Corporate Finance And Tax Departments, Buckle Up; It’s An Election Year

And just like that, we're back into the season of change.

This year, important elections are going to be held in both Britain – where the Prime Minister can be elected any time till December 17 – and America – which is a presidential election year. As we have learned over the past decade, these types of choices can have a major impact on the global tax landscape. This means that corporations – and especially tax policies affecting those corporations – are guaranteed to be in the headlines.

This begs the question: How can corporate finance and tax departments prepare for the coming storm of potential economic and reputational impacts?

Ghosts of tax reform past

If this all sounds very familiar, that's because it is. When Britain voted to leave the European Union eight years ago – known as Brexit – it created a major shift in global tax policy. Although most doomsday predictions that Brexit would trigger a recession comparable to the 2008 stock market crash did not prove true, it would have deep and lasting consequences.

Many major multinational financial companies created and executed contingency plans to move employees, balance sheet assets and, in some cases, entire headquarters out of London and to other EU centers such as Frankfurt, Brussels and Paris. The UK's tax revenues fell significantly as a result of corporations shifting profits to other countries.

Additionally, complications emerged due to changes in the value-added tax (VAT), a consumption-based tax that applies at each point in the production and sale of goods and services. The VAT structure in the UK was directly linked to the common market structure of the EU. So, for example, if a farmer sells corn to a processing company for $1, the processing company sells the high fructose corn syrup to the soda company for $2, and the soda company sells a two-liter bottle of soda to the consumer for $3. , the value-added of each of the three producers is $1. In a VAT environment, every $1 of profit in the supply chain would be taxed. Similarly, the expenses of each step in the chain are used to offset the tax.

When the UK left the EU, it needed to restructure its VAT system to accommodate the newly introduced customs duties and tariffs that would now be in place on all goods imported into or exported to other parts of the Eurozone. Result? High costs of import and export, which hit corporations and citizens alike.

American history tax

While Brexit is undoubtedly one of the most significant examples of a choice upending the corporate tax structure, a look at the US shows that there is more than one way to create huge vulnerabilities for corporations.

When President Donald Trump enacted the Tax Cuts and Jobs Act (TCJA), it represented one of the largest reforms to the U.S. tax code seen in decades. Eliminated the tax penalty for violating the individual mandate under the Affordable Care Act, limited the deduction of state and local income taxes, sales taxes, and estate taxes (SALT), and – most importantly for multinationals -Corporate tax rates were significantly reduced. From a tiered system that reached 39% to a flat 21% tax. Additionally, the Corporate Alternative Minimum Tax (CAMT) was abolished.

Then, after President Joe Biden was elected, he moved quickly to change the landscape again. The Inflation Reduction Act (IRA) was signed into law in 2022, which effectively reversed these key corporate provisions in the TCJA. Most notably, the IRA reinstated the CAMT, which imposed a minimum tax of 15% on all companies with book income of at least $1 billion. That reversal was huge, and it surprised many companies that were on the edge of that range.

the vast unknown

All signs point to the latter half of 2024 being when we may see a new round of tax-focused volatility, and this is leaving corporate decision makers in a dilemma. If they don't even know what changes they need to prepare for, what steps can they take to make sure they are aligned? Unfortunately, the answers are not simple.

Even as corporate finance professionals are trying to predict what each political candidate might do if elected, the coming year will surely bring us surprises that no forecaster saw coming. Companies need to ensure that their key stakeholders are preparing their departments to be agile and that they have an infrastructure in place to make real-time decisions on quantitative, comprehensive data, even when uncertainty is a central part of the equation. Businesses will need to be cognizant of how both new compliance requirements will impact their day-to-day operations, as lack of compliance can be a quick route to becoming a political target and living through a reputational nightmare.

That means the stakes are high, and at a time when everyone is focused on what change will come, it's important for business leaders to focus on the things they can control. Are. For corporate tax and financial professionals, the keys to building a bullet proof tax story will be data integrity, regulatory hypervigilance and a process that is quick and decisive even in the face of unknowns.