The companies are raising their financial forecasts and planning to prepare for possible changes to U.S. tax law under the new Biden administration, which are now more likely now that the runoff elections in Georgia put Democrats in control of the Senate.
Joe Biden, who will serve as U.S. president on Wednesday, campaigned to reverse the elements of the 2017 tax revision that reduced the federal corporate tax rate from 35% to 21%.
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Mr Biden proposed raising the corporate income tax rate to 28%, along with other measures such as an alternative minimum tax of 15% on companies making profits of $ 100 million or more.
He also plans to increase tax rates on the income of foreign subsidiaries of American companies, proposing a 10% tax penalty for US companies with offshore manufacturing that sell to domestic customers, as well as a tax credit for companies that are new to the US create jobs
CFO and tax advisor at the food manufacturer Conagra Brands Inc.,
Energy company NRG Energy Inc. and aviation company AAR Corp.
take a close look at their companies’ books and activities to see what these suggestions could do for their tax obligations.
“People need to rethink their modeling exercise now,” said John Gimigliano, director of KPMG’s US tax law and regulatory services division. “The companies are going back to the Biden plan and examining the proposals.”
David Marberger, Conagra’s chief financial officer, said the company behind brands like Reddi-wip and Birds Eye is reviewing different parts of its balance sheet.
David Marberger, CFO of Conagra Brands Inc.
Conagra Brands Inc.
“We’re trying to plan what this might mean,” Marberger said, adding that higher taxes could result in less money being available to buy back shares or for mergers and acquisitions. Chicago-based Conagra’s effective tax rate was 19.1% for the six months ended November 29, 2020 compared to 14.3% for the same period last year.
A higher corporate tax rate would affect companies in various sectors and appears to be a key concern for executives, said Matthew Mullaney, partner at Anchin, Block & Anchin LLP, an accounting firm.
Democrats have a slim majority in the House of Representatives, and the groundbreaking vote by elected Vice President Kamala Harris will give them an advantage in the Senate. Because of this, lawyers expect there could be a successful proposal to raise the statutory tax rate from 21% to around 25%, but not as high as the 28% that Mr Biden advocated, said Eric Sloan, partner at the Gibson, Dunn & Crutcher LLP law firm.
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Changes in global low intangible tax income (GILTI) regulations could also result in a higher tax burden for businesses. As part of GILTI, companies tabulate their tangible foreign assets and do not have to pay taxes on 10% of the total amount. Above that threshold, GILTI creates a 10.5% floor for U.S. companies paying foreign taxes by 2025, and lets them receive some foreign tax credits.
Mr Biden has proposed increasing the GILTI rate to 21%. Combined with the proposed reintroduction of an alternative minimum tax, which was removed from the Tax Cuts and Employment Act of 2017, such proposals could result in “substantial increases,” said George Salis, chief economist and tax policy advisor at Vertex Inc., a compliance software – and service companies.
In addition, certain allowances that are currently helping companies reduce their tax burden, such as the qualifying corporate asset provision that companies rely on to calculate how assets are treated for the application of GILTI, could be removed, tax lawyers said.
Businesses still lack clarity about other ideas like tax credits for companies creating new manufacturing jobs in the US. Some of these could help mitigate a possible base rate hike, said Todd Metcalf, a principal in PricewaterhouseCoopers’ tax policy services division. “If you get a 2% increase but a 10% incentive, the two may cancel each other out,” Metcalf said.
Kirkland Andrews, CFO of NRG Energy Inc.
NRG Energy Inc.
Renewable energy companies could also get help from the government through tax regulation. Mr Biden has pledged support for clean energy generation and companies in the industry hope that this will be achieved through the renewal of the renewable energy investment tax credit.
“I think it’s … tax incentives, especially in the renewable energy space, that are probably the biggest focus for us,” said Kirkland Andrews, chief financial officer of NRG, based in Houston and Princeton, NJ
Businesses will also be on the lookout for changes in areas like interest expense deductibility or net operating losses, tax advisors said. Last year’s Cares Act gave companies additional options to deduct more of their interest expense and capitalize on net operating losses. However, these elements expired at the end of the year.
Mr Biden proposed a new stimulus plan last week but has not given any additional insight into his tax plans in recent weeks. The Biden transition team did not immediately respond to a request for comment.
Despite the forecasting efforts of executives, companies will most likely wait for legislative proposals before considering how to deal with any tax changes. “With more detailed information available, I expect companies will do more to map out their tax picture in the future,” said Mullaney of Anchin, Block & Anchin.
Sean Gillen, the chief financial officer of Wood Dale, AAR based in Illinois, does just that: he’s waiting for more details. “The reality is that … until a proposal is made, it is difficult to analyze anything in the tax area in detail,” said Gillen.
AAR reported an effective tax of 26.5% for the last quarter ended Nov. 30, compared to 23% in the year-ago period, largely driven by lower forecast pre-tax revenues in the current fiscal year due to the coronavirus pandemic in a filing with securities regulators.
– Kristin Broughton and Richard Rubin contributed to this article.
Write to Nina Trentmann at Nina.Trentmann@wsj.com
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