Top tax challenges.

• Author: Brennan, Bill
• Position: Tax

In the not-so-distant past, tax departments within publicly traded companies operated with some degree of invisibility. Until the turn of the century, U.S. Securities and Exchange Commission (SEC) rules did not require tax matters to be addressed comprehensively within financial statements.

[ILLUSTRATION OMITTED]

That partial invisibility has become a relic of the past. New SEC reporting rules--along with new technology--have ushered in an era of extreme tax transparency. Now publicly traded companies must share more detailed tax information in quarterly and annual financial statements. This information is more readily available to media professionals, bloggers, social activists and organizations (NGOs), such as Citizens for Tax Justice, among others. In fact, there's even a smartphone app that lets users access a massive amount of corporate tax data on almost any publicly listed company with the swipe of a finger.

Those finger swipes can be powerful and potentially troubling for tax departments, which confront a new reputation risk now that decision-making can be viewed and judged by a growing audience.

Managing reputation risk represents only one of five key challenges that corporate tax departments face. However, its root causes--regulatory change and ever-increasing transparency requirements--figure as prominent influences on most of the other challenges.

Potential for Substantive US Income Tax Reform

Starting the year, sequester budget cuts in the United States dominated headlines and more recently, multiple governmental scandals are filling airwaves. There remains broad support in the business community and throughout Congress for a substantial overhaul of the U.S. income tax code. Indeed, recent revelations of the Internal Revenue Service targeting particular groups applying for nonprofit status has given tax reform proponents more fuel.

In addition, more than half of the 2,000 attendees at an Ernst & Young U.S. tax conference last year agreed in its Tax Risk and Controversy Survey: A New Era of Global Risk and Uncertainty that tax reform remains a top area of focus for executive management, boards of directors, and audit committees.

Reform likely would revamp the country's outdated international tax method and lower the corporate tax rate. These overhauls would have significant impacts on tax departments. For example, a corporate tax rate reduction from 35 percent to 29 percent or less would necessitate sufficient "revenue raisers" to reduce the corporate tax rate to the lower levels currently bandied about by federal legislators. Potential revenue raisers include:

1) A slower rate in taking the depreciation tax deduction;

2) A slower rate in taking research and development (R&D) tax deduction;

3) A repeal of the last-in-first-out (LIFO) tax inventory method;

4) A repeal of the U.S. manufacturing tax deduction; and

5) A repeal of the R&D tax credit.

These and other likely revenue raisers would have major implications on companies, depending, of course, on industry and current tax posture. As with all previously enacted federal tax reform bills, there will be winners (companies that...