Now that federal tax law changes are in place, the 13th Annual EY Domestic Tax Conference survey shows that state tax is drawing the attention of corporate tax leaders.
Among respondents, 78% anticipate either a patchwork of changes or new ways to decouple from state issues caused by federal reform. Depending on how each state conforms to the new tax code, the economic impact and the way specific provisions are implemented at the federal level, states may choose not to conform to federal provisions that reduce corporate tax rates.
The international provisions, in particular, may lead states to choose against conformity due to their effect on states’ corporate effective tax rates. Among new policies, 40% believe the global intangible low-taxed income (GILTI) provision will have the most impact affecting rates, followed by the transition tax (28%), base erosion and anti-abuse tax (BEAT) (23%) and foreign-derived intangible income provisions (FDII) (9%).
“All these changes produce a ripple effect of planning and implementation challenges, but they also leave corporate tax directors with an optimistic view of the potential economic impact,” said Kate Barton, EY Americas Vice Chair and EY Global Vice Chair Elect – Tax Services. “Overall, they see advantages: 64% of respondents expect the economy to continue to grow. Many also see the stock market rebounding or growing if the economy does stay strong.”
The survey results follow a change in focus from planning for the Tax Cuts and Jobs Act to implementing the new law. Six months ago, 70% of EY International Tax Conference surveyrespondents predicted that tax reform would happen within six months. Today, 44% of respondents to the Domestic Tax Conference survey say they are still not fully prepared to implement the changes that became law in January. Sixteen percent say their resources are overwhelmed with adjustments due to a completely changed tax profile.
Amid the tax compliance and planning challenges from tax reform, two-thirds (66%) of respondents are also preparing for M&A activity in 2018. Among them, 69% need to make changes to tax planning and the tax function.
Despite talk on Capitol Hill of a potential phase two for tax reform, more than half of the respondents (64%) will wait and see if future changes will substantially affect their company’s tax situation, and 15% hope it will provide greater clarity on some ambiguous issues in the current law.
Teaming and Technology to the Rescue
To address the volume and pace of change, 23% of respondents said they are adding outside resources to supplement their team and technology.
“Technology and innovation are constantly changing the way tax operates, collaborates and interfaces with outside support services or tax authorities,” said Barton.
Overall, 64% of respondents say they are using new technologies as they seek efficiency, accuracy and consistency of administration or classification of assets or transactions. Most of those companies (89%) focus on one type of innovation at a time, though combined efforts can be found:
- Advanced Data Analytics: used by 84%
- Robotic Process Automation: used by 37%
- Machine Learning: used by 9%
- Other Artificial Intelligence: used by 13%
Last year, almost 40% of organizations were investing in new tax management platforms (18%) or new enterprise-wide systems that make the tax function more efficient (22%). That trend continues, with a slight shift in 2018. Thirty percent are still investing in new tax technology, but another 8% are choosing to outsource most of the work that requires the latest innovations. Even among companies that want to develop their own capabilities, 54% use outside services to develop or help develop them.
Barton noted, “The challenge of developing and managing ever-changing applications doesn’t pay off for every company, particularly those who want to collaborate and share data as part of a managed service agreement anyway.”