Navigating economic uncertainty is a common theme for CFOs. They regularly make decisions based on short- and long-term business goals or growth projections, using the best information available to them at the time. They are constantly evaluating the company’s existing and future financial picture: Is now the time to expand into new global markets? What should our employee headcount be by year-end? What about in the next five years? What role, if any, is tax playing as we model toward the future?
Tax policy plays a role in shaping our economic climate. Given that, and considering that business decisions will, by their nature, have tax implications, CFOs looking to navigate today’s economic uncertainty should consider including their tax functions in overall business planning.
The global pandemic forced business professionals to be unusually flexible. It also taught leaders the need for a plan A, B, C and D.
Approaching current economic uncertainty with that same flexible mindset is important, as is planning from a holistic standpoint. It’s not enough to just have an acquisition or restructuring plan – business leaders need to confer across all business lines to evaluate the impact of business decisions. Determining how each unit, individually and collectively, contributes to projected outcomes helps increase the odds that planning efforts will closely sync up with reality.
Fully evaluate tax benefits
Even the most well-informed CFO may not be aware of all available tax benefits. Coordinating with the tax function is key to staying abreast of tax credits and incentives that could help offset planned investment and growth costs.
For example, while most are aware that there are renewable energy grants in the Inflation Reduction Act of 2022 (IRA), many don’t realize that the funding is available to other sectors, including manufacturing, life sciences, consumer products, retail and more. The expiration dates of these benefits vary, but most are available for several years, which can make them attractive options for long-term business planning.
As the tax environment can shift quickly, having regular touch points with the tax function is a leading practice CFOs can adopt to help navigate a changing tax landscape.
Better understand potential tax liabilities
When we look at tax from the opposite side, it’s essential that CFOs understand how the IRA’s new 15% corporate alternative minimum tax (CAMT) and 1% stock buyback tax might be relevant to their organizations’ operations and transactions.
The CAMT is based on book income and applies to companies that report more than $1 billion in profits to shareholders (based on a three-year average). The CAMT analysis is complicated —companies will first need to determine whether the tax applies to them and, if so, how much they should pay. This step requires two separate calculations to determine the tax liability (with the business paying the higher of the two amounts).
The new 1% stock buyback tax may add additional costs to stock repurchases and new compliance obligations to the tax functions of certain publicly traded companies. This could potentially affect a wide variety of common M&A activities. Companies should scenario plan accordingly to see what situations would trigger the tax.
In addition, activity has accelerated on the OECD’s Base Erosion and Profit Shifting project (BEPS 2.0), with the European Union (EU) issuing an agreement that requires EU Member States to enact global minimum tax rules by December 31, 2023; South Korea enacting a new global minimum tax law on December 31, 2022; and the OECD issuing hundreds of pages of guidance on BEPS 2.0. Pillar Two issues. And even those companies that may not owe additional tax under those rules will still have to deal with the burden of performing the necessary calculation and filing the required forms.
Liability for these new taxes can affect a company’s bottom line, so modeling out the potential impacts with the tax function can keep CFOs informed of any potential new liabilities stemming from enacted tax legislation. By involving their trusted tax advisors in business considerations, CFOs can help make certain that they are both managing tax risk and identifying tax issues to help their organizations navigate uncertain times.