Three potential tax impacts of the proposed reconciliation bill

7 minute read 16 Sep 2021
By Marna Ricker

EY Americas Vice Chair – Tax

Transformational business leader. Passionate about enabling talent and promoting inclusiveness and empowerment. Glass-ceiling breaker. Mother.

7 minute read 16 Sep 2021
Related topics Tax

Marna Ricker, EY Americas Vice Chair – Tax discusses the proposed House Ways and Means reconciliation bill and what it means for tax leaders.

The 3.5 trillion-dollar reconciliation bill, recently released by the House Ways and Means Committee Chairman Richard Neal, would enact much of President Biden’s Build Back Better agenda, including expanding the social safety net, infrastructure financing and addressing climate change. It has many significant tax implications.

The first thing to keep in mind is that this bill is not a final piece of legislation. Senate Democrats will also have a reconciliation proposal, and there will be significant differences between the versions that will need to be ironed out. That’s why it’s critical for tax leaders to understand the latest developments so you can be proactive as the legislation evolves.

Potential tax impacts

Based on the recent House Ways & Means proposal, there are three key potential impacts that tax leaders should be focused on – rate increases, M&A costs, and supply chain.

GAAP and Cash effective tax rate increases

There could be significant GAAP and Cash effective tax rate increases, so it’s critical to understand legislative developments and model the implications.

  • The biggest headline for companies is 5.5% increase in the corporate tax rate – from 21 percent to 26.5 percent for large businesses
  • In addition, the draft proposes several significant and complex changes to the US international tax regime that will increase the taxes paid by most if not all US multinational companies 
  • The draft also outlines several tax increases that would impact company owners who pay their business taxes on their individual returns
  • There’s also an increase in the top income tax rate for individuals, a capital gains tax rate increase, a 3-percentage point surtax on top earners, and changes to the estate tax
It’s critical for tax leaders to understand the latest developments so you can be proactive as the legislation evolves.
Marna Ricker
EY Americas Vice Chair – Tax

M&A deal pricing and costs

This legislation could result in increased deal pricing and costs for mergers and acquisitions, so now is the time to plan for a potential new environment.

  • For example, depending on the effective date of potential increases, higher corporate rates may mean considering cash-driven transactions in 2021 before the law would take effect, with an increase in tax-free transactions afterwards
  • It could also make tax-efficient global financing more complex, with an increased need to focus on changing inbound and outbound tax rules for multinational enterprises

Supply chain disruption

There could be supply chain disruption and a need for operating model re-design. While supply chains have been front in center throughout the pandemic, tax departments should take a fresh look at supply chains.

  • Companies should be actively reviewing both US proposals as well as global developments to understand the tax impact of where they locate assets, functions, and risks
  • On the global front, many countries are moving ahead with their own tax reforms, and don’t forget that a group of about 140 countries are working within the OECD on proposals to change fundamental international tax rules and impose a global minimum tax of at least 15%

Expiring provisions of the TCJA

To add more complexity to the situation, tax departments should also be tracking the expiring provisions in the Tax Cuts and Jobs Act of 2017 – or TCJA. 

If Congress doesn’t act on these provisions by the end of 2021, there’s an automatic tax cliff that will result in less interest expense allowed as a deduction and will require amortization of R&D costs over 5 to 15 years. The Neal bill would address the R&D issue, not interest deductibility.

Develop your tax strategy

There is a lot for tax departments to focus on, but you don’t want to wait until passage to develop a strategy. Right now, tax departments should be thinking about three things:

1. Monitor developments

First, continue to monitor legislative developments and understand how proposed changes might impact your enterprise. 

Think about your company’s goals and what tax strategies you might need to implement.

Remember there is proposed legislation happening across the globe – there are a lot of tax implications including BEPS and ESG. Stay close to any change that might impact your business.

2. Model and plan

Second, model and plan for possible changes. 

At EY we have seen that the companies who are out ahead and modeling prior to passage are the ones most able to move quickly when legislation is signed into law.

Whether it’s modeling for a change in the tax rate or for your ongoing initiatives and considering pre-enactment planning, it’s critical to have a plan in place.

3. Engage in the legislative process

And third, today is the time to get engaged and be sure legislators understand your perspective. That means identifying “areas of focus” for engaging with policymakers and consider coordinating comments with similarly situated taxpayers.

US tax reform

As the Biden Administration pursues its policy priorities, tax changes, including potential changes to TCJA provisions, may be on the agenda.

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Summary

The latest information on the proposed reconciliation bill that the House Ways and Means Committee Chairman Richard Neal recently released, and what the changes could mean for tax leaders.

About this article

By Marna Ricker

EY Americas Vice Chair – Tax

Transformational business leader. Passionate about enabling talent and promoting inclusiveness and empowerment. Glass-ceiling breaker. Mother.

Related topics Tax