Strategic planning is especially important for large corporate taxpayers because business decisions often have bigger tax consequences for larger entities. In addition, many members of the Fortune 500 realize tax savings through sophisticated tax planning. The increasing role and prominence of tax in the financial performance of entities, as well as the economy more broadly, has brought tax planning and tax departments, and new and important scrutiny. It is therefore critical for board of directors and senior managements to ensure that their companies are managing their tax affairs appropriately in alignment with the overarching business strategy.
Navigating through a sea of complex tax issues has also become more difficult in a global economy. Tax planning affects, and is affected by, critical business decisions, such as where to invest or locate facilities, how to set up financing, how to compensate employees, and how to distribute profits. Tax planning is also complex. Taxpayers face decisions that are affected by the fluid and rapidly changing character of the tax laws. Some of these changes are taxpayer-friendly, like the new tax cuts, while other developments, like the gross income inclusions in the foreign transition tax, impose tax increase. Taxpayers must stay ahead of these changes and think more broadly and deeply about the implications of these changes.
With the ongoing tax reform landscape, navigating corporate taxes is more complex than ever before. The recently enacted Tax Cuts and Jobs Act made many significant changes, including making the United States more tax-competitive. However, ongoing uncertainties in the tax reform space continue to evolve, as well as aggressive enforcement efforts by federal, state, and international tax authorities.
Understanding the Importance of Corporate Tax Planning
Many of the costs or constraints that taxpayers encounter in trying to achieve these objectives can be classified as tax planning products. You can then proceed to the last few steps of the decision-making process, addressing the alternatives, making a decision and presenting it, and implementation. You cannot plan a tax solution to a problem if you do not know the business, regulatory, and tax climate at the time. Once you understand the client’s broad business objectives and the role of tax in these objectives, your next step becomes problem solving. If the client has not initiated the process by identifying a potential solution, tax advisors will explore potential tax solutions outside the client’s planning department as a way to help him evaluate his accounting and tax implications. It can provide tax solutions to unanticipated accounting issues that have arisen once the client’s financial statements have been audited.
There are many ways to understand the tax planning process. The systematic approach allows you to gain a better understanding of more complicated situations, not just the easy ones. Typically, the tax planning decision-making framework is a seven-step one. Some people are surprised when several steps are put behind only understanding an individual’s objectives and services, but it is incredibly important to make sure that you know the aspects of a problem before trying to come up with a solution. Once you understand the objectives and constraints, it should be relatively obvious that the third step, facts and assumptions, and the fourth step, issues to be addressed, are murky. People may focus on having broad objectives, but they may be less specific about how these objectives should be achieved. Clearly, before a solution to an issue can be determined, you must identify the relevant issues.
Overview of the Tax Landscape for Businesses
Globalization and modern technology can impact transactions to such an extent that the United States government extends its long-arm reach into virtually every country. This is why, when planning almost every transaction, business leaders need to evaluate the tax consequences of doing so. Such a review does not mean that you should not go forward with a proposed transaction. However, it does mean that if you are thinking of purchasing a small business with the intention of merging it with another company, you must also consider potential tax consequences. If your company is buying a company in a location that is known to offer credits, your informed analysis can direct a meaningful discussion during the negotiation process. This is just one example of how tax and business planning are intertwined. However, the tax should not have the tail that wags the business. Having an understanding of business tax consequences allows the business leaders to make informed decisions before they move forward with their business initiatives. Knowing all of the many business tax rules allows businesses to consider economic modeling without exposing them to potentially negative tax consequences.
The best protection you can have in your dealings with taxing authorities is knowledge. This chapter is designed to give you an understanding of the various taxes that federal, state, and local governments in our country impose and to familiarize you with the different corporate forms you may use as an investor or a business owner. Comprehending the different types of business entities and the considerations that apply to an individual pedaling a side business, a lawyer or doctor practicing his or her profession alone or in association with others, or an employee starting a side business—type endeavors can best determine the type of business form most appropriate for his or her financial and business needs.
Key Considerations for Corporate Tax Planning
Key considerations to think about during tax planning include what depreciation methods to use; which inventory methods to adopt; the extent to which taxpayers can take advantage of myriad credits and alternative minimum tax (AMT); and how the procurement or disposal of business property can impact tax implications. Businesses need to assess the sustainability of economic arrangements from a tax perspective instead of just focusing on transactional tax implications. Companies need to focus on long-term tax risks that could impact a business decision. Long-term tax risks include potential legislative changes by jurisdiction; changes in case law that may arise from a particular transaction; Inland Revenue Service examination; currency instability; third-party consequences; and financial market fluctuations.
In a dynamic and changeable business landscape, businesses need to be cognizant of the tax environment and laws that impact their businesses locally and internationally. The tax landscape is always in transition; tax legislation is regularly amended; and from time to time, increased compliance measures are introduced to clamp down on businesses operating below the spectrum. Continuing advances in accounting, international finance, and technological innovations have far-reaching effects on the tax environment. Tax also plays a significant role in making business decisions, particularly cash flow management, investment planning, and competitive edge maximization strategies. In view of the above, understanding how to navigate the tax landscape and devise strategies to adapt and thrive in a challenging atmosphere is vital.
Identifying Tax Saving Opportunities
Today, many companies are dependent on corporate tax departments or external firms to research new tax provisions that could benefit their businesses. These units are either underfunded or understaffed just as companies are experiencing increased uncertainty and operational problems. Important decisions must be taken daily regarding tax issues. Corporate tax departments are faced with a constant struggle to do more with less. Breaking the connections that exist silo between the finance and tax functions is fundamental to designing an efficient tax planning process that produces continuous and sustainable results. To maintain its position in the market and offer substantial returns to its stakeholders, a company must focus on optimizing its tax footprint. One way to achieve this is to rely on the work of the tax function and department in-house to provide new opportunities for the tax provision before the excise tax provision is officially established. In this way, internal operations cost zero, and the tax function only collaborates differently to provide a more complete internal control structure.
When unexpected changes occur, they often impact businesses, labor, and people at all levels, casting uncertainty over planning, investments, and projects. Business professionals commonly turn their focus on stabilizing the potential pandemic-induced rough paths, learning, if not creating new ways to move into a murky future. If one will truly tackle the pandemic crisis using all the available manpower and a solid economy with little desire for excess repeated aid spending, then the overall fiscal strength of the country and the possibility of declining personal and corporate tax rates will become a priority sooner rather than later. Companies will recover by maximizing opportunities and developing internal disciplines that ensure continuous improvement in their operations, which includes efficient management processes to identify potential tax savings and incentives for all tax components. For companies that are heavily penalized, tax expenses can be material. Identifying potential tax-saving opportunities is not just a crucial corporate tax exercise but also an opportunity to identify areas for potential operational improvements. However, creating an efficient tax planning system is complex. Tax savings and tax incentives lead to a series of compliance requirements that if not managed appropriately may cause annual impacts.
Effective Tax Rate Management
Strategic tax planning is a comprehensive guide to business strategy, tax management, and tax planning. One of the company’s objectives is to reinvest in its business growth through acquisitions, internal growth projects, and technology. Additionally, the company benefits from reinvesting in growth, share repurchases, and dividends to ordinary shareholders. The way a company utilizes its funds can significantly impact its effective tax rate. Companies focused on operational acquisitions and divestments require a thorough understanding of the tax rate, cross-border tax planning, merger integration activities, financial evaluations related to acquisitions and divestitures, structuring opportunities, and other operational benefits. It is also important to consider factors that could affect the effective tax rate, tax payments, and overall tax efficiency.
Effective tax rate management is crucial for businesses. The effective tax rate is typically calculated by dividing the provision for income taxes by income before taxes. A lower effective tax rate indicates a tax benefit, while a higher effective tax rate suggests a financial impact due to income tax costs. Understanding the factors that drive the effective tax rate can help in making management decisions that positively affect the tax rate. Several factors contribute to a company’s tax expenses, including tax provisions, dividends, cost ratios, accounting policies, and the location of income. Staying informed about the current tax management landscape and adapting to changes is essential for efficient decision-making and tax planning.
Optimizing Tax Deductions and Credits
Timing for book and tax should not differ substantially from when the corporation needs deductions for tax purposes. As long as the corporation’s net income flows through to the individual shareholders, individual tax planning should take into account the timing of available deductions (e.g., charitable contributions, medical expenses, real estate taxes). One major area to be careful with is the estimated tax deductions. Multinational corporations that have entities in the United States may have difficulties in computing their estimated tax payments. They should take into account the timing of the payments for better tax planning. A substantial underpayment of the tax may result in a penalty. There are exceptions to avoiding penalties for a corporation whose tax obligation is less than $500,000. If the corporation paid 100% of the tax reflected on the current year return or rank with the tax shown on the return of the preceding tax year.
Part of good tax planning involves making the most of available deductions and credits to lessen the impact of taxable income. As such, the corporation needs to be aware of potential deductions both from a tax standpoint and a financial accounting standpoint. Financial accounting requirements dictate what can be booked for tax purposes beyond any book and tax differences the firm may have. The book limit tends to not cost the corporation as much in tax savings as it did in past years because the adjustment by nature brought the income more in line with book income (income from financial accounting). However, the Tax Cuts and Jobs Act (PL 115-97) eliminated the domestic manufacturing deduction (Section 199) and replaced it with the FDII (Foreign-Derived Intangible Income) deduction, which is now available for tax year 2018 and later. The FDII deduction is limited to 37.5% of qualified income that is included in taxable income and is 50%. Therefore, the deduction amount is equal to 37.5% of qualified income that is included in taxable income, resulting in a maximum 13.125% deduction, phased in over a six-year period as the tax rate decreases to 21%.
Strategies for Successful Corporate Tax Planning
There are external factors where efficient corporate tax planning is much needed. Some of those are already characterized by the current context. The external actors are already monitoring and assessing annual corporate statements. A company’s share performance on the capital market always takes into great consideration a series of relevant factors, and one of the increasingly important factors has to do with the tax impact on the company’s net profit. Also, the fact of being mostly monitored and publicly attacked in the origin country has determined important designations of the most important initiatives or the influential international organizations. The result is sometimes an exaggerated corporate tax weight where equitable fiscal pressure is applied to all VAT taxpayers in order to cover up the excess public deficit.
In the actual environment, it is of great importance to navigate corporate tax planning carefully in order to manage a series of inhibiting factors for corporate activity expansion and achieve extra gains. The tax department of any company is nowadays much more involved in the establishment of strategic goals and closely belongs to the management team. This department should have the capability of informing, guiding, and flexibly requesting the function on several company divisions, such as the investment division, especially within the implementation process or the organizational development managers throughout the complete process. They, in turn, have to have an actual coverage on the company’s modus operandi, both in terms of present activity and regarding all other future projects. In this landscape, the corporate tax department is not considered anymore as being the only single profit center.
Tax Planning for Business Structure and Entity Selection
The basic decision concerning the type of business organization to be used is crucial to any taxpayer engaged in a business venture. The actions a taxpayer takes in structuring his or her enterprise can have significant legal, accounting, and tax consequences. Generally, one may conduct operations in the following forms: sole proprietorship, corporation, partnership, or limited liability company. In addition, in the U.S., if a taxpayer is engaged in a trade or business, he or she will be taxed as an individual if not incorporated. The question then becomes: Corporation or Pass-through entity?
Your new business may not be ready to invest in international tax planning, but you can still reduce your U.S. tax burden through corporate tax planning. The U.S. has thousands of credits and deductions, not to mention industry-specific niche tax breaks. These tax benefits can and should be used to give your new business a boost. If you are new to the system, you may not know about these tax breaks, so be sure to ask your CPA what is available to your industry. Even established businesses and individuals that invest have the opportunity to lower their U.S. tax bill through credits and benefits. A professional with experience and expertise on the tax code, such as our company, can greatly assist in both identifying and helping you navigate the tax landscape. Remember, tax planning is not hypothetical tax savings; it is actually realizing these tax benefits at your tax filing.
International Tax Planning and Transfer Pricing
Transfer pricing is the method by which business transactions between related entities are priced. Consequently, transfer pricing issues can arise in activities that occur between two related parties outside of the United States and are subject to tax in the foreign country. It is the IRS’s position that transfer pricing is a taxpayer compliance issue and that there is very little tax-based merit to any planning strategies that solely involve transfer pricing adjustments. Achieving transfer pricing audits by foreign tax authorities should be limited as they may open a Pandora’s box of unintended consequences. A transfer pricing audit will not only open the U.S. taxpayer up to potential additional U.S. taxes, penalties, and interest but also can lead to unintended taxable gains in foreign affiliates offshore, transfer pricing adjustments subject to tax in foreign countries, loss of U.S. foreign tax credit offsets, increased potential for economic double taxation, and lost opportunities for foreign loss utilization. These outcomes can be substantial and introduce volatility to the U.S. international effective tax rate (“TIRE”). This can also result in unforeseen tax liabilities, penalties, and interest in both the U.S. and foreign jurisdictions at a cost to the company. Given these outcomes, this area can be a minefield for a multinational.
The number and popularity of international tax arrangements have grown exponentially as businesses expand beyond their home borders. These tax structures are often complex, which increases an organization’s exposure to the IRS and other taxing jurisdictions. The acquisition and subsidiary structure of multinational corporations can significantly impact the organization’s tax rates as well as its regulatory landscape. Many multinationals seek to transfer assets and income from higher-tax jurisdictions to lower-tax jurisdictions through various planning transactions. Companies engage in a wide range of complex tax reduction strategies. These transactions often involve intangibles and sophisticated financial instruments and can lead to disputes between taxpayers and governments regarding the economic substance and arm’s length nature of the transactions, which we will discuss later in the chapter.
Tax Planning for Mergers, Acquisitions, and Divestitures
Tax planning for the seller – For the seller, tax planning often starts by determining the form of acquisition that best fits the long-term strategic objectives of the company. Some companies use the sale of a business unit, such as products or product lines, to divest a portion of their business, raise funds, and position the company for long-term growth. In these cases, the seller may prefer a tax-free disposal of the unit to avoid double taxation or to leverage capital gains rates. This can include a tax-free SpinCo transaction. If global business units are involved, pre-transaction structuring may provide enhanced strategic operational flexibility while providing local and global tax benefits. In other situations, sellers may prefer cash, minimizing ongoing management oversight of the disposed operations, and reinvesting to grow the ongoing business. For other sellers, specific post-deal consideration may be more attractive, including using carried equity interests or installment sales methods to effectively recognize the economic benefit over a period of time. For merger transactions, structuring is driven by central business objectives of the parties; however, tax posture is an important consideration for both the target and the buyer.
Tax planning for mergers, acquisitions, and divestitures. Acquisitions, divestitures, and other M&A transactions can present a unique set of tax challenges, and businesses must navigate these challenges carefully to avoid unforeseen tax consequences. Because these transactions fundamentally change your business, tax planning needs to be done before a deal is signed. This is true whether you are acquiring the target business or the target business is acquiring your business.
Compliance and Risk Management in Corporate Tax Planning
Whether and which policies are made long or short, standards should be defined, a timeline for measurement created, a plan established, and progress recorded. Assessment timelines should be delineated and the process of who is accountable and at what price should be clearly stipulated. The smaller the circle of accountability, the easier it is to conduct blame. Chances created with regard to compliance, tax policies, and procedures are indicative of the rules and standards the tax team sets alone to establish expectations of the corporation. Policies and procedures being uniform and sustainable, a clear line of authority helps us to secure the right individual when concerns arise. With limitations coming information will turn out to be invaluable. Smart, transparent procedures open the company to communicate status and be receptive to the requirements of the user.
This chapter reviews tax compliance issues relative to the broader strategic planning process. Tax-related policies and procedures specific to compliance and risk management should be crafted and streamlined to work with the corporate culture. When a tax department makes policy decisions as part of compliance planning, it should clearly signal the strategy to that end. Policies and procedures should inform the company on what is required to properly administer what is required. They should be useful guidelines to employees. When policies are made part of new employee training and existing employee updates, the department assists them in making “best practices” part of the corporate culture.
