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Carol Kulish (CK): Hello, I’m Carol Kulish from KPMG’s FLRS (Federal Legislative & Regulatory Services) practice. I’m talking today with John Modzelewski about KPMG’s tax reform modeling tool and how it can help companies prepare for potential U.S. tax reform.
John Modzelewski (JM): Thanks, Carol. Happy to be here.
CK: John, I know you have been very active in developing KPMG’s tax reform modeling tool that can assist companies to better understand the potential impact of tax reform. Would you give us a quick summary of the tool’s background?
JM: Sure. The tax reform modeling tool starts with recent, major tax reform proposals, including the House Blueprint and the Camp Tax Reform Act of 2014. These proposals also include some elements that are similar to the “core principles” for tax reform announced by the Trump Administration.
KPMG’s interpretation of these proposals and principles and how they may work in practice allows corporate taxpayers to compare their current tax results with potential outcomes under a reformed tax system.
In a typical modeling engagement, we work with a client to understand its current and projected financials and collect data for revenue, export revenue, interest expense, and depreciation, among other areas. Utilizing the modeling tool, we then analyze this financial data through both the lens of the current tax regime and tax reform as described across various tax reform proposals. The output that KPMG provides to a client is a comparison of the proposals, using a format similar to a Form 1120. This format makes it easy to see the differences across the proposals.
CK: Anyone tuned into tax reform discussions over the past several months knows that some aspects of the Blueprint are controversial and that the legislative process is very dynamic. As a result, what proposals ultimately may make it into tax reform is uncertain. How does the modeling tool address this uncertainty? Is scenario planning possible?
JM: The tool has a toggle feature that has proven to be popular, especially given the continued uncertainty over the contours of tax reform. The toggle feature identifies the 12 or so key aspects of the various tax reform proposals, including the House Blueprint, and allows for these aspects to be included or excluded from the comparison of the current tax regime with that under tax reform. For example, if a company wants to see the effects of tax reform with border adjustability turned off, the model can be updated accordingly.
CK: As we get closer to understanding what aspects of tax reform are more likely to survive and which are more likely to be discarded, businesses may want to consider possible delays or phase-ins with respect to the implementation of certain rules. Do the toggles address possible delays and phase-ins?
JM: Yes, but in a limited way at the moment. Currently, the tool has a toggle in place to allow for the phase-in of the net interest expense limitation. As we learn more about the form that tax reform may take in future months, the tool will be enhanced to have more toggles to address possible delays and phase-ins.
CK: The tax reform modeling tool that we have been discussing is an industry-agnostic tool aimed at C corporation tax filers. What about tax reform modeling efforts for other types of taxpayers?
JM: We also have a modeling tools for entities taxed as partnerships and S corporations.
Certain industries have special tax reform concerns as well. KPMG professionals who specialize in the banking industry and in the insurance industry taxation areas have created custom tax reform models that address the unique concerns of taxpayers in those industries.
Finally, an important part of the tax reform debate has been how macroeconomic factors can impact any given industry and within an industry a given company. Major policy initiatives such as tax reform can be expected to affect the flows of goods and service between individuals, companies, and government at a macro level. KPMG has developed an economic tool that considers macroeconomic effects in evaluating a post-tax reform world. That is, how changes in supply, demand, labor costs, etc. could affect a company’s financial forecasts. This tool then allows for a high-level comparison of a company’s operating income before and after potential tax reform.
CK: Given the uncertainty about when and how tax reform will be enacted, why should taxpayers engage in tax reform modeling now?
JM: I think there are several reasons. Generally, companies should be considering the possible effects of tax reform in their financial forecasting.
Publicly traded companies are likely to continue to face questions from stock analysts regarding the forecasted potential effects of tax reform. The C-suite may want to have a range of numbers available to respond to such questions, and that’s where the modeling tool can be helpful. Even nonpublicly traded companies are likely to have stakeholders that are interested in the possible effects of tax reform.
The prospect of tax reform also presents tax planning opportunities for companies. The modeling tool can help to estimate the extent of the change under tax reform and can be the first step in identifying these potential planning opportunities.
To the extent that some tax is proposed to be levied on the offshore earnings and profits of U.S. companies—for example, like the mandatory repatriation tax that's described in a number of the tax reform proposals— the baseline tax modeling tool can estimate the potential tax liability. If the model estimates that a company would face a significant tax liability associated with non-U.S. earnings and profits, we can work with the company now on ways to mitigate such exposure.
And, more broadly, modeling can help companies consider what their views are on particular proposals.
CK: It’s safe to say that tax reform watchers are eagerly awaiting the next big development on tax reform. How will the tax reform modeling tool address and incorporate significant new developments?
JM: Once the details of significant new tax reform plans or legislation are made available to the public, the tax reform modeling tool will be updated to reflect KPMG’s interpretation of those plans or legislation. This update would take the form either of new or adjusted columns in the output that would enable a quick glance comparison of the current tax regime with tax reform proposals.
Updated versions of the model will work well with client data that we have already obtained for prior modeling engagements.
CK: John, thanks so much for your perspectives on tax reform modeling. I encourage anyone interested in more information to visit KPMG’s tax reform Web site. There you can find the latest tax reform news and KPMG analysis, and information about KPMG tax reform Webcasts.
JM: It was great talking with you, Carol. Thanks.
CK: Thanks, and thank you all for joining us today.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.
The information contained herein is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.