In addition, our recent survey of 500 C-suite level executives at businesses with more than US$500m in annual sales found that 75% of respondents said they were likely to expand their manufacturing in the US because of savings from the new tax law, while 47% plan to use their US tax reform savings to invest more in research and development, and 42% to pursue mergers and acquisitions.
“Looking beyond the headlines, it’s clear that the TCJA is giving businesses confidence to invest more heavily in manufacturing,” Ricker says. “These decisions are directly related to permanently lowering the marginal tax rate on investment.”
Nancy McLernon, President and Chief Executive Officer of the Organization for International Investment (OFII), which represents the interests of US subsidiaries of multinational enterprises, said the new tax law is also enticing foreign companies to expand in the US. “We believe that the changes that were made updated our system and made the US more competitive for foreign direct investment,” McLernon says. She believes that the manufacturing industry could be one of the main beneficiaries of new foreign direct investment (FDI) in the US. “FDI in the US is predominantly in manufacturing,” McLernon says.
First-quarter M&A activity involving US companies hit an all-time record of US$559b, according to our analysis of Dealogic data. While Ricker says technology disruption and efforts to gain or extend market access are currently fueling M&A, some businesses may use the tax savings to accelerate M&A strategies.
The TCJA also contains provisions that allow businesses to immediately expense 100% of certain capital expenditures for five years. But Greg Matlock, EY Americas Energy Tax Services Leader, notes that companies may prefer to move forward with projects already in the pipeline, as well as focusing on acquisitions. Investment, after all, is a strategic activity, and companies only launch new projects after painstaking research into future demand and prospective rates of return, Matlock adds. So the provision will likely be “a stimulus to make capital investment earlier rather than later,” he says.
In the energy sector, for example, the immediate expensing provisions may prove timely for oil, gas, and other natural resource investments and activities, which need substantial capital throughout the value chain. “The timing is great,” says Matlock.
Reviewing the rules
Businesses keen to use the TCJA as an investment springboard need first to undertake a thorough review of its impact on their US operations. “The new rules create a whole lot more complexity for capital structuring for multinationals,” says David Golden, Director of the Capital Markets Tax practice at Ernst & Young LLP.