stay connected and aligned, I think would obviously be successful. And then part of that clearly is the role of technology. I’m interested in how you’ve seen technology play a role in the tax function in response to the pandemic and the immediate current crisis.
Ricker
I feel like, Myles, I had talked about technology for the last two or three years as I came into role and while it had always been at the center of everything we really had done, I would say that the acceleration and the arrival of technology to our business and, frankly, to every company’s business was … it just almost came right with the virus. The realization of it, and the importance of it, came at the moment that it swept from east to west and arrived in the United States.
And so, for us, let me just give you a quick example, it was busy season in most of our countries across the Americas. It was really a big tax compliance deadlines for us to deliver for our clients when the virus came into most of these Western countries. So, it was really late February, and so we officially closed our offices on March 17th here in the US and moved to remote work to keep all of our people safe. And our US tax professionals had two of the largest filing deadlines.
So, many of you listening to this podcast will know it was March 31st, which is a really big partnership filing deadline here for K1s and April 15th, which is obviously a US individual tax return deadline. So, that was a moment when we needed to be agile and to be able to file almost 30,000 K1s for some of the world’s largest funds around the world.
We literally pivoted overnight, mobilized our entire business overnight, embraced virtual teaming, everyone accessing our technology platforms over the intranet globally. We had certainly done that while working from our clients and some people needing to flex and work from different locations and from home, but this was everyone accessing our technology platforms over the intranet globally, and obviously new ways of working to continue to deliver on our commitments to our clients. We were incredibly agile, quick to adapt, obviously create flexibility for our clients and obviously our teams to be able to work from alternative locations. Every single person around the world to be able to do that.
From my perspective, COVID-19 has really just made our technology-driven tools table stakes, and the transformation is upon us and we will never go back, literally never go back. And we’re certainly finding that exact same thing with our clients. Our clients need that same support from us now more than ever to take advantage of transforming their front office, the way they interact with their clients, and certainly their back offices accordingly while we’re doing the exact same things to ourselves.
My perspective is that those businesses that are really going to thrive coming out of the pandemic and the economic crisis are the ones that are doubling down on technology investments accordingly.
Corson
That is a great example of how technology has enabled the immediate aftermath of the pandemic. But as you mentioned, Marna, clearly this journey to technology and digital has been ongoing for a while and, in fact, the pandemic has accelerated what was already in train. So, as we think more broadly around this digital translation of the finance function and the tax function, what types of technology and software are CFOs and tax executives seeking help to help them access data and to do things at this fast pace that you were describing?
Ricker
I think there’s maybe some level-setting to do really quick before we jump into the specific examples of the types of technologies. And I’ll share some stats that I think are really relevant.
So, when I look at data as we think about the finance and the tax function, I put it in three big buckets. The first would be governments. And so, governments are using technology more than ever in managing their enforcement divisions and executing effective tax audits. It typically would be that the taxpayer and the companies would really have the advantage on data and knowing their companies, knowing their tax positions globally. And that data is really changing that in governments, that sort of asymmetric issue has gone away because governments now have more data on companies, and they’re using technology tools and able to really come into an audit in a really strategic way and have a lot of information about a company coming into that conversation. So, that’s number one.
Second, the tax function itself is really transforming itself through the use of technology and creating really great data and analytics to be able to inform their tax positions and be able to provide strategic insight to the business. So, that’s number two.
And then the third is exactly what I was talking about earlier is every company is really using technology to transform the way it does its business and the way it interacts with its companies. And that obviously has tax outcomes. That has tax consequences and tax outcomes. So, tax departments are having to inform the business and to keep pace with being a great strategic partner to the business and how they move forward. So, those are the three things I wanted to just level set.
So, now let’s come back to your question on what types of technologies there are enabling the finance functions around data. What are we seeing? So, there’s no doubt everybody is looking for technology and software to provide easy access to data from across the organization. That’s happening with lightning speed. And I’d say most of it is cloud. Everybody’s in the cloud, so cloud-based solutions which provide greater agility at lower cost.
We’re seeing a ton of increase in use of tools like Blackline, again, cloud-based software designed to automate and control finance close processes. In a recent tax technology survey we did, we had a number of respondents say they spend 40 to 70% of their time on cleansing activities. So, before they ever get to that strategic aspect, they’re doing cleansing activities. We’ve seen an increase in low-code and no-code tools and visualization tools for rapid and agile data cleansing and modeling and visualization-type activities. We’re doing a ton of training ourselves and upskilling around those types of tools in our practice, our tax practice and our insurance practice.
In that same exact survey, we had CFOs and tax executives also saying they’re turning to data warehouses to reduce that data cleansing time by about 40%. And 70% of the respondents also said they plan to build or extend their existing finance or tax data warehouse in the next three years. A ton of work around that data, getting it into a data warehouse, getting it cleansed, so they can get on to the modeling and the visualization and the analytics to provide insights to the business.
And this was a line I pulled out of a UN report that was talking about data. It said, “Data is the lifeblood of decision-making and the raw material for accountabilities.” And I thought that was a great line. I think that sort of says it all, so I’ll say it again. “Data is the lifeblood of decision-making and the raw material for accountability.” I love that one. I couldn’t agree more.
I’ll really close with an example of what we’re doing when we talk about that data warehouse and that data platform piece. A significant investment in the way we’re bringing this to life inside our global tax practice — it’s called the Global Tax Platform. It is our tax technology platform, and it really is an industry-leading, automated, cloud-enabled data management platform built for enterprises to digitally transform everything tax.
So, think about the GTP as a mobile phone where all the data is in one place and comes into a platform. We literally are bringing data out of our client systems globally one time in an automated way. We’re partnering with Microsoft, Microsoft Azure cloud-based platform, where we do everything with that data — VAT, corporate income tax, statutory reporting, provision. We do it one way, one time, globally, using third-party tools to process and calculate tax returns and with complete reusability. Reusing analytics, visualization, stored once one way globally, and again, as I said, we partnered with Microsoft to make that happen.
We were also recently recognized by Microsoft with three Global Partner of the Year awards, and so, again, really fun for us to be partnering with them and using their technology to bring our Global Tax Platform to life. That’s my technology conversation and obviously one you can tell I’m really passionate about as we bring forward our business.
Corson
I love that quote as well. I’m going to be using that one. Data is the lifeblood. It’s definitely one that resonates. Let’s move on now from technology and back to the political conversation. One of the other disruptions I think everyone has been observing is trade policy and some of the trade tensions that have been existing globally and how that potentially impacts supply chains, exacerbated by the COVID-19 and the need to be more locally sourced. What types opportunities should finance leaders be aware of as they look at this issue around trade policy globally?
Ricker
It’s a great question and it’s certainly one that was on all of our executive’s minds pre-COVID. And with COVID, obviously, it really expands the need to think about alternative supply chains. And we’ve certainly seen a trend towards businesses onshoring and reshoring, and you’re seeing that in both packages on either side of the presidential candidates as well. So, I think there will be incentives for that.
One of the things that I want to make sure that companies are thinking about is the full cost of all taxes. As you’re going into countries, you want to make sure that you’re thinking about the incentives on the way in and how you operationalize and your transaction flows. As you’re leaving countries, you’ll want to think about the exit charges and preparing for controversies on the way out.
There’s no doubt tax policy will play a role as governments are offering these incentives to attract manufacturing. That will be globally; that’s certainly not just here in the US, as I said, on the minds of both the Trump and the Biden campaigns. All countries I think will be trying to attract investment, including manufacturing investment into their countries as companies look at alternative supply chains.
The other thing I think that you’ll want to make sure you’re up to date on the latest trade policies, so you can collect all the data and model where you’re going to want to put those supply chains, and we have a COVID-19 Global Trade Considerations Tracker to help really monitor the rapidly emerging government trade policy responses. Things like customs, excise taxes, import tariffs; and then the same on the immigration side. When you’re moving workforces, you want to make sure that you’re paying attention to where your workforces are going to be and how you’re going to move those around too. So, workforce matters, trade implications matter and then the taxes — I’ll call it the full cost of all taxes as you’re moving those trades around.
I heard a line that I thought was another great one. You can tell I love things that I put in my head, and then you can sort of keep in mind that there’s simple ways to say it. I heard one of the executives at one of our clients say, “Supply chain is moved in many ways from just in time in this environment to just in case.” I thought that was a really good line from a resiliency perspective. You think about geopolitical, you think about trade and tariffs and you think about, obviously, a pandemic and a workforce going down.
And so, just in time was the line of the day, and now he said he believes that just in case is equally important.
Corson
Great points, and resilience, I think, is going to be an increasingly important topic. Marna, you mentioned workforce there, and in your intro, you mentioned, obviously, the importance in your role of inspiring people and talent. And we’ve been through this period of people needing to be agile and adapt both in the pandemic but also in response to all of those technology changes that you talked about.
As a leader, what are the skills you think finance leaders and tax professionals need to be thinking about for themselves but also for their own teams in this environment?
Ricker
It’s one that we think a lot about again in the services business where people are your absolute greatest asset. And it’s a privilege to think about that. I think upskilling and reskilling, particularly around technology that we hit on earlier but around many things, is it’s no longer table stakes; it’s really a critical factor for finance organizations, including tax executives here to evolve and help lead our companies forward in the transformation that’s before us over the next few years.
There’s three critical things to think about when you’re looking at that transformation journey and that upskilling and reskilling of talent. The first is mindsets, the second is behavior, and the last is the skills piece of it. And not particularly in that order, but you do have to come at all three components. The first is the mindset piece, and that’s really our ability to embrace the distribution and to lead empathetically. The softer skills are just as important as technical skills.
I think as finance and tax executives, we tend to think the technical skill is the most important. So, making the right decisions for our teams and businesses depend on them and that’s what we think about. But that mindset piece and how we lead is equally important. The culture piece of that and being agile and resilient particularly as you look at what the environment will be over the next several months, maybe over the next several years will be very, very important.
On the skills piece, on technical finance skills, it will be really important on finance as well, there’s some … well, I call them ubiquitous skills, high-demand emergent skills that are key to performance in any role. There are five critical ones on the finance side. Analytical acumen, so heavy cognizant loads of thinking, complex business solving; creative reasoning, so our ability to generate new ideas, that piece; social and emotional intelligence, the ability to collaborate, collaboration tools, the way we’re working today is really important; resilience, our ability to keep difficult situations in perspective and bounce back from challenge, challenges will only continue; and then learning agility, so our approach to learning and the aspiration to upskill and to have a growth mindset.
Analytical acumen, reasoning — generating ideas to say that simply. Emotional intelligence around collaboration; resilience, difficult situations, keeping it in perspective; and learning agility — really that growth mindset. I want to learn; I want to grow in my skill. Those are the five big technical or finance skills, tax skills that we’ll all need. Those are the things that from a business strategy, a tax strategy, a finance strategy, that we as finance and tax leaders need to be focused on — and the mindset, behavior and skill piece.
Corson
I love the way you’ve really brought in the balance of the IQ and the EQ and this of the left brain, right brain, which I think is so essential. As we wrap, any final words of advice or recommendation you can provide to our listeners?
Ricker
It’s an incredibly exciting time to be a finance executive. Of course, I’m a little bit biased towards the tax side of that. I think it’s a privilege to be in this part of the business and an exciting, dynamic time to be in it and look forward to continuing this kind of conversation and moving it forward, Myles.
Corson
Marna, really appreciate you joining us today and bringing some of these insights and simplifying what is a very complex topic into a very digestible and understandable form, so thank you.
Ricker
My pleasure.
Corson
As always for our listeners, thank you for listening. And if you’ve enjoyed this episode, please remember to subscribe or leave a rating or review. If you’d like to find out more about any of the topics discussed, we’ll post related links to our website at ey.com/betterfinance. I look forward to speaking with you on the next episode of the Better Finance Podcast, a series that explores the changing dynamics in the business world and what it means to the finance leaders of today and tomorrow. Thank you.
