CFOs at U.S. global companies can relax a bit this year when it comes to higher corporate taxes. A divided Congress is not about to push tax reforms that increase costs as the prospect of a recession looms. “People are sick and tired of high prices, food shortages and skyrocketing mortgage rates,” said finance chief Tatiana Tsoir. “Congress feels the same things.”
Rather than raise taxes, Tsoir, a fractional CFO at four privately held companies, including Green Air Care, a provider of indoor air quality services, and international men’s clothing brand Nasty Pig, said U.S. legislators can be expected to avoid “big changes and move to support the economy because the American economy drives the world economy.”
Her analysis is in alignment with the projections of three of the Big Four audit and advisory firms. In interviews, tax and accounting experts at Deloitte, KPMG and PwC said the odds of new and planned major tax reforms hitting the books this year have slimmed considerably, now that Republicans control the House of Representatives.
“While I personally think there’s a chance a tax bill will get done later this year, political division and economic uncertainty make it an increasingly `to be determined’ possibility,” said Ken Kuykendall, who wears two hats at PwC as the firm’s U.S. Tax Leader and Tax Consulting Leader. “With some strange winds in the economy causing inconsistent predictions, like mass layoffs but low unemployment, a divided Congress will limit the scope of new tax and spending legislation.”
Steve Gallucci, National Managing Partner in Deloitte’s U.S. CFO Program, said the majority of finance chiefs in the firm’s surveys expect the country to dip into a recession this year, compelling many to reappraise their priorities. “The level of bullishness and appetite for risk has consistently gone down over the last 15 months, due to economic uncertainty. From a policy perspective, now is not the time to advance more taxes,” he said. “In a strange way, the divided Congress works in the market’s favor.”
The inertia in planned and new tax-related rules and laws is liberating tax functions to invest in technologies like robotic process automation, AI and even virtual reality to make tax planning, preparation and filing a more efficient, accurate and compliant undertaking.
“Top of mind for CFOs and chief tax officers is a big focus on digitizing tax data,” said Brad Brown, KPMG’s Chief Technology Officer-Tax and the firm’s Global Head of Tax Technology & Innovation. “Historically, it has been difficult to gather, assimilate and analyze tax data. That’s changing as companies invest in digital agility, creating a slow but steady shift in the makeup of the future tax department.”
He added that the stage is set “to better prepare for possible policy changes and new tax laws when the legislative gridlock eases.”
Kuykendall concurred: “We’re seeing more tax functions leveraging digital data to become more of a strategic partner to the rest of the business, helping solve cross-functional problems related to tax reporting and compliance.”
Tax in Focus
As CFOs fund these new tax initiatives, they’re also keeping a steady watch on movements in corporate tax policy changes. Prior to the mid-term elections, President Biden in August 2022 signed the Inflation Reduction Act, which imposes a 15 percent minimum tax on the adjusted financial statement income of large corporations.
The Biden administration successfully lobbied the Organization for Economic Cooperation and Development (OECD) to back a similar 15 percent minimum tax rate in all the countries in which a multinational company operates. That plan domestically is stymied in a divided Congress. Republican legislators have warned they may block adoption of Pillar Two of the OECD’s two-pillar tax plan, which supports the development of new global rules ensuring that large multinational companies pay the minimum 15 percent tax rate across all territories.
In a letter to U.S. Treasury Secretary Janet Yellen, the legislators wrote, “While some may believe that implementation by foreign countries of the (OECD’s) model rules…will lead the United States to follow suit, Congress’s hand will not be forced.”
Other tax rules in limbo include the pass-through business tax deductions enacted by the 2017 passage of the Tax Cuts and Jobs Act (TCJA). The deductions and more than 20 others are set to expire at the end of 2025. House Republicans would like to make most of the act’s provisions permanent; the Democratic-led Senate would like to do otherwise. Similarly, the expansion in the child tax credit is caught in the political crossfire, with both parties unable to agree on who should qualify.
Also in limbo is the TJCA’s amortization of R&D expenses. The new rule, which came into effect just last year, jettisoned the decades-long practice of deducting R&D expenses from taxable income immediately, replacing it with the amortization of these costs over multiple years. In November 2022, nearly 180 CFOs asked Congress to repeal the tax code change and restore the former R&D expensing rules. Legislative gridlock suggests traction is unlikely in 2023.
Economic uncertainty is a key factor impeding movement. Raising taxes on people and companies during a recession is not a winning policy. Hence the upswell among CFOs and other business leaders to repeal tax provisions on the books deemed to increase cost and forestall newer tax provisions bound to do the same.
Lastly is the growing concern of a more robust Internal Revenue Service making life tedious for all tax-paying businesses. Every Republican in the House voted down the Biden administration’s $80 billion plan to overhaul the IRS, while every Democrat voted otherwise. With not much activity expected on the tax front this year, there is all the more reason for finance chiefs to put their energies toward increasing the efficiency and speed of tax processes.
As CFO Tsoir puts it, “No business wants to be audited by the government and find out they weren’t paying taxes they should have been paying and will be penalized for it. With Congress divided, I’m advising the four companies I serve to invest in automation, AI and other technologies ensuring tax-advantaged processes, efficiency and savings.”
Intercompany Financial Tax Management
Many finance chiefs are doing just that, driven by economic uncertainty to leverage increasingly sophisticated technology tools to streamline their tax plans, processes, preparations and filings.
“Given the prospect of shrinking top lines and rising costs, CFOs need to look at tax-advantaged opportunities to drop as much income as possible to the bottom line, all done compliantly,” said Mark Partin, CFO at public company BlackLine, a leading global provider of cloud-based finance and accounting solutions, with 2022 estimated revenues of more than $521 million and 1,900 employees.
One way to do that is “to make sure there’s no leakage in the company’s tax planning and consumption-based taxes like VAT and sale and use taxes, looking for opportunities to pay not one dollar more than you should be paying, under the banner of total compliance,” Partin said.
The challenge for multinational companies is navigating intercompany tax flows across multiple legal entities and billing routes, at a time when global tax authorities are intensifying intercompany tax scrutiny and demanding real-time tax reporting and e-compliance. Using BlackLine’s internal technology capabilities, the tax function is “hyper-automating” the intercompany tax workflows, Partin said.
Gartner defines hyper-automation as a “business-driven approach to identify, vet and automate as many business processes as possible,” naming the approach one of the top technology trends in 2022.
“What we’re doing is capturing all transactional information between legal entities in one place, driving real-time visibility (into this data), informing our tax planning,” he said. “By modeling the tax incidence across multiple legal entities and billing routes, we’re able to ensure that local taxes are statutorily supportable, toward attaining group compliance across all global tax jurisdictions.”
That’s just one sophisticated solution making tax less taxing. “The amount of tools at the disposal of tax professionals has exploded,” said CTO Brown at KPMG. “The tax function has become data thirsty to fulfill the CFO’s reporting needs.”
Today, this thirst can be quenched. “In the past, before companies began migrating to the cloud, data was disparate and stuck in Excel spreadsheets. That made it time-consuming for tax professionals not only to get the tax information together for the filing; it was also very difficult to analyze the details for tax planning,” Brown explained. “This is no longer the case today.”
KPMG’s internal investments in tax-focused technology solutions has skyrocketed, he said. “It’s a bit of a tech arm’s race to be able to use the latest and greatest tools, which takes significant investments that would be costly for clients,” he said. “They’ve pivoted to invest in cutting edge technology made by tax professionals for tax professionals.”
He’s referring to clients effectively outsourcing their technology needs to KPMG, using its platform for their tax processing. KPMG has recruited needed data scientists and engineers to layer intelligent automation, machine learning and AI onto its platform to help clients generate more actionable business insights, tax-wise.
Peel from Deloitte said that many tax functions are “eager to do more outsourcing. With a potential recession looming, there are cost pressures coming down from the CFO. It’s also difficult to attract tax professionals to handle the workload at a time of accountant shortages. Meanwhile, having your own tax technology and upgrading it as needed is expensive. We and other Big Four firms want to placate our clients as they look for another way.”
“The movement is definitely toward outsourcing and co-sourcing of tax software and services, given the ability to do more with less,” PwC’s Kuykendall agreed. “As companies move their core systems to the cloud, it creates the opportunity to automate tax processes and calculations, freeing senior tax professionals and the function to handle more strategic tax issues and objectives.”
Down the line, today’s tax tech tools will become table stakes. At public company Wolters Kluwer, Executive Vice President and CTO Brian Diffin is experimenting with the use of extended reality in the blockchain-enabled Metaverse. Extended reality is composed of augmented reality and virtual reality technologies mirroring the physical world with a digital twin environment, in which people interact with each other.
“I’m a big fan of extended reality, which will really change the world of tax and accounting,” said Diffin, who oversees global technology in Wolters Kluwer’s tax and accounting practice. “My team and I held all our leadership meetings in a virtual collaboration space, wearing Oculus headsets to create more seamless tax experiences for clients.”
Asked for an example of these benefits, Diffin pointed to a a large, consolidated tax return executed by a multinational company with geo-distributed subsidiaries. “Instead of the current practice of people in one country inputting data into the tax return, people in another part of the world doing the same thing, and so on, you’re able to get everyone in the same `room’ inputting data in real time,” he said.
The value of this approach is an efficient and rapid resolution of issues in preparing the filing, since the Metaverse offers an opportunity to do things faster than what currently takes place through email and phone calls, he said. “The beauty of a virtual collaboration space is that you can assemble dozens of different screens with the different parts of the tax return that everyone simultaneously can see,” he said.
Another benefit is fraud prevention, given the immutability and integrity of the data trails in blockchain ledgers. “Today, if an auditor is working on the return and needs to ask a bank for a written confirmation of a specific cash account balance, you email them and they email you back, a process wrought with potential fraud,” said Diffin. “Blockchain eliminates this risk.”
Tax professionals in the trenches awaiting the delivery of their virtual reality headsets are already in a position their occupation’s forebears would envy. Technology has provided the means for less mundane and burdensome tax filings. It’s a good position to be in to address future tax developments, since no one knows where the political football on taxes will fly. “CFOs shouldn’t consider anything to be true or likely when it comes to tax law changes,” said Tsoir, “unless they actually pass.”