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Tax Reform Modeling

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tax reform modeling

Six Reasons Companies Are Modeling the Potential Impact of Tax Reform

August 21, 2017 (updated)

Many companies are currently modeling the potential impact of U.S. tax reform on their business. Both polling from KPMG's Tax Reform Thursdays Webcasts and the many modeling engagements KPMG professionals have underway with their clients confirm this activity. As tax reform is far from certain and any timetable would be guesswork, why make the effort to model the potential impact now? At least six reasons come to mind:

To know where your company may stand amid evolving tax reform proposals

Example: A company must make certain strategic decisions that could affect its future several years down the road. Under the current uncertain tax reform landscape, decision-making may be hampered. Using a modeling tool that allows for scenario planning, the company decides to make assumptions that (i) tax reform will lower the tax rate to between “x” and “y”; (ii) net interest expense deductions would be limited; and (iii) capital purchase expensing would be allowed between “z” and 100 percent. The scenario planning provides a range of possible outcomes, putting “flagpoles” around the company’s possible tax positions in the future. While not providing certainty, the flagpoles may help provide the orientation needed to make strategic decisions.

To answer questions from the C-suite, analysts, and other stakeholders on tax reform

Example: During an earnings call, a CFO receives several questions from stock analysts on the potential impact of tax reform on the company’s performance in the future. Through modeling possible scenarios, the tax department is able to provide the CFO with a pro forma financial statement that takes into account some of the potential attributes of tax reform, allowing the CFO to answer the analyst’s questions with greater confidence.

To understand how tax reform might affect the price on an acquisition

Example: A private equity fund is looking at two possible acquisition targets. The fund uses modeling to run scenarios with possible tax reform outcomes and then uses the scenarios for financial modeling purposes on each target.

To decide whether to externalize its views on specific tax policies

Example: A company determines through modeling that the consequences of particular proposals that might be included in potential tax reform may be problematic (or beneficial) for the company. As a result, the company starts working with its industry peers to make its positions and concerns known more publicly and to identify issues on which it communicates with policymakers (through trade associations, its government affairs office, or otherwise).

To understand the potential impact of tax reform on the financial statements

Example: A company has significant deferred tax assets (DTAs). A drop in the corporate income tax rate—an element of several tax reform proposals—could result in a write-off of these DTAs that would increase the effective tax rate and decrease earnings per share. The company is using modeling as part of its process of deciding whether to accelerate the use of any of its DTAs.

To make decisions on sensible tax planning regardless of whether tax reform passes or fails

Example: A company’s management believes that mandatory repatriation is a likely tax reform scenario. Using modeling, the company decides it could be advantageous to implement planning to repatriate cash into the United States prior to mandatory repatriation, while using its foreign tax credit carryforwards. 

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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.
Related resources
KPMG's Tax Modeling Tool

KPMG's Tax Reform Modeling Tool

Watch this seven-minute video to learn about how KPMG's tax reform modeling tool is helping clients prepare for potential reform.

Outlook for Tax Reform

Outlook for U.S. Tax Reform

Visit our page for ongoing insights from KPMG on the outlook of U.S. tax reform. 

Questions?

Email us at us-tgi@kpmg.com, or contact:

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Ron Dabrowski

Technical Deputy to the Principal in Charge
Washington National Tax, KPMG

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