Democrats Tax Proposals, Democrats Tax

Some CFOs Say Higher Corporate Taxes Could Lead to Lower Investments

U.S. finance chiefs are taking a closer look at their companies’ cash flows, spending plans and overseas operations in response to House Democrats’ tax proposals

9/28/2021 11:30:00 AM

U.S. finance chiefs are taking a closer look at their companies’ cash flows, spending plans and overseas operations in response to House Democrats’ tax proposals

Companies are preparing for another round of corporate-tax increases under a new administration, reframing their forecasting models to account for the impact of higher taxes on cash flows, spending and their overseas businesses.

The law lowered the statutory tax rate from 35% and introduced various stipulationsprofit shifting to low-tax jurisdictions and instead motivate companies to invest more in the U.S.Newsletter Sign-upCFO JournalThe Morning Ledger provides daily news and insights on corporate finance from the CFO Journal team.

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PREVIEWSUBSCRIBECisco, which moved a large proportion of its intellectual property back to the U.S. following the passage of the 2017 tax law, said it welcomes maintaining the current framework around foreign-derived intangible income. The provision, which sets a 13.125% rate on domestic income generated from serving foreign markets, was meant to encourage companies to locate their IP back to the U.S. The Democrats’ plan envisages raising the rate on such income to 20.7%.

“We have been very active in helping shape policy along those lines,” Mr. Herren said. Cisco’s effective tax rate stood at 20.1% during the fiscal year ended July 31, up from 19.7% during the prior fiscal year and broadly in line with the 2019 fiscal year. It is lower than the statutory rate due to things like tax credits for research and development and deductions for foreign-derived intangible income, the company said in a filing with securities regulators. headtopics.com

Finance chiefs at U.S. businesses with large operations abroad also will be reviewing their interest expenses, said Remmelt Reigersman, a partner at law firm Mayer Brown and a member of its tax transactions and consulting practice.House Democrats are proposing to limit companies’ ability to offset interest costs at the U.S. corporate tax rate depending on the proportion of income that is generated in the country, which could result in CFOs moving debt to foreign subsidiaries. “Debt can become very expensive if the interest isn’t deductible anymore,” Mr. Reigersman said.

Some businesses could benefit from a higher rate, at least temporarily. Coffee companyFarmer Bros.Co.might see the value of certain tax offsets tied to the company’s net operating losses rise, finance chief Scott Drake said. The company hasn’t been profitable in recent years and can apply its historical losses against future income, Mr. Drake said.

Northlake, Texas-based Farmer Bros. hasn’t had to pay corporate taxes on its profits, due in part to costs stemming from the company’s 2017 acquisition of Boyd Coffee Co. and, more recently, the impact of the pandemic, according to Mr. Drake. Farmer Bros. reported a $41.7 million net loss during the fiscal year ended June 30, compared with a $37.1 million loss a year earlier.

Farmer Bros. expects to return to profitability once the impact of the pandemic on its commercial customers, which include restaurants and hotels, abates, Mr. Drake said. At that point, the company could use some of the tax offsets it has accumulated, he said. “It’s kind of one of the benefits of bad times, and then turning to good times,” he said. headtopics.com

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