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Execs expect U.S. taxes to rise regardless of who controls Congress: PwC

Yahoo Finance’s Akiko Fujita and Rohit Kumar, Co-leader of PwC’s national tax office, discuss U.S. executives’ perspectives leading into the 2020 election.

Video Transcript

AKIKO FUJITA: Well new results out from PwC's new survey points to the growing risks corporate America sees with the presidential election less than three weeks away. Corporate tax policy and tensions with China top the list, but executives say they plan to increase trade investments outside of the US regardless of who wins.

Let's bring in Rohit Kumar. He is the principal at PwC. And, Rohit, we've been talking a lot about moves in the market that seem to suggest investors have already started to position themselves for a potential Biden win, given what the polls have pointed to. How are leaders in the C-suite viewing the prospects of a change in the White House?

ROHIT KUMAR: So, when we think about the C-suite and we look at our survey results, we see a couple of things that kind of jump out at me. We see across the board a plan to increase investment, especially-- and it's really stable regardless of who wins the election-- with respect to the EU and the UK. But you see a pretty noticeable difference with [AUDIO OUT] China investment in particular, right? So if President Trump gets re-elected, then you see, you know, far less appetite for new investment in China under a Trump administration. But you see relatively more investment for investment in-- more appetite, rather, for investment in China under a Biden administration.

And I that simply just reflects we have four years of experience with President Trump. We know what the China terrain looks like. The president campaigned on sort of a tough-on-China platform and has I think [AUDIO OUT] largely executed that strategy as president. And so there's this sense that a President Biden, if he were to be elected, you know, might take a different approach.

Although I'll be honest. I'm not sure that it would be much more dovish in its orientation. It might be a different strategy. He might engage with our trading partners in a different way with respect to China. But I'm not convinced that a Biden administration, nor do I think they are campaigning on a platform of, will be easier with respect to trade tensions in China than the Trump administration has been.

AKIKO FUJITA: When you talk about American companies looking to increase investments in places like the EU, what's driving that decision? I mean, you know, one could argue that with a Biden administration there are certainly concerns around the corporate tax being raised from 21% to 28%, but you're saying that it doesn't matter who wins. These companies are already looking abroad. What's driving that?

ROHIT KUMAR: So I think partly it is an assumption that as we come off the COVID pandemic and economies start to recover, you know, growing economies create opportunities for investment across the board. And then on a relative basis, you know, relationships with the EU and the UK are likely to be more stable, you know, over the long haul than they are with other jurisdictions.

I will say on the question of tax, it was actually-- one of things that really surprised me, and continues to surprise me about the survey results, we've run-- this is now our second time we're running this survey. And both times we see executives saying that they expect taxes to go up domestically regardless of not only who wins the White House, but regardless of who controls Congress. It was actually pretty surprising because there's a legitimate question as to who is going to control the Senate. I think the House is likely to stay under Democratic control. Absolutely no one is predicting to the contrary.

But the Senate I think is very much up for grabs, and as someone who worked for seven years for Senator McConnell in the leader's office, I have a pretty good sense of his perspective on tax increases. And my instinct, my strong instinct, is if Republicans keep the Senate, if Vice President Biden becomes President Biden, I don't see the Senate sending a lot of tax increases across the Senate floor to the president's desk. Now obviously if there's a Democratic sweep that changes the dynamic. But the question we asked just said regardless of who controls Congress. And that, to me-- that doesn't square with my assessment of what happens in a divided government scenario.

AKIKO FUJITA: So have we already seen those investment plans set in motion? I mean, it sounds like the expectation is pretty much set because it doesn't matter which side gets the big win come November 3rd. Have we already seen a lot of these leaders in the C-suite start to position themselves?

ROHIT KUMAR: So I don't think that-- my impression anyway is that people have not yet taken concrete steps. But there is a whole lot of scenario planning and modeling going on right now trying to establish sensitivity analysis because for every company it will be different. You know, if, for example, the corporate rate increases-- let's say it doesn't go all the way to 28, but only goes to 25, let's split the difference just for assumption purposes. You know, what is a 25% rate mean?

Right, it has consequences not only for the domestic rate. But much of the way in which we tax the overseas income of US-headquartered companies is mechanically tied to the US corporate rate. And that's a design feature of the 2017 statute. And so there are, you know, second-, third-, and fourth-order consequences of domestic rate change. And for every company, where the tipping point is on a particular investment will vary at 23, 24 or 25, all the way up to potentially 28.

AKIKO FUJITA: One of the other concerns that has been listed here among executives is tech and data regulation. And on that front, again, this is one of those issues that we see an even split in terms of concerns regardless of who wins the election. How do you see that materialized in the investment plans for corporate America? I mean, what specifically are they looking to?

ROHIT KUMAR: Well, so you are right that there is sort of this emerging, call it bipartisan, angst, or the phrase in Washington, DC, is "techlash," right? But that's not solely the province of one party or the other. And so I see this as there's sort of two separate things going on here. There's the sort of bipartisan apprehension, if you can call it that, around, you know, technology and privacy issues and concentration of market power.

But then separately, we see companies continuing to pursue their own digital strategy, right, because being-- going digital provides flexibility, and in times of uncertainty, flexibility is something you will never regret. And so we're seeing, you know, both in ourselves and in our clients, lots of companies are continuing to pursue their own digital strategy because it's a long-term investment. It makes sense, and right now with the sort of significant uncertainty in the system, going digital provides sort of agility and flexibility. And that's the most you can hope for in uncertain times.

AKIKO FUJITA: Yeah, no question. We've seen a huge acceleration on that digital process over the last seven months or so. Rohit Kumar with PwC, I appreciate your time today.

ROHIT KUMAR: Thank you so much.