Many organizations already consider the potential short-term challenges to their tax positions when building forecasts. How prepared are they, though, for the different sets of risks and opportunities associated with long-term uncertainties? For example, how well are they accounting for the long-term impacts of multiple government measures being introduced globally in response to recent crises, such as the COVID-19 pandemic?
There is no doubt that this is a subject of huge interest to tax teams, who are currently wrestling with the increasing number of uncertainties introduced by markets and governments alike – interactions with corporate tax teams continue to confirm this. When tax professionals were asked in a recent insightsoftware webinar to consider the areas of long-term forecasts that most interest them, the results were as follows:
Forecasted ETR – 56%
Balance sheet reporting (DTAs/DTLs)* – 19%
Cash tax payments – 13%
Tax implications of restructuring – 13%
*Deferred Tax Asset and Deferred Tax Liability
Preparing for the unknown
Because changes in government tax regimes are becoming more common and widespread, multinational enterprises (MNEs) increasingly need to account for these unknowns within their tax plans.
Tax experts are hearing from more and more companies about long-term planning in tax. There are some things that they can predict, but there are many others that are difficult to forecast. What they can see are potential changes coming down the track and a shift in how their profits are taxed. For example, the percentage rates and number of indirect charges designed to address lifestyle and climate issues are growing, including carbon levies.
At the same time, global tax regimes are evolving to take into account new instruments, such as cryptocurrencies and the uptake of financial flows from ecommerce. This changes the way in which tax rates are set and impacts how countries will operate in the future, which brings us to BEPS 2.0.
The OECD’s and G20’s base erosion and profit shifting (BEPS) project is seeking to ensure that international tax rules are fit for an increasingly globalized, digitized business world. BEPS 1.0 had a significant impact on the international tax regime, and has been an important part of discussions, but did not really address concerns around digital business.
It is also as of yet unclear how the latest recommendations made by the OECD will play out, especially given the current uncertainties in global trade. But if organizations are running any element of their enterprises as digital businesses, change is likely bound to come their way at some point in the future. As a result, it’s important for MNEs to be familiar with any far-reaching changes to government taxation when BEPS 2.0 is ratified and rolled out. Instead, they should already be incorporating these considerations into their tax forecasts.
Relax into change
Further accounting changes will also be introduced by IFRS 16/17, and meanwhile nobody knows what the impact of Brexit and the pandemic will have. All of this makes long-term tax forecasts extremely difficult, and one possible response is to relax into the uncertainty, get the right tools in place, and prepare to pivot and be flexible as change unfolds.
Exploring possible outcomes with tax advisers is recommended, as well as discussing common ground with peers outside the organization who are likely to be making similar decisions. You should also stay on top of the emerging news agenda to better understand the context around the numbers. Accept change and be vigilant about the various changes that governments are most likely to introduce.
It’s important to understand and communicate the context of these potential developments. Will a change in political regime lead to higher or lower tax rates, for example? Democrats, newly but narrowly in control of the policy-making levers in Washington, have proposed substantial corporate tax increases including raising the statutory rate by a third (to 28 percent from its current level of 21 percent) and substantially revising the international tax rules applicable to multi national businesses, so what could the impact of those changes be for organizations and their financial positions?
While advisors are crucial in providing the insights that tax teams can add into their forecasts, specialized tax tools can be used for proper execution. When it comes to implementing the right tools, organizations can consider using tax software that consolidates finance statements and can easily be updated with new tax regimes, as well as having the ability to run multiple scenarios, which can then be built into forecasts.
Jamie Eagan, VP of Product Management for Longview products at insightsoftware, agreed that speaking to peers is a great way to identify what other businesses are doing to tackle the problem. “The good news is that so many resources and tools are available to help,” he said.
Preparing for uncertainty
Above all, tax teams need time and space to identify material drivers. “You need to show the meaning behind the numbers,” Eagan said. “You can start by pegging the projected tax changes on historical accounting periods to see what might happen to your organization if various scenarios come to pass.”
The first step in this process is to understand whether the organization’s strategic plan has changed, or will need to be refreshed because of evolving tax regimes and the challenging economic environment. MNEs may have had to modify traditional key performance indicators (KPIs) during the pandemic, or set new KPIs to take account of.
DTAs and DTLs may also need to be recalculated, along with estimated tax returns. It’s crucial to understand the most tax efficient timings for when the utilization of assets should begin, especially for organizations operating in multiple countries and tax regimes. That way they can see if schedules could be changed to smooth—or at least not shock—the organization if tax changes come into play.
Many organizations are considering how they may restructure their businesses post-COVID. This might involve shutting down or opening up facilities or supply chains in new locations, which may also be facing change in the future.
The key point is to leverage technology and tools to revisit, test, and influence planning wherever they are applicable, so that the organization can be prepared for as many eventualities as possible. “The best way to prepare for an unpredictable future is to review your current analysis around long-term tax planning and think about how to provide context to the business, particularly around statutory tax rule changes,” concluded Eagan.