What boards can do now while companies wait for tax reform
While health care reform and other pressing issues are still receiving attention, tax reform remains a top priority on the agendas of both the Trump administration and Congress. It has been billed as the biggest tax reform effort since the Reagan administration, and boards need to be prepared for it.
The final details of any tax reform bill are not yet known, but based on proposals and public remarks, likely areas for reform include lowering business tax rates, provisions to encourage domestic job growth and investment, and changes to the taxation of globally active companies. One likely outcome is reducing the tax rate imposed on U.S. companies’ repatriated offshore earnings. Many believe that this will result in a substantial amount of these profits being brought back into the United States—an estimated $2.5 trillion. The goal of the Trump administration and the Republicans in Congress is to pass tax reform by the end of this year.
Should this become a reality, boards will need to plan for the potential repatriation of foreign earnings—and any ripple effects this may have. For example, extra cash here in the United States can attract interest from activists, some of whom focus on cash as a primary criterion when deciding which companies to target. When determining what to do with the repatriated dollars—whether to return them to shareholders or invest in the business or in expansion—each decision can have an impact on stock price, which in turn commonly affects, among other things, executive compensation plans. These decisions should be made with eyes wide open to all the implications and repercussions before determining the best course to follow.
This potential repatriation of profits held overseas is only one example of how any tax reform legislation could affect a business. Other provisions may similarly impact the business’s financial statements and decision making. Boards can do some proactive planning while waiting for Washington to act on tax reform. Here are some things boards can do now in order to prepare for a range of potential scenarios.
Keep an ear to the ground. Boards need to have access to real-time updates on tax reform developments that may affect planning. Since being a board member is a part-time job at the company, directors usually rely heavily on the CFO and the finance team for ongoing, current information about any proposals being considered. For each proposal, the board and management should discuss the potential impact not only on the company’s overall financial picture, but on investments, growth plans, compensation, and other business areas that might be changed.
Prepare for a range of options. Consider the range of tax reform proposals, and consider planning for those that will have the most impact on your business. For those that appear most likely to occur and could have a profound impact on the company and key stakeholders, run both current numbers and numbers from years past to estimate what the specific impact would be, and have a plan so the company is ready to take action if and when it is appropriate.
Make sure your voice is heard. Whether on tax reform or any other major regulatory or statutory issue that could have a significant effect on the company and key stakeholders, boards should plan for how best to be heard by lawmakers. A large company may have a potent and loud voice on its own, while others may want to join forces with companies in the same industry to ensure they get their message across.
The tax reform picture is still unclear, and specific solutions will vary from one company to another, but many companies will benefit from planning ahead. Armed with the best up-to-date data, boards will be ready to spring into action when needed, regardless of what changes come.
Article originally appeared in NACD's Directorship magazine September/October 2017 issue.