The White House recently announced its initial tax plan, teasing the financial community with a short series of bullet points. Although there is much work to do to formalize the plan, including passing it through a gauntlet of approvals and negotiations in Congress, President Donald Trump’s plan is effectively music to the ears of CEOs, CFOs and corporate treasurers.
Here are the highlights for corporate treasury:
1) Reduction of the corporate tax rate to 15%
2) One-time tax on overseas earnings
3) Implement territorial systems ending taxation of offshore income
CEOs of a Fortune 500 companies have responded enthusiastically, including the CEO of Wyndham Worldwide, a Kyriba client, who perfectly articulated the potential benefit when in a recent conversation with Bloomberg he said, “lower taxes mean better cash flow.”
Additional reading: Cash Management and Forecasting
While a final tax reform package is months or more away, it is clear that President Trump aims to significantly reduce taxes. In anticipation, CEOs and CFOs are already strategizing on how to maximize business value in a lower tax environment, making it the perfect time for treasurers to become more strategic. Treasurers need to proactively answer key questions:
– How much new cash will be generated?
– Of this cash, how much will be available domestically vs. overseas?
– How much of our existing overseas cash can be repatriated?
– What is our best use of cash after it is repatriated?
To prepare for strategic discussions with senior management, treasurers can start by evaluating the following checklist:
Global Cash Visibility – Treasurers must have 100% visibility into cash in order to optimize repatriation of cash balances. While not every Euro or Renminbi or Real can or should be brought home, knowing where your cash is will confirm what you have, where it is, and what mechanisms will be required to physically transfer cash back to the U.S.
Additional reading: Four Steps to 100% Global Cash Visibility
Cash Pools and Intercompany Loans – In most cases, cash held offshore will be tied to certain intercompany transactions. In-house banks, cash pools, and intercompany loans must be evaluated to determine if they would continue post-reform. Many global organizations have complicated intercompany structures (because they wanted to minimize tax paid), so studying the impact on intercompany transactions is critical to begin thinking about.
FX Hedging Strategy – Offshore cash is likely not held in USD, so the volatility in currency rates will affect the value of cash when it is repatriated, never mind ongoing earnings under a proposed territorial tax system. It does not require a foreign exchange expert to understand that the U.S. Dollar has already risen based on this news and will continue to do so as the prospect of billions to trillions of dollars have to be purchased in order to repatriate cash into USD. Even a 1% rise in USD wipes away billions of dollars of value from corporate cash reserves, so those treasurers that hedge against 5%, 10% or greater rises in the dollar will be rewarded through share price increases (on their stock options) and other KPIs that may drive their compensation.
Collaboration with Tax and Accounting – Every treasury team knows that tax strategy drives cash flow, and this theory holds true for tax reform as well. Treasury, tax and accounting (because taxes are actually on earnings) will spend many hours (or days) calculating the value of global cash reserves in order to determine what earnings and cash flow should be brought back to the U.S. and what should stay overseas. Treasury has a key role to play in these discussions as no one understands the need for liquidity in each region better than the treasurer.
Cash Forecasting – To forecast projected liquidity needs globally, treasurers must have an extremely reliable cash forecast. Leaving excess, idle cash offshore is not prudent with the spotlight on the treasurer and CFO to explain why every penny of overseas cash was not repatriated. Treasurers must have a solid defense – which is provided by the cash forecast. Because most treasury teams perform forecasting manually or semi-manually, since they lack the right forecasting tools and data, consider this to be a fantastic opportunity to make the investment in cash forecasting.
Treasury Technology – Those CFOs and treasurers who do not have a reliable treasury management system will struggle with cash visibility, cash forecasting and tracking intercompany transactions – never mind performing scenarios to analyze potential sensitivity to different tax scenarios. If your treasury operation is too manual, lacks visibility and is sub-standard in reporting and scenario analysis, there is no better time to justify the value of treasury technology than the present. There are few more compelling events that drive business value than enabling the company to save millions (or billions) in tax on offshore cash.
While tax reform will take time to be fully implemented, CFOs and treasurers need to begin preparations now so that they are ready for the complexities of maximizing repatriated cash while minimizing their tax liability. For treasurers, especially, this is a one-time opportunity to proactively impress senior management on an issue that has incredibly high visibility for every CEO and corporate board. Treasury will never get a second chance to make this first impression.