Biden’s tax policy creates cashflow challenges for corporate treasurers

US President Joe Biden’s plan to raise corporate tax from 21 to 28 percent will be followed by a series of tax incentives and types of credits, which corporate treasurers will have to include in their cash management strategy, says Laurence Field, partner at Crowe.

“It all comes back to cash management,” he says. “Understanding when those taxes are due, how much they are going to be, but also if you will be able to get credits, and whether these are going to be against taxes or that they might be subsiding. Treasury departments must understand these cash flows.”

As for US subsidiaries, UK treasury departments will need to measure how the change in tax policy will affect their cash flow.

“If we’re having to fund US subsidiaries and they are profitable, but they might not be as cash generative, then treasury departments are going to have to fund that additional seven percent,” says Field.

“You could see there being a requirement when looking carefully at cashflow, to work out whether more money needs to go into the US or will the amount of money coming out of the US be reduced – and whether that has any knock-on effects on UK treasury departments and cash requirements,” he adds.

The rise in corporate tax could impact treasurers in regards to exchange rates as well.

“If you combine it with the stimulus that is being talked about in the US, currency markets can be somewhat fickle. The markets will want to be sure that the new tax is coming in, or at least going to cover the additional spending that’s going out,” says Field.

“If the markets aren’t convinced, there could be movements in the exchange rates as well. Corporate treasurers are going to have their work cut out until we really understand what the implications are.”

But the president’s tax increase will only affect corporates on a small scale, says Field, compared to president Obama’s 35 percent corporate tax – an amount well above average.

In 2020, the global average corporate tax rate was 23.85 percent whilst Europe’s alone was calculated at 19.99 percent, according to the Tax Foundation.

However, the headline rate of US tax will be linked to other tax raised by the new government.

The Global Intangible Low Tax Income (GILTI) – introduced through Trump’s Tax Cut and Jobs Act to target intellectual property being held offshore from the US in low tax jurisdictions – will double to 21 percent under Biden’s policy to close remaining loopholes.

Field says amendments made under the Biden administration will cause US companies to do more onshoring than offshoring – an objective that Trump’s tax plans had also aimed for.

“US companies will start to look very hard about where they hold certain assets,” he says.

Biden’s corporate tax proposals will likely cause a wave of global cooperation amongst countries across the globe. Germany’s finance minister Olaf Scholz has already expressed its ambition in reaching an accord on the OECD’s blueprint with the US, at a Reuters’ conference last month.

Published in October, the OECD’s report on Pillar Two aims at reaching consensus between member states to ensure that all businesses operating internationally pay a minimum level of tax – a policy that could be crucial for the recovery of world economies following the financial impacts of the health crisis.