CHICAGO–(BUSINESS WIRE) – While an economic downturn had long been expected, no one expected a pandemic to plunge the globe into economic chaos with such precise magnitude and speed. When Congress passed the Coronavirus Aid, Aid and Economic Security Act (CARES) in March 2020, the tax became an integral part of business response and relief planning. According to the BDO 2021 Tax Outlook Survey published today, 99% of tax advisors said they were involved in their organization’s response to the economic slowdown caused by COVID-19.
Although the impact of the pandemic was mixed across industries, liquidity and access to capital were universal keys to survival, and tax departments used a variety of strategies to save cash, from filing repayments for net operating loss (NOL) to using tax extension extensions . Tax officials have proven to be critical in guiding their organizations through the crisis. In fact, almost half (49%) said they had strengthened the tax’s role as a strategic partner over the past six months, and 97% said they were “always” or “sometimes” involved in strategic planning and decision-making of 89% in 2020.
“The tax function has always been a central part of strategic decision-making, but not everyone in the organization recognized it. I do now, ”said Matthew Becker, National Managing Partner of Tax. “The COVID-19 crisis has accelerated the tax function’s path to being perceived as a true partner. Going forward, the tax department will be a key advisor to the C-Suite, regardless of whether decisions seem routine, such as the tax implications of hiring a remote employee, or whether mergers or acquisitions are major ones. ”
Tax advisors expect the impact of the pandemic to preoccupy them in the coming year: 50% said their primary tax problem is mapping the impact of COVID-19-related business strategies, followed by digital taxation of 17%.
The strategies they are expected to apply in 2021 versus 2020 are designed to illustrate the evolution of the impact of the pandemic and the resulting adjustment of the focus from immediate tax solutions like NOL setbacks to longer term optimizations like the supply chain Shifts.
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TOP 5 TAX STRATEGIES |
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2020 |
2021 |
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# 1 |
Research and Development Tax Credit Studies |
TIE:
Restructuring the supply chain for more tax efficiency
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Outsourcing of specialized tax work |
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# 2 |
TIE:
NOL transfers / AMT refund credits
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Reverse audits |
Challenges in assessing property tax values through appeal |
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# 3 |
Deferment of the social security tax |
Relaxed tariff / customs payment extensions |
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# 4 |
TIE:
Restructuring the supply chain for more tax efficiency
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Relaxed tariff / customs payment extensions |
Research and Development Tax Credit Studies |
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# 5 |
Employee Loyalty Credit |
Employee Loyalty Credit |
The corporate tax rate and total tax liability are expected to increase
If 2020 was the year the tax function was put on the map, 2021 will be the year it is anchored there. Tax officials see significant challenges on the horizon, including a possible increase in the corporate tax rate: 92% of tax officials said the U.S. corporate tax rate will rise this year, and 35% said changes in the federal income tax rate were their main tax priority.
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Top tax policy priorities |
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# 1 |
Changes in federal income tax rate (35%) |
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# 2 |
International tax changes (GILTI, offshoring, etc.) (25%) |
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# 3 |
Income tax adjustments (24%) |
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# 4 |
Trade and Customs (17%) |
“It remains to be seen how President Biden’s pledge to raise corporate tax rates, among other things, will take shape in the face of the demands of the ongoing battle to contain the spread of the coronavirus,” said Todd Simmens, National Managing Partner of Tax Risk Management. “That said, taxes are on the federal agenda, and companies should plan scenarios in which changes are made that could potentially impact corporate tax rates, capital gains rates, individual income tax rates, and the amount of estate and gift tax exemptions.”
With a new presidential administration holding both houses of Congress tightly together and a growing international push to tax multinational corporations, the tax authorities are expected to crack down on them, the results of which could be costly. Due to the pandemic, jurisdictions worldwide are facing lower tax revenues in 2021 and are likely to try to recoup it in the near future.
In fact, 73% of tax officials said their organization’s total tax liability – the sum of all taxes owed at any given point in time – has increased over the past year, and 70% said it will continue to increase in 2021. Respondents said that they are the biggest contributor to this increase will include taxation of digital products and services, as 79% of tax advisors believe the Organization for Economic Co-operation and Development (OECD) will reach an agreement on one this year global tax framework. Such an arrangement would result in a multitude of changes in domestic tax law that could create new and substantial tax liabilities for many companies.
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What will have the biggest impact on your total tax liability in 2021? |
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# 1 |
The taxation of digital products and services |
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# 2 |
New tax policy due to the US presidential election |
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# 3 |
Effects of a prolonged economic slowdown |
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# 4 |
International trade tensions and tariffs |
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# 5 |
Continuation of state and local nexus changes |
“Companies may suddenly be responsible for paying taxes in many more countries than before,” said Monika Loving, Managing Partner and International Tax Services Practice Leader. “For companies selling digital products or services, shifting the distribution of profits from the seller’s home country would be a huge change, much like it did domestically after the South Dakota ruling against Wayfair.”
State and local taxes play a key role in regaining income
As a result of the 2018 U.S. Supreme Court ruling in the South Dakota v Wayfair case, most states have moved to an economic rather than a physical nexus standard on sales and use taxes to incorporate online sales revenue into their Recovering jurisdictions.
Looking ahead, it is likely that many state governments will crack down on seller non-compliance. Companies that sell online have seen their sales and tax obligations explode over the past year due to the growth of e-commerce. Technologies that provide a comprehensive view of real-time updated VAT rates and liabilities are key to being in compliance and maintaining compliance and minimizing liabilities where possible: 65% of tax advisors updated their technology in 2020, and 51% plan to do so in 2021.
COVID-19 underscores the need to introduce tax technologies
Tax technology is seen as key to managing the areas that vie for the attention of tax executives: More than half (56%) of respondents said technology and process constraints had a major impact on their ability to keep up with tax changes. Unsurprisingly, almost the same percentage said the pandemic accelerated digital transformation in their tax departments.
In 2021, tax advisors plan to continue investing in transforming their own technologies and processes to create greater agility and resilience: their main area of investment in 2021 will be identifying and implementing new technologies (51%), and their top mandate is transformation the control function for more efficiency and better insights (33%). While they may seek advice from outside vendors, their goal is to build skills in-house to implement those efforts in the future.
Tax officials are no strangers to change, but 2020 has got the momentum going. With more shifts on the horizon, 2021 is likely to have more of them. For tax advisors, the spotlight on their ability to develop or break business strategies has never been better, and the tax department is ready to help their organizations take the next steps.
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