Trade Tensions Still Vex Tax Execs

Despite the preliminary trade deal with China, corporate tax leaders expect tariffs to be a pain in their side throughout 2020.
David McCannFebruary 26, 2020
Trade Tensions Still Vex Tax Execs

January brought a truce of sorts in the U.S.-China trade war, with the signing of a preliminary agreement between the countries. Nonetheless, international trade tensions and tariffs are expected to have a greater impact on midsize companies’ tax liability this year than any other issue.

That’s according to a BDO survey of 151 senior tax executives at U.S. companies with revenue of $100 million to $3 billion.

It’s unclear how ongoing trade negotiations between the United States and China will pan out. Most of the Section 301 tariffs remain in place pending Phase 2 negotiations, plans for which are not concrete. President Trump has suggested that he may wait until after the November election to restart talks, and, according to BDO’s survey report, that’s what most observers expect.

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

Survey participants said international trade tensions and tariffs will have a bigger impact on this year’s corporate tax liability than several other potentially troublesome trends and events. Those include: international regulations on the taxation of digital services; the results of the presidential election; a potential economic slowdown; and continued state and local tax changes.

Because of those weighty issues, a large majority (83%) of those surveyed said they believe their companies’ total tax liability will increase this year.

Companies are taking assorted actions to mitigate negative tax effects stemming from the trade war. Two-thirds (66%) of the BDO survey participants said they have re-evaluated international supply chains and logistics.

The other most popular actions include price increases (59%), altered strategic sourcing processes (56%), applications for exemption from tariffs (56%), and the factoring of tariff exposure into potential M&A activity (50%). Only 3% of those surveyed said their companies have not taken any of those steps.

Tough Tasks

The list of issues expected to have the greatest impact on tax liability does not match up with the toughest challenges tax executives are facing this year.

The Tax Cut and Jobs Act that took effect more than two years ago is still causing them headaches. A plurality (26%) of the respondents identified it as the most challenging issue for them in 2020.

“International tax provisions like the base erosion anti-abuse tax (BEAT) and Global Intangible Low-Taxed Income (GILTI) have been particularly challenging,” BDO wrote. “And with regulatory guidance on these provisions finalized only recently, there is still plenty of uncertainty about how to interpret the law.”

Other key challenges include legislative changes at the state and local level (23% identified it as their biggest challenge this year), taxation of digital services (18%), navigating tariff changes and trade tensions (17%), and growing scrutiny on the taxation of foreign earnings (16%).

More than half (55%) of those surveyed said they expect additional tax changes after the 2020 election no matter who is elected president. Almost a third (30%) said they expect such changes only if a Democrat is elected, while 12% said the same if a Republican is elected.

The poll was conducted last October, well before the onset of the China-centered coronavirus scare. “The coronavirus is causing significant global supply chain disruptions,” notes Damon Pike, customs and international trade leader at BDO.

According to a recent statement by Treasury Secretary Steven Mnuchin, the United States doesn’t expect the coronavirus to have a major impact on the implementation of the new trade deal with China. “That may change, though, if the crisis does not abate soon,” Pike says.