With Tax Overhaul Approaching, U.S. Manufacturers Weigh Options

One thing I hear from my international friends concerns manufacturing policy emanating from the new political climate in Washington. One of the first policies concerns tax “reform.” I love that word “reform.” It used to mean a progressive agenda 100 years ago. Now it means changing things in a direction I like (doesn’t matter who “I” is).

So, the manufacturing policy analysts at PwC have taken a look at potential policy changes. They begin, “Altering the supply chain might create an advantage, but the impact on operations must be factored in.”

Following is from the report. Follow the link for the complete look.

As discussions surrounding tax reform accelerate in Washington, manufacturers are considering the impact of the House Republican Blueprint. A reduction in the tax rate from 35% to 20% would clearly benefit business, and many manufacturers would be helped by a move to a territorial tax system. The Blueprint’s controversial border tax adjustment feature would benefit some manufacturers and hurt others. Understanding how this proposal could affect taxes and costs is an essential first step.

When it was introduced last summer during the heat of the presidential campaign, the House Republican Blueprint for tax reform didn’t get much attention from U.S. manufacturers. Although many of its provisions were potentially relevant to U.S. businesses, the ambitiousness of the proposal and uncertainties of the election kept corporations from diving into the details.

Fast-forward to 2017: The Blueprint has taken on new urgency. As early as next year, many concepts included in the Blueprint may become law.

As a result, supply chain managers, heads of production and chief financial officers of industrial manufacturing companies are racing to understand what a Republican-led tax overhaul may mean for them. They want to know how the changes will affect their organizations’ earnings and cash flows—a question they’re increasingly getting from Wall Street. And they want to know if there’s anything they can or should be doing with their businesses to benefit—or at least avoid harm—in the event the tax code undergoes big changes to reward U.S.-based operations.

The run-up to tax reform

How to proceed? Broadly, our advice is:

  • Don’t expect simple answers. The complexity of the supply chains of most U.S. industrial manufacturers means it is unlikely there will be one obvious solution—that is, a set of decisions that maximizes the business benefit with no risk. Almost anything you decide to do could affect your costs, your ability to execute, or your competitive position later on. This is essential to keep in mind.
  • Model the scenarios. The starting point of understanding how much of your materials base is foreign-sourced is only that—a starting point. (And it may not be such an easy piece of information to get, because companies don’t always have clean data on this.) Industrial manufacturers also have to consider other factors, like how changes in the structure of the exported “good” (knock-down versus fully built units, for example) might affect tariffs in destination countries.
  • Wait for clearer indications of the likely law before changing your footprint. There’s uncertainty today about a number of issues: whether and how border adjustment would be included in any enacted legislation (and what transition rules might be provided); the likelihood that exchange rates will adjust; and the possible competitive responses that other countries might undertake to offset a perceived U.S. tax advantage. As such, businesses need to consider a deliberative and informed approach. This is one of those instances where it’s probably smart to monitor developments closely and wait before acting. If you have an effective supply chain, leave it alone for now.
  • If you can’t wait, analyze your footprint options exhaustively. For those U.S. companies that need to make footprint changes in the coming months, the possible tax changes should be factored in, especially in deciding where to locate new manufacturing capacity. There may still be reasons to locate a plant outside the U.S. But because current tax disincentives for U.S. production could be substantially lowered under tax reform, it probably makes sense, for near-term decisions regarding plant formation and expansion, to at least consider making those investments in America first. Just understand that down the road, the conversation may be different.

 

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