Jeff Glenzer CTP, Vice President and Chief Operating Officer, AFP
Some things never go out of style. The Beatles. A fine steak dinner. Attempts to reform the corporate tax code.
Corporate tax reform isn’t as appealing as listening to John, Paul, George and Ringo while eating filet mignon. But for as long as I can remember – and I first joined the Association for Financial Professionals back in 1999 – Congress and just about every President have been tinkering with corporate taxes in an effort to free trapped overseas cash.
President Obama is the latest to try pushing that boulder up the hill. He wants to lower the current tax rate on accumulated foreign earnings to 14 percent, then introduce a 19 percent tax on future profits. That’s better than the current rate of 35 percent – highest in the world. However, it’s still significantly higher than the rate that most global companies pay in their home country on earnings from overseas operation, which is often zero.
Meanwhile, several members of Congress have put forward their own corporate tax reform proposals. One House plan would lower the overseas rate to 8.75 percent, and introduce a tax on future foreign earnings based on where a company’s overseas plant or office is located. A Republican Senator and a Democratic Senator have cobbled together their own bipartisan proposal: a five-year tax holiday that lowers corporate taxes on foreign earnings to 6.5 percent.
All these corporate tax reforms sound great in theory. What corporate treasurer wouldn’t want to lower the corporate tax rate and have a more economically-sound reason to repatriate some of their company’s trapped cash back to the United States?
But there’s a reason why I’m not holding my breath for anything positive to come out of these discussions. Like I said before, corporate tax reform has been around since at least President Clinton’s second term in office. Politicians always call for corporate tax reform, and then corporate treasurers weigh in about what corporate tax reform should look like… and then nothing good ever happens. If anything, the rate seems to creep higher and corporations spend more time and money trying to do their tax planning. Meanwhile, the amount of U.S. cash trapped overseas is approaching $4 trillion.
I know, I know: Complaining about politicians also never goes out of style. But there is a larger point about the never-ending corporate tax reform follies that I want to make. And it’s one that directly affects corporate treasurers and their companies.
Namely, the corporate tax reform saga has become just another form of regulatory uncertainty. And regulatory uncertainty around the globe is now one of the biggest risks for corporate treasurers. In fact, regulatory uncertainty was one of corporate treasurers’ top risks to corporate earnings, according to the 2015 AFP Risk Survey.
Regulatory uncertainty transforms corporate treasurers from proactive guardians of corporate cash into reactive observers. We sit and wait for something permanent to come from Capitol Hill, but the best we’ve got in the past is temporary tax “holidays” that prolong regulatory uncertainty and encourage the stockpiling of overseas cash until the next tax holiday is declared. We think it makes much more sense to develop a permanent solution to this issue that allows American companies to remain competitive. If that solution finally comes, let’s hope it’s good for our companies.
Back when I was a corporate treasury executive, I had to worry about a lot of treasury tasks: cash management, payments fraud, bank relationship management, accounts payable and receivable, to name several. That’s why AFP offers so many educational and training resources for treasury and finance professionals.
And corporate treasurers are still concerned about them today – as they should be, because these are some of the fundamentals of the profession. They are corporate treasury responsibilities that never go out of style. Never in my worst nightmares did I think that regulatory risk would be near the top of the list of treasurers’ concerns.
Yet here we are. Corporate treasurers are fretting over Basel III, FATCA, IFRS vs. FASB, and, once again, corporate tax reform. There’s even as-yet proposed rules stemming from the half-decade-old Dodd-Frank Act – nearly a quarter of the rules have not been published, according to one estimate.
My hope is that our elected officials and regulators come to their senses and move beyond this seemingly endless cycle of rules that are proposed, debated, approved and refined. That way, we can look back at this period of regulatory uncertainty as a passing fad – not a timeless classic that never goes out of style.