For CFOs, Tax Overhaul is a Leap Into the Unknown

Finance chiefs are still hoping for a U.S. tax overhaul within the next 12 months, but a fragmented attention span in Congress has many making mental adjustments to when a lower tax rate would actually materialize.

Understanding the true potential for the most ambitious rewrite of the tax code since 1986 is a priority for the financial leaders. Any successful change will have implications for how CFOs allocate capital, select funding options and evaluate likely drivers of growth.

"There's an expectation happening now that the U.S. will have a lower corporate tax rate," said George Davis, CFO of Qualcomm Inc., at The Wall Street Journal's CFO Network Annual Meeting in Washington this week. "To the extent it doesn't, it would be a negative."

Policy makers speaking at the meeting put on an optimistic face for their audience of CFOs.

"We're going to get tax reform, and I think we'll get it done this year, " said Commerce Secretary Wilbur Ross. He added that a tax bill would come after a second attempt to pass a new health-care law. Republican leaders in Congress are also optimistic, but there are still significant intraparty divides over the content of the bill.

In addition to a lower overall tax rate, CFOs said they want a path for bringing trapped foreign earnings home at tax rates lower than today's. CFOs also want Congress to rethink proposals such as introducing a border-adjusted tax and denying tax deductions for interest expenses. Still, like much of Washington, they disagree widely on what deductions they're willing to give up for the cuts.

"No one will get everything they want," Mr. Davis said, adding that ultimately some elements of a bill "won't be attractive" for all.

Qualcomm -- like many multinationals -- is particularly invested in efforts to change the code to allow companies to repatriate their foreign earnings without paying hefty U.S. taxes on them. While most countries tax only the money companies earn inside their borders, the U.S. taxes profits that American companies make world-wide at 35%, minus any foreign taxes paid.

The chip maker had $32.5 billion of earnings offshore at the end of last year. Under current law, Qualcomm can defer paying U.S. taxes on the earnings as long as it indefinitely reinvests the income overseas, leaving it trapped offshore.

Foreign cash isn't the only point of concern. If today's overall 35% corporate tax rate drops, car-audio maker Harman International Industries Inc. could boost investments in the U.S., said Sandy Rowland, its finance chief.

But the company, now a unit of Samsung Electronics Co., doesn't favor Congress's plan to use a "border adjustment" to pay for the reduction, Ms. Rowland said, during an interview on the sidelines of the two-day meeting. The proposal would end companies' ability to deduct import costs from their revenue and it would create a tax exemption for exports.

Harman has manufacturing plants in Kentucky, Indiana and Washington state, but it also imports from factories abroad, including Mexico.

Rep. Kevin Brady (R., Texas), chairman of the House Ways and Means Committee, floated a five-year phase-in to the border-adjusted tax plan during an interview at the CFO Network meeting.

Another proposal worrying some CFOs would reduce or eliminate businesses' ability to deduct interest payments from their income.

"It's very critical for us," said Duke Energy Corp. finance chief Steve Young. The company had more than $48 billion of long-term debt on its books at the end of 2016, and paid $1.9 billion of interest. Duke would oppose any overhaul that excluded the interest deduction, even if it lowered the top rate, he said.

The Charlotte, N.C., utility company borrows money to pay for long-term electrical grid and plant upgrades. If it couldn't deduct the interest on that debt, customers would pay more, he said.

The ability of companies and individuals to deduct state taxes, including property taxes, from their federal obligations could hurt consumers, said Peggy Smyth, finance chief of National Grid PLC's U.S. unit. The utility company's U.S. property tax bill is almost $1 billion a year.

"If we are not getting a deduction [for property taxes], we could have to pass on the additional costs to our customers," Ms. Smyth said.

Rep. Brady said utilities could get some targeted treatment as part of the plan. "We're also looking carefully at regulated utilities," he said.

Defense contractor Harris Corp. wants existing debt to be exempt from interest rate deductibility rules, said CFO Rahul Ghai. Companies made the decision to take on debt under a different tax regime and with the assumption of certain benefits, he said. Harris made $183 million in interest payments on roughly $4 billion of debt during its last fiscal year, which ended in July.

"The right thing to do is to make sure old interest is grandfathered irrespective of the future," Mr. Ghai said.

Rep. Brady backed the idea. "My current thinking is in the area that we grandfather existing debt in a generous way so that the financial arrangements that are currently in place stay there," he said.

Any tax overhaul needs to be permanent if policy makers hope to see it lead to higher investment in factories and equipment, said David Meline, CFO of biotechnology company Amgen Inc. Current proposals depend on arcane Senate rules that would limit the revamp to 10 years before it expired. Mr. Brady wants a permanent policy, but some lawmakers are discussing temporary changes to comply with a law that allows expedited Senate passage but forbids increasing long-run budget deficits.

Finance chiefs would have trouble justifying long-term investments under those conditions, because tax rates could jump back after a decade, Mr. Meline said.

"Ten years is a short period," he said. "But temporary reform is better than no reform."

Nina Trentmann and Richard Rubin contributed to this article.

Write to Vipal Monga at vipal.monga@wsj.com and Tatyana Shumsky at tatyana.shumsky@wsj.com

(END) Dow Jones Newswires

June 16, 2017 05:44 ET (09:44 GMT)