Trump Tax Proposal: The Steps Corporate Finance Teams Should Be Taking Now

At the end of April, the US treasury secretary, Steven Mnuchin, unveiled a one-page overview of the Trump administration’s tax plan. The ideas are in line with much of what President Trump described as a candidate — they include slashing the corporate tax rate to 15%, and offering a one-time repatriation holiday for US corporations.

The proposal also calls for a territorial tax system and the elimination of tax breaks for special interests. There are some stark differences between the administration’s principles and the Republicans’ “A Better Way” proposal — notably, the lower corporate tax rate and the exclusion of a border-adjusted tax.

While this is just one of the first steps toward tax reform legislation, the proposed changes could have implications for tax planning, forecasting, and accounting, talent, and cash deployment. There are three areas that corporate finance teams should focus on now as they prepare for potential changes to tax policy.

Tax Planning and Forecasting

There is still no detail about the specific legislative changes that might be implemented and their impact on companies’ effective tax rate (ETR) and currency valuation. This will obviously diminish the accuracy of tax planning and long-term forecasting and, as year-on-year ETR performance metrics become obsolete, there won’t be much guidance for companies during the potential transition to a lower corporate tax rate.

Finance teams should:

• Benchmark their current and historical ETRs compared to peers.
• Determine whether they have the ability and capacity to model long-term scenarios in-house, or whether they should work with an external adviser.
• If they currently benefit from what would be considered a “special interest” tax break, run scenario analyses to identify potential outcomes and estimate the new ETR under different circumstances. Incorporate new tax variables, validate assumptions, and account for different possible transition rules.
• Develop a response strategy to prepare for any legislative change.
• Assess and prioritize the most impactful tax planning strategies using standard criteria.
• Create a standard tax risk assessment process to accurately identify and evaluate enterprise-level risks that could result from a new tax code.

Tax Talent

While Trump’s high-level proposal doesn’t seem to require drastic changes to disclosures or legacy tax systems, any legislative change will require highly skilled and experienced tax accountants. People with the expertise to interpret the new rules and translate them to a particular company’s context will be in high demand.

Finance teams should:

• Provide managers with a simple toolkit to assess and manage retention risk for critical tax talent.
• Develop targeted retention plans for tax employees in critical positions.
• Identify and resolve any misalignments between tax employees’ aspirations and their job responsibilities and career opportunities.

Cash Deployment

If the corporate tax rate is significantly lowered, most investors will expect the savings to be used for growth investments or returned to shareholders. It’s likely that the competition for investment targets would increase, driving up the price of raw materials, implementation expertise, and acquisitions. As a result, return on invested capital (ROIC) models would need to be updated.

Finance teams should:

• Model how a new tax code could affect their cash deployment strategy.
• To achieve sustained long-term growth, build a case for consistently allocating capital to big bets, like transformational R&D innovation and large M&A deals.
• Evaluate their level of dependence on outside expertise to implement any growth investments.
• Prepare executives to answer analyst questions about how tax changes could affect the firm’s dividend and growth investment strategies, and encourage them to be candid about how and why.