Inside the C-Suite: US Tax Reform and Business Strategy

What has been the impact on business strategy as a result of US corporate tax reform, which was signed into law in December 2017? A recent PwC survey of US C-suite executives highlights the investments and business directions taken or planned thus far.

The impact of tax reform in the US

The Tax Cuts and Jobs Act of 2017, the first major tax reform in the US since 1986, was signed into law in late December 2017 with a new corporate tax rate of 21%, down from the previous rate of 35%. The legislation provides for an estimated net $1.45 trillion 10-year reduction in taxes, which includes a $280-billion estimate for 2019.

To evaluate the implications, PwC surveyed 403 US C-Suite executives to research how businesses will reform at a strategic level to optimize the 2017 US Tax Cuts and Jobs Act. The firm conducted an online survey from April 23 to May 10, 2018 of US chief executive officers (154), chief financial officers (130), and chief operating officers (119). Thirty-seven percent of participating executives lead companies with annual revenues of $1 billion or more and 89% are headquartered in the US.

The PwC survey showed that most C-suite executives (79%) believe tax-reform savings give their company an opportunity to make strategic business investments not possible in the past. Eighty-one percent of executives say that their companies have created a long-term strategy for investing tax reform savings. Over the next year, companies expect to invest across a variety of areas that range from their workforce (87%) to growth initiatives such as research and development (R&D) (61%), digital capabilities (54%), and mergers and acquisitions (M&A) (51%). Thirty percent say they’re likely to make geographic changes as a direct result of tax reform, and another 34% are considering similar changes.

“Employee bonuses, wage increases, or stock buybacks have gotten a lot of attention in response to tax reform, but these appear to be primarily concentrated in some of the largest public companies,” said Dr. Deniz Caglar, Cost Transformation Principal at PwC Strategy&, PwC’s strategy consulting team, in commenting on the survey results. “Our survey suggests that the impact of tax reform has only just begun. Executives across companies have taken stock of the implications of the tax reform for their companies and are now looking to invest in a range of areas.”

Eighty-nine percent of executives say their company has experienced savings as a result of tax reform and these savings will have implications for how they run their businesses. According to those surveyed, so far this year, companies have already made investments in a range of initiatives as a result of tax reform as outlined below.

Workforce investments. Sixty-three percent of executives say they have invested in their workforce, including hiring (24%), raising wages (24%), contributions to retirement plans (22%), expanding benefits (21%), reskilling (21%), and one-time employee bonus (18%).

Strategy and capabilities. Sixty-two percent of executives have invested in strategy and capabilities, including digital capabilities (23%), R&D (22%), long-term strategy (22%), cybersecurity (20%), M&A (19%), and new service/product offering (18%).

Corporate finance. Thirty percent of executives said they have invested in corporate finance, including paying off debt (20%) and executing share buybacks (15%).

Looking ahead

In the next year, executives said they plan to invest in a variety of areas. Eight in ten (80%) plan to invest in growing stronger capabilities: R&D (61%), long-term strategy (58%), digital capabilities (54%), cybersecurity (54%), M&A (51%), and new service/product offering (48%).

In the next year, eighty-seven percent of executives said that they plan to use tax savings to benefit their workforce in one or more ways: hiring (65%), raising wages (62%), expanding benefits (59%), reskilling (54%), contributions to retirement plans (50%), and one-time employee bonus (49%).

The results of a survey by the National Association of Manufacturers (NAM), a trade organization representing 14,000 US-based manufacturers, released in June 2018, which coincided with the six-month anniversary of US tax reform also showed positive developments with respect to US tax reform. The survey showed that 95.1% of manufacturers have a positive outlook for their companies—an all-time record in the survey’s 20-year history—following enactment of the Tax Cuts and Jobs Act with all-time highs for projected employment growth and capital spending.

“This record optimism is no accident. It is fueled by the game-changing tax reform passed six months ago,” said NAM President and CEO Jay Timmons, in a June 20, 2018 statement. “Last year, manufacturers promised that we would deliver for our people and our communities if tax reform became law. Congress and the President delivered, and now manufacturers are keeping our promise: hiring new workers, raising wages, improving benefits, buying equipment and expanding right here in the United States. And the best part is, with manufacturers’ record-setting confidence and plans to keep hiring and growing, more good news is yet to come.”

Tax reform and the pharmaceutical industry

Investment due to tax reform can also be seen in the pharmaceutical industry with several pharmaceutical companies announcing capital allocation plans or other investments as a result of US tax reform.

As part of their full-year and fourth quarter 2017 earnings reports, Pfizer and AbbVie announced near-term capital-allocation plans, including increased investment for manufacturing projects in the US. Pfizer said it plans to invest approximately $5 billion in capital projects in the US over the next five years, which includes the strengthening of Pfizer’s manufacturing presence in the US. Over the next five years, AbbVie plans to invest approximately $2.5 billion in capital projects in the US and said it is currently evaluating additional expansion of its US facilities.

Earlier this year (July 2018), Pfizer announced plans to invest $465 million to build a sterile injectable pharmaceutical production facility in Portage, Michigan. The new 400,000-square-foot production facility will expand Pfizer’s presence in Portage, where the company employs more than 2,200 people at one of its largest plants. The investment is part of the overall plan announced by the company in January 2018 to invest approximately $5 billion in US-based capital projects as a result of the enactment of US tax reform. During the next six years, the company expects to invest approximately $1.1 billion in Kalamazoo County in Michigan—which is in addition to the $1 billion it has invested in the site over the past decade.

In its 2017 earnings release, Pfizer outlined further investment in the US. Pfizer plans to make a $500-million contribution to its US pension plan in 2018 and has allocated approximately $100 million for a special, one-time bonus to be paid to all non-executive Pfizer employees in the first-quarter 2018. In the fourth-quarter 2017, following the passage of US tax reform, Pfizer made a $200-million charitable contribution to the Pfizer Foundation, an organization that provides grant and investment funding to support organizations and social entrepreneurs for improved healthcare delivery.

In its 2017 earnings release, AbbVie also outlined further investment in the US. AbbVie said it plans to make a one-time charitable contribution of approximately $350 million to select not-for-profit organizations based in the US, which includes contributions toward re-building efforts in Puerto Rico following Hurricanes Irma and Maria. The company also plans to accelerate pension funding by $750 million as well as enhance non-executive employee compensation.

Also, earlier this year (July 2018), Amgen broke ground for a new biomanufacturing plant that will be constructed at its West Greenwich, Rhode Island campus. The new plant, worth up to $200 million, will manufacture products for the US and global markets. In January 2018, Amgen announced a five-year capital investment plan of $3.5 billion, which included committing up to $300-million to build a new manufacturing plant in the US, in part encouraged by US tax reform.

Eli Lilly and Company invested in a new $72-million insulin-manufacturing project at one of its facilities in Indianapolis, Indiana. The project is part of the company’s $850-million investment in US capital projects, which Lilly announced in March 2017. Also as reported in its second-quarter earnings releases, the company completed a previously announced $5-billion share repurchase program and authorized a new $8-billion share repurchase program.

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