How do big companies really feel about the Trump administration's corporate tax plan? The answer isn’t quite as simple as a lower topline corporate tax rate might suggest.
For some clarity on the issue, I spoke with DuPont’s vice president of tax Mary P. Van Veen. Speaking from her vantage point on the front lines of high stakes corporate tax, Van Veen warns that getting tax reform right will require a delicate balancing act.
The Trump administration made headlines around the world last week with its highly anticipated plan to overhaul the U.S. tax code. At the center of the plan is a reduction of the top corporate tax rate from 35% to 15%, a lower tax rate on foreign income that is repatriated back into the U.S., and a suggestion to adopt a territorial corporate tax system that would apply tax based on where goods are purchased, rather than where they are manufactured.
Good for business?
The plan has sparked a great deal of debate over what the potential impacts to businesses large and small would be. Why such obsession with the prospect of a lower corporate tax rate? After all, it’s been widely reported that few large corporations pay anywhere near the full 35% statutory corporate tax rate. Would lowering that rate to 15%, which is Trump’s plan, or 20%, as the Congressional Republican blueprint suggests, really make that big of a difference in the grand scheme of things?
In a word: yes. But it’s not just the topline tax rate that’s got corporate CFOs, investors, and tax pros dissecting Congressional proposals and scanning tweets for any indication of what the official corporate tax plan might look like. It’s the litany of details on how that plan will be implemented, what strings will be attached, and how long it will take to implement it that has corporate America on pins and needles. There will be clear winners and losers based on the structure of tax reform alone, not just lower headline corporate tax rates.
For example, U.S. companies have been implementing a wide range of strategies over the past several years to maximize profits by reducing their exposure to the 35% corporate tax rate. At the extreme end of the spectrum, many have done inversion deals whereby the company acquires a foreign entity in a lower tax regime and moves its corporate headquarters to that location. Less extreme, but far more common, companies have moved essential staff into lower tax regimes in different countries and otherwise built-up foreign infrastructures in order to claim ever-higher percentages of earnings in parts of the world where the tax rate is lower than the U.S.
This has had an obvious impact on U.S. corporate earnings, share price growth, and job creation. But the mechanics of all of that tax planning will not be easy to unwind. Add the details of how the U.S. tax reforms will be implemented, how they correspond with global tax reform initiatives, such as those proposed by the Organisation for Economic Cooperation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project, and how they impact each company’s individual tax plan and it’s easy to see where a low corporate tax rate alone may not be enough.
The DuPont perspective
To get a better sense of how a large U.S. corporation could be affected by the various components of a significant corporate tax reform, I spoke to Mary P. Van Veen who is vice president, tax at DuPont, where she oversees the multinational chemical giant’s global tax function. Van Veen has been a source of insight into the way big companies think about tax and build it into their overall business strategies for a long time, and I’ve been sharing her outspoken views on tax reform in this forum since 2013. It helps that her company is a poster child for complex tax challenges. DuPont delivers products and solutions in about 90 different countries and achieved $25 billion in net sales in 2016. It’s also in the midst of a major merger with longtime competitor Dow Chemical Company that will create a $130 billion market cap behemoth.
Now that we’re getting to a place where we may start to see some significant tax reform taking place sooner than later, I was really interested to see how Van Veen and her team at DuPont were interpreting the current state of affairs. Ultimately, she finds a lot to like in the Trump plan, but also warns about some pretty significant lingering question marks that could have huge impacts.
“We’ve been looking at the House GOP plan and we clearly like the low rate they are proposing at 20%, and we like Trump’s suggestion of a 15% corporate tax rate even better. This would put the U.S. in line with most of our trading partners and put U.S. companies on a level playing field with foreign competition. We also really like the idea of a territorial tax system. The U.S. is far behind the rest of the world in enacting a territorial system so that our overseas earnings are not taxed when they are brought back to the U.S.”
A territorial system would eliminate the need for repatriation tax in the future and would permanently remove any tax incentive to leave cash outside the U.S. The proposal also contains a controversial border tax component, which would exempt any U.S. exports from tax, but apply a tax to imports. The border tax is one of the bigger details that could dramatically impact the fortunes of U.S. companies depending upon how the tax is implemented.
As Van Veen explained, that comes with some good and bad:
“DuPont is a net exporter so when you look at it from a pure tax perspective, it could be very favorable, but when you look at it from a broader economic perspective, it’s less clear. There are a lot of economic theories that the dollar will adjust accordingly to compensate for the non-deductibility of imports. It’s still not clear what will happen, but you have to ask the question: ‘What does it mean to be a U.S. company with a really strong dollar if the majority of your sales are outside the U.S.?’ On the other hand, without the border tax, it’s difficult to fund the lower tax rate.”
The devil is in the details
Her comment underscores just how insanely complicated any one change to the corporate tax code can be. Consider, for example, the potential impact of the border adjustment tax on giant retailers like Wal-Mart and Target that are among the largest importers of foreign goods in the world. Wal-Mart alone receives about 700,000 containers full of imports per year. Take the tax deductibility out of those goods and the scale of impact is enough to change the value of the U.S. dollar.
Then there’s the issue of repatriation. Trump has said that he wants U.S. companies to be able to bring their offshore profits back into the U.S. at repatriation rate of just 10%. The House GOP plan similarly calls for a one-time 8.75% tax on accumulated foreign cash and liquid assets and 3.5% on reinvested earnings. Beyond that one-time tax holiday, the GOP plan obviates the need for repatriation in the future since it is based on the territorial system Van Veen mentioned earlier.
However, there are still a ton of devils in the details when it comes to how, exactly, this repatriation plan will be treated. Van Veen explained one challenging scenario DuPont is preparing for now.
“For companies like DuPont, we’re not in favor of a one-time repatriation holiday without also changing to a territorial system. While we do have cash offshore that could be invested in the U.S. if we were able to repatriate, it’s relatively small compared to the amount of our accumulated earnings overseas. We’ve been operating overseas for decades but we’ve re-invested our earnings in those markets: we’ve built plants, made acquisitions, etc. So, we would be taxed on something we no longer have the cash for. We could live with that if it changes our ability to repatriate our foreign cash in a tax efficient manner.”
This is a classic example of how U.S. companies have, over the course of years of high corporate tax rates, adjusted their business strategies to invest outside the U.S. and build real economic footholds in foreign countries.
It’s also a level of detail you don’t typically see when you read about the trillions of dollars in profits U.S. companies have sitting offshore. It’s tempting to picture those earnings sitting in piles in vaults somewhere, but they’re not. That money is being put to work for these companies in the local markets where they are active.
That’s where the issue of tax reform really hits home for U.S.-based multinational corporations. They have incredibly complex businesses that have been operating a certain way based on existing tax code for many years. While it may be advantageous for them to get the reforms the Trump administration has been suggesting it will deliver, the transition also comes with a great deal of challenges that will need to be overcome. If those challenges are offset by policies that make the U.S. more competitive overall, the effort will have been worth it. But great care will need to be taken to get the details right.
Van Veen perfectly summed up the political and business balancing act that needs to happen in order for corporate tax reform to work:
“The real question for us is not whether the administration will get the tax reform legislation through, it’s whether it will stick that really matters. If you don’t have bipartisan reform and you just ram it through a Republican Congress, I think it’s very subject to change in the future. We’re seeing that in healthcare right now. Corporations need stability in tax policy in order to appropriately plan for the future, including building new plants and adding jobs.
It’s worth noting too that my conversation with Van Veen occurred before the Republicans pulled their health care bill, making her comments amazingly prophetic and underscoring just how important it is to have some stability behind major legislation of this scale.
Until we know for sure how that will all play out, business leaders, investors, and the corporate tax world will be watching very closely for signals out of Washington. But don’t expect any easy answers.
View this post as it originally appeared on Forbes.