If you want to experience more stress in your life, consider the drastically different plans that corporate tax leaders are gaming out based on who wins the presidency and control of Congress this fall.
If President Joe Biden wins reelection and Democrats retake the House, this time next year we might be talking about new tax hikes on corporate income and stock buybacks, and how tax reforms could align US code with the global minimum tax that Biden supported in 2021.
If a second Trump administration is in office with a Republican majority in the Senate, we’ll be looking at that president’s plans for a 10% tariff on imports, and a 60% tariff on imports from China.
Obviously, the election is still months away, but finance and tax professionals should ideally be thinking now about taxes in 2025 and beyond. To help navigate this complicated and uncertain landscape, CFO Brew spoke with two of KPMG’s federal tax policy leaders, John Gimigliano and Danielle Rolfes, after a recent tax roundtable hosted by the firm.
You described the expiration of the Tax Cuts and Jobs Act (TCJA) provisions, the implementation of the global minimum tax, and the 2024 campaign as being all intertwined. Can you explain why that is?
Gimigliano: We don’t have this whole Pillar Two discussion, this whole global minimum tax discussion without having a question of, ‘Well, how did we get there?’ Partly it was because of what the US did in 2017 [with the TCJA]. But the US is gonna say, well, we don’t get there if the rest of the world hadn’t been racing to the bottom and lowering the corporate earnings [rates], which forced the US to react…Each one was the proximate cause of the other in a weird way…And of course, it’s impacted by the elections because Republicans and Democrats just view these things fundamentally differently.
Where does this leave tax planning right now?
Rolfes: The one thing that’s certain is that the US investment climate is uncertain. The tax policy in the US is uncertain. And that is going to have a drag. This uncertainty is bad whether you’re a Democrat or Republican. It’s bad for any incentive regime if you’re asking, ‘Will it achieve its intended effect?’ You know, the IRA credits, the extent people are wondering…somebody here said ‘killing your IRA credits, that would raise a lot.’ Well, that’s really bad if you’re trying to get somebody to build a battery factory.
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If one of the questions is, ‘Do you invest in the United States?’, you have to do a whole probability analysis about what you think that outcome is. I’m using [Foreign-Derived Intangible Income] FDII, this historical experience coming out of TCJA and the fact that I know it was an incentive that had the potential to really attract a lot of income to the US. It’s going to be taxed somewhere; why not here? FDII was enacted at a really good time for the US…It’s an incentive rate designed to encourage US companies to basically move their IP to...the US.
The biggest hindrance that FDII has had is that people don’t know how long it’s going to stick around…The instability, the uncertainty around FDII held some companies back because they didn’t trust it. It’s so unfortunate about our code that we go through all this uncertainty, that we’re doing basically all-partisan tax deals.
What can businesses trying to make long-term plans do when there’s so much uncertainty about how their taxes will change this year or next year?
Gimigliano: If you were the CFO of some company making this investment decision, I think you have to manage to the worst-case scenario. If you say, ‘Okay, maybe none of this gets extended, does this investment still pencil out?’ And if the answer to that is yes, then you do the deal…But it’s hard to win at that scenario, right? If you’re really trying to get an advantage or an edge, it’s hard to. So then I think you’re saying, ‘What’s the most likely scenario?’
And that’s the thing I think is so maddening. It goes back to what Danielle was saying, is that uncertainty forces everybody…to manage down to the worst-case scenario, and if this investment still pencils out in that scenario, let’s do it. If it doesn’t, I’m taking personal risk, because we’re making a guess, and is anybody willing to take that personal risk? That’s a company by company decision to make.