Leverage tax reform for proactive cash management

Changing global tax landscape spurs strategic shifts

The fallout from last year’s tax reform is driving change in large corporate treasury departments, as multiple provisions affect day-to-day business practices as well as long-term strategies. While there’s no shortage of changes, treasurers seek the best way to comply with profits to position their departments and organizations for long term competitive advantage.

At stake is the Treasury Department’s operating model as the United States morphs into a more attractive destination for capital. At the same time, international tax provisions designed to curb offshoring of intellectual property, cash and profits require changes in corporate capital structures, international liquidity management and cash management practices.

NeuGroup Survey: Global finance and treasury executives, managers and practitioners considering tax-reform related international liquidity management changes
NeuGroup Survey: Global finance and treasury executives, managers and practitioners considering tax-reform related international liquidity management changes

NeuGroup Survey: Global finance and treasury executives, managers and practitioners considering tax-reform related international liquidity management changes

While most Treasury executives are aware of the effect of specific tax provisions on their organizations, many haven’t yet decided exactly how to proceed in implementing tax reform related changes. The implications of these decisions are profound as they will shape corporate treasury environments and results for years to come.

Tax provisions overview

Provision Response
21% tax rate Consider moving subsidiaries and cash into the U.S.
Section 179 deduction Build depreciation model via cost segregation studies to determine optimal Section 179, cost recovery and bonus deprecation write-off strategy; review capital investment strategy
Bonus depreciation Build depreciation model via cost segregation studies to determine optimal Section 179, cost recovery and bonus deprecation write-off strategy; review capital investment strategy
100% cost recovery Build depreciation model via cost segregation studies to determine optimal Section 179, cost recovery and bonus deprecation write-off strategy; review capital investment strategy
30% interest expense limit Assess current debt structure; employ arbitrage; leverage alternative financing
15.5/8% foreign cash repatriation Repurchase shares; pay dividends; invest in CapEx; pay down debt; engage in mergers and acquisitions
10.5% global intangible low-taxed income Avoid related party debt with controlled foreign companies (CFC); consider third-party debt; fund CFCs with equity
13.5% foreign derived intangible income Separate foreign and U.S. cash pools; utilize third-party debt
10% Base erosion minimum tax Evaluate current operating model; consider geographical changes for specific functions and risks
50% U.S. persons for controlled foreign corp. Fund CFCs with equity; utilize third-party debt or vanilla inter-company funding via Treasury Center
Anti-hybrid rules Refinance with non-disqualified related party debt

Source: Ernst & Young, PriceWaterhouseCoopers, Clark Schaefer Hackett, Baker Tilly

Explore potential options

Corporate treasury departments are weighing potential courses of action on the parts of tax reform that affect the treasury function. More than three-quarters of NeuGroup treasury executives, managers and practitioners surveyed are actively investigating changes to their international liquidity management practices as a result of U.S. tax reform.

Often U.S. companies have reasons other than simply avoiding taxes to keep money overseas. Many have operations in other countries, including those where labor is cheaper than it is in America, or where their businesses have more potential to expand.

As you contemplate these issues, reevaluate your cash deployment strategy. Do you have mergers and acquisitions coming up, what is your cash redistribution strategy (dividends, share repurchase, etc.), and what are your internal investments? Other things to consider include the local restrictions around taking cash out of a jurisdiction. These restrictions may prove to be more costly than the value of repatriation. In these instances, it may benefit you more to put cash to work in region.

Treasurers’ response to tax reform

NeuGroup Treasurers’ response to tax reform

Source: NeuGroup Survey

Companies planning on repatriating cash and profits from overseas have a variety of potential uses in mind, including:

Companies planning on repatriating cash and profits from overseas have a variety of potential uses in mind

  • 46%: Share repurchase
  • 40%: Dividends
  • 33.3%: CapEx
  • 26.7%: Debt pay down
  • 26.7%: Mergers & Acquisition
  • 26.7%: Other
  • 6.7%: Increase in employee compensation and benefits

Source: NeuGroup Survey

As interest rates rise, treasurers planning to pay down debt are focused on reducing commercial paper balances, paying down bank debt and targeting debt with short-term maturities.

A refocus of the U.S. tax code around a limited territorial international tax system is leading treasurers to re-examine their cash investment strategy, especially in regard to foreign subsidiaries. NeuGroup treasury executives, managers and practitioners report tactical adjustments across a wide spectrum, including:

  • 58.3%: Investing less cash outside the U.S.
  • 41.7%: Reducing longer-term maturities ahead of repatriation
  • 41.7%: Significantly reducing total invested cash
  • 33.3%: Changing investments held by foreign subsidiaries to domestic entities
  • 33.3%: Other
  • 8.3%: Revising cash investment policy
  • 8.3%: Reviewing banking relationships in light of reduction of cash invested overseas

When revisiting your investment strategy, consider options such as dynamic discounting that allow you earn a no-risk yield and a flexible strategy to put cash to work — whether repatriated or within region — across your global presence.

Take advantage of provisions before they sunset

While there is no need to rush into poorly-thought out changes, there isn’t a lot of time to waste as most of these tax provisions will sunset between 2022 and 2027 unless extended by Congress and the President.

Tax Reform Provision Sunset

Provision Sunset
21% tax rate None
Section 179 deduction None
Bonus depreciation Sliding scale until Dec. 31, 2027
100% cost recovery December 31, 2022
30% interest expense limit Changes from EBITA to EBIT in 2022
15.5/8% foreign cash repatriation One-time allowance in 2018
10.5% global intangible low-taxed income Effective rate rises in Jan. 1, 2026
13.5% foreign derived intangible income Effective rate rises on Jan. 1, 2026
10% base erosion minimum tax Effective rate rises on Jan. 1, 2026
50% U.S. persons for controlled foreign corp. December 31, 2025
Anti-hybrid rules December 31, 2025

Sources: Ernst & Young, PriceWaterhouseCoopers, Clark Schaefer Hackett, Baker Tilly

Map expected path

Optimizing tax reform for your cash management is a huge undertaking. It makes sense to create a plan and assign staff to study and recommend specific actions, all with a specific end-date in mind.

Learn more

If you would like to understand how dynamic discounting benefits your global cash management strategy, our Working Capital Advisory team can help.

Sources