Without a doubt, all tax departments—income, sales and use, and property tax—make a unique contribution to a company’s bottom line. But as a former director of property tax at a large corporation, I can also attest to the fact that all corporate tax functions are interrelated. In fact, I’d argue that joint strategizing between all tax departments can actually have a greater impact on profitability than any one single tax department can make on its own.
In my days as director, our teams spent time developing long-term tax planning strategies for the corporation jointly. Without this type of coordination, it was inevitable that, at some point, the benefits of work produced in one department would not be leveraged and work would be duplicated in other areas of tax, including the possibility of “canceling out” the benefits that were produced. So the question then becomes: How can tax teams work together to achieve the ultimate goal: minimize risk as well as tax liability?
Following are three scenarios larger companies commonly face, and how a joint corporate tax planning strategy could help optimize your tax positions in each case.
Need more time for strategizing? Simplify and shorten your tax management process with technologically advanced property tax software.
3 Scenarios Where Joint Tax Planning Strategies Pay Off For Corporations
1. When tax laws change.
2017’s Tax Cuts and Jobs Act had a major impact on corporate tax, and required tax departments to revisit their overall tax strategy. It changed the federal income tax rate to 21% limited interest reductions, and allowed for bonus depreciation deductions, among other changes. There were also some major changes to the rules for multinational companies, including the introduction of the base erosion tax, which is designed to counteract base erosion and profit shifting, a tax-planning strategy that involves moving taxable profits made in one country to another with low or no taxes.
Big changes like these often require taking a high-level look at a company’s tax positions. In the case of this particular change, it wasn’t just about U.S. income taxes—it was also about how to comply with a variety of countries’ tax laws as well as how to address the U.S. government’s change in taxing international profits going forward, as well as complying with state and local tax policies. Each department needs to understand how the changes will impact them, and work together to both mitigate negative effects and maximize the positive ones. (Keep in mind, too, that, just the effects of a tax law change won’t always be clear immediately—litigation in the years following the new law will almost always create new interpretations of what the changes mean for corporations.)
2. When your business becomes more service-based (vs. product-based) or increasingly digitized.
In 2018, the U.S. Supreme Court, in the Wayfair decision, changed the physical presence rule affecting state sales tax. The ruling expanded the reach of states, giving them the ability to collect sales taxes for online purchases no matter where the seller is located. That creates a big issue for companies with an online presence. In combination with Wayfair, the changes to a digital economy create more areas for planning. The rules continue to change when it comes to online sales, the distinction between products and services, and how to best create a strategy to comply with variances across states.
When it comes to tax strategy, it’s important to consider if your business is in the midst of a change, perhaps transitioning to selling more services than products, or selling more online than in physical stores. Your revenue base could change as a result of the transition—for example, whereas previously you might have sold a shrink-wrapped, physical version of software; now your customers can access and subscribe to it online. The items are paid for differently (a one-time purchase vs. monthly subscription payments), and the amount paid might be less (at least initially)—both of these changes will impact two corporate tax functions, sales and use tax and income tax.
3. When you’re underpaying or overpaying on your property taxes.
As more companies shift to a digital economy, taxing jurisdictions’ revenue from sales and use taxes and income taxes may be negatively affected because it ultimately limits their sources of funding. Sometimes that causes property tax to rise in importance to both taxing jurisdictions and companies. In fact, property tax is becoming a larger part of the overall tax base for a lot of jurisdictions, making it a more contentious area than in years past.
Issues with the way fixed assets are treated might not create major issues for the sales and use tax team or the income tax team, but it is a primary driver for property tax liability. For example, in an acquisition the purchase price allocation will determine the reporting cost for property tax, but (depending on the transaction type) might not impact the tax basis and depreciation for income tax. For the property tax team, however, overvaluation is a major issue. The fact that those assets were not properly valued during the purchase price allocation will, in fact, increase your tax liability because the property is being valued at more than what it’s worth—and that means you’re paying more in property tax than you have to.
Corporate Tax Planning: An Ongoing Conversation
The advantages of corporate tax planning are multiplied when the various tax teams work together. Not every issue impacts all functions, but the only way to know is to hold ongoing conversations to help you stay on top of the issues. A little joint planning and strategizing can help you maximize your tax benefits well into the future.
This guest post was contributed by Alfonso Porras, a director at Valentiam, a firm that provides independent transfer pricing and valuation services.