January 30, 2019
Democrats completed their committee slots in the House of Representatives this week, setting the stage for the new majority to start working through their legislative agenda. While tax activity in 2018 was primarily focused on promulgating rules following the historic passage of the Tax Cuts and Jobs Act, the 2019 tax agenda exposes US and foreign parented companies to significant legislative and political risks while also creating opportunity for stalled legislative items to be revived on a bipartisan basis.
It is our view that corporations will face significant and potentially damaging oversight and scrutiny at the committee level regarding their business operations, given the passage of the Tax Cuts and Job Act provided broad business friendly corporate changes to the tax code.
Incoming Chairman Richard Neal (D-MA) added eleven new members to the Ways & Means Committee. The new majority could pursue an agenda that poses significant political risks to companies’ enterprise value. It should be noted that zero Democrat committee members voted for the Tax Cuts and Jobs Act in 2017 and the appetite to conduct oversight on the legislation is significant.
Chairman Neal plans to hold a number of hearings on the tax bill, his first is set for the end of January. He is also likely to hold a number of hearings on specific provisions of the tax bill, which Democrats claim were hastily crafted and provided little time for analysis before passage. Provisions such as the Base Erosion Anti Abuse Tax (BEAT), Global Intangible Low Tax Income (GILTI), lowering of the corporate rate to 21%, business expensing, and repatriation of overseas earnings and profits will likely be subject to significant oversight from the new committee.
Democrats will likely seek to create a political narrative that pits corporations, executives, and shareholders against labor, employees, and the middle class. Companies may be forced to testify on transactions made post tax reform. Issues likely to be raised include tracking repatriated cash, executive compensation, dividends paid out to shareholders, capital investment in the US, and corporate share buybacks. Each of these topics will put unprepared companies on the defensive and raise their political risk position to a level of that could be severely damaging to a company’s reputation and brand.
Stories regarding corporate activity post tax reform are gaining traction in many news outlets as well, creating a narrative of winners vs losers. There is often a circular information flow between the media and key Congressional staff in order to drive a mutual political agenda which almost always will be anti-business.
A direct threat to companies that will certainly take shape is Democrats in the House will begin proposing spending bills that roll back many of the tax provisions in the 2017 legislation in order to raise revenue and “pay for” many spending priorities. This threat will only get worse when Presidential candidates introduce their platform proposals and if Republicans lose the Senate and the White House in 2020 without retaking the House. Companies should be prepared to play defense to preserve any positive provisions enacted last Congress.
FTI Consulting has a seasoned team of tax experts that help companies defend their tax position and corporate reputation should they encounter significant negative attention within the halls of Congress, various print and tv media, as well as any digital footprint that calls out companies for their tax activity.