Losing Hope on US Tax Reform: US MNC Treasury Implications

December 11, 2013

By Joseph Neu 

The idea that the need for further fiscal stimulus might prompt a US tax reform that would incent US MNCs to repatriate offshore cash and thus boost the US economy is dead. Indeed, hope for any substantial corporate tax reform for the US in the near term appears lost and this holds significant implications for treasurers at US MNCs.

Greater chance for bupkus

Republican House Ways and Means Committee Chairman Dave Camp will miss his deadline for a 2013 bill release, due in part to current House political considerations, and the ball is now in Democratic Senate Finance Committee Chairman Max Baucus’ court.

Unfortunately, Sen. Baucus’ recently released plan does not go as far as the Camp plan toward a territorial tax system and proposes a tax rate on existing offshore cash of 20 percent. It is also vague on how much below 30 percent the corporate tax rate would go.

Thus, it gets less overall support from Corporate America, and it also triggers the conflict between MNCs who want to mitigate the hit to deferred offshore earnings (represented by the LIFT America Coalition) and those willing to trade for a lower overall tax rate (represented by the RATE Coalition).

Both men have until late 2014 to make tax reform part of their legacy: Baucus is retiring and Camp’s six-year term as Ways and Means Committee Chair will end. But according to the November monthly Tax Reform Business Barometer survey by E&Y and the Tax Council, the chances of that happening are a paltry 15 percent. The best likelihood for anything more than bupkus is in 2016.

Meanwhile, the OECD is stepping into the mix with its Base Erosion and Profit Shifting (BEPS) action plan and other tax jurisdictions are actively exploring ways to grab a larger share of MNCs’ revenues. These efforts will increasingly weigh on US tax reform, too.

Treasury implications

As memories of HIA fade and hope for a second repatriation tax holiday dim, US MNC treasurers should be looking to make the most of their offshore cash. Accordingly, many are acting with measures including:

  • Stepping up implementation of in-house banks, related- and add-on structures to improve intercompany lending flexibility, pool offshore liquidity and centralize payment and investment activity.
  • Replacing pure tax structures with more liquidity-management friendly ones. The rollout of IHBs and similar structures is part of an ongoing and accelerating trend to dial-back on the tax efficiency of offshore structures, some in order to make them more effective from a cash perspective.

Along with increasing the cash utilization of structures, treasurers are also making the case that they ought to pose less operating risk—e.g., make them less obviously tax-driven and not located in tax havens.

  • Shifting the mindset on offshore cash. While tax deferrals rest on the notion that the earnings are permanently invested offshore, the post-HIA mindset encouraged a view of offshore cash as being “parked” until the next tax holiday or tax planning structure allowed it to be repatriated.

Accordingly, no treasurer has wanted to risk having offshore cash tied up in a way that would not allow repatriation whenever that window opened, so better to be short and conservative with any excess.

Perhaps now cash can be locked in until 2016 at least, and more of the focus can shift from repatriation planning to how best to deploy offshore cash in pursuit of offshore growth, be it organic or M&A (why not buy into a friendlier tax jurisdiction instead of waiting for reform?).

Similar actions can be prescribed in response to tax changes outside the US. Reports of stepped up scrutiny and forced closure of structures by tax authorities worldwide are common in our recent conversations with treasurers. Accordingly, treasurers should also be working with tax to:

  • Identify and shut down structures that are no longer in use or needed. As a preventative measure, MNCs should be walking through their lists of legal entities and structures to identify and close those that are dormant or otherwise no longer needed before they trigger unwanted scrutiny that could spillover onto more vital structures.

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