Turning Tax Reform into Digital Opportunity?

Technology and data are the fuel of our modern economy. They have given us the cloud, social media and the Internet of Things. They have also driven the opportunity for businesses to become more customer-centric, to create a digital supply chain connecting the most distant resource to the most recent customer, and to imagine innovative business and support models with the power to redefine business value. 

But if technology and data are the fuel, planning and budget resources are the oil that allows the digital economy to run frictionless. And thanks to the recent changes in US tax law, companies may be able to remove a bit more of that friction.

This past December, the Tax Cuts and Jobs Act (technically the “To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” Act) was signed into law. While much of the public debate centered on the implications for individual taxpayers, the impact of this tax reform on corporations is likely to be significant, and go far beyond simply lower taxes and higher earnings.

The new law is fairly expansive, with the power to disrupt both accounting and business models. But beyond the tax and accounting issues, these changes to the tax code could have a profound impact on how businesses operate, and offer up the opportunity to leverage tax savings to invest more aggressively in transformational business processes and technologies.

Think cloud, the Internet of Things (IoT), machine learning, automation, and data analytics. Or talent and training. Or digitizing the supply chain. All the elements needed to increase competitive positioning, improve business agility, and better serve the customer.

There are three key elements of the new tax code worth diving into, each bringing a bit of disruption and a bit of “tech” opportunity for the more forward-thinking companies.

Pay Less. A Lot Less.

The reduction in the corporate tax rate, from a maximum 35 percent rate to a flat 21 percent rate, is significant. Not only does it bring US-based businesses in line with the rest of the global economy (where the average corporate tax rate hovers around 23 percent), it allows businesses to increase cash reserves on an ongoing basis (translation: operational flexibility).

Opportunity: Increase investments in discretionary technology and software spending to increase production, improve operational and information infrastructure, and advance initiatives into new market opportunities. As this is a long-term tax change, this should be viewed from an ongoing strategy perspective.

Expense It. Now.

Expensing of short-lived capital investments has traditionally been a multi-year process. Moving forward, qualifying equipment (e.g., machines, computers, off-the-shelf software) and business properties acquired between September 27, 2017 and January 1, 2023 qualify for an immediate in-tax-year 100 percent expense (note: this phases out over time).

This ability to quickly write off some types of capital expenditures is certainly a benefit, but in today’s “everything-as-a-service” economy, most enterprises have shifted to off-premises, hosted, and cloud-based infrastructure with subscription software to take advantage of both feature and cost flexibility (a recent Futurum Research survey revealed that 62 percent of businesses are already utilizing off-premises private cloud/VPN services with 49.6 percent using public cloud).

 

“We expect that many enterprises have not 

fully taken into account the new opportunities 

in existing 2018/2019 budgets.”

 

However, this shift to cloud-based infrastructure and services has often been done at the expense of control and security. In the same Futurum Research survey, 79.9 percent of respondents who maintain on-premises IT assets and infrastructure cite security and data protection as the most important concerns.

Opportunity: For smaller enterprises, this new write-off model may bring back a short-term financial incentive to bring some technology and software back on-premises (at least for the coming five years) or to upgrade and reinforce existing infrastructure at a discount. This could be particularly appealing to companies in highly regulated industries, such as Banking & Finance, Healthcare & Pharma, and Energy & Utilities (and the systems integrators that support them).

Show Me The Money

Perhaps the most significant windfall from the new tax code comes from the shift away from the traditional worldwide tax system, where US-based companies owe taxes on all income, regardless of the geography where the income is earned. In an attempt to defer hefty tax bills (up to 35 percent), many US multinational firms have kept cash earned overseas parked in offshore accounts. 

How much are we talking about? Goldman Sachs estimates US companies hold up to $3.1t overseas, with the top 50 collectively accounting for over $925b of overseas assets (note: Apple, Microsoft, Cisco, Oracle and Alphabet collectively account for over $500b).

The new “repatriation” tax rate (15.5 percent for cash) has suddenly given US businesses, such as global players in the pharmaceuticals, high-tech and consumer products industries, a major incentive to bring that cash back home.

Opportunity: While we certainly expect a good portion of this cash to make its way to shareholders and M&A activities, this offers an opportunity for enterprises to think a bit outside the box, particularly when coupled with the incentive offered by the increased expensing of capital investments mentioned above (e.g., on-premises and software in particular). 

Asking the Right Questions

The new US tax code is not a license to spend. But it does offer an interesting opportunity for companies who have been limited in the implementation of digital initiatives by budget constraints to accelerate their plans, for both hardware/software and services.

Digital transformation doesn’t always mean cloud-based services. It may be a great next step in transforming and innovation plans, but it isn’t the only approach. On-premises has always been an option, and now it might be more of an option (for the next five years). This new tax change offers the chance for those that have on-premises infrastructure to shore up, update, or even expand (at a discount).

While this tax rewrite has been in the works for a while, and discussed even longer, we expect that many enterprises have not fully taken into account the new opportunities in existing 2018/2019 budgets. Corporate and IT execs should work with the appropriate finance and tax teams to determine exactly how the new tax laws will impact their particular business. Key for these companies will be asking the right questions:

  • What is the status of current digital transformation initiatives? What is working, and what isn’t (continued investments in failed initiatives is not the right move)?
  • Are there existing plans (for 2018) that can be accelerated without impacting other initiatives?
  • Where have budgets been a gating factor in achieving success, and how best can budgets and strategic plans be reviewed for potential near-term adjustment?
  • Is there value, from a control, cybersecurity, or compliance perspective, in bringing assets back on-premises (including software, cloud, etc.) or merely keeping them on-premises longer?
  • Do we have the right tools, talent, and partners (and procurement policies) to actually leverage increased financial resources?
  • How can plans for 2019 and beyond be adjusted or accelerated to better leverage technology and infrastructure to increase competitive positioning, business value, and customer satisfaction?

Perhaps the biggest question, however, is will vendors, providers, and enterprises find a way to take advantage of the new playing field. Budgets and planning cycles are usually one of the driest parts of any business. But this year is a bit different. 

For more aggressive businesses, this as a rare opportunity to move beyond the more common shareholder value and employee bonus discussions and hit the digital transformation boost button. It’s an opportunity that should at least be considered.

Note: Futurum Research and its analysts and advisors do not provide financial, tax, or legal advice. The information contained in this opinion column is for informational purposes only and should not interpreted to provide, and should not be relied upon for, financial, tax, or legal advice. 

Fred McClimans

Fred McClimans

Fred is an experienced analyst and advisor, bringing over 30 years of experience in the digital and technology markets to the Futurum team. Prior to Futurum, Fred launched the equity research team at Samadhi Partners and provided marketing strategy through the Wasabi Rabbit digital agency. He also previously served as an EVP and Research Vice President at HfS Research, launching its Digital Trust practice and coverage of emerging "trust-enabling" technologies. Fred previously founded analyst firms Current Analysis (now GlobalData, acquired by PDM), Decisys (acquired by the Burton Group/Gartner), and the Aurelian Group. Fred’s analyst and consulting experience also includes Gartner and E&Y, with technology experience at Newbridge Networks’ Advanced Technology Group (now Alcatel) and DTECH LABS (now part of Cubic Corporation).

A frequent author and speaker, Fred has served as a guest lecturer at the George Mason University School of Business (Porter: Information Systems and Operations Management), keynoted the Colombian Associación Nacional De Empressarios Sourcing Summit, served as an executive committee member of the Intellifest International Conference on Reasoning (AI) Technologies, and has spoken at #SxSW on trust in the digital economy. His analysis and commentary has appeared through venues such as Cheddar TV, Adotas, CNN, Social Media Today, Seeking Alpha, Talk Markets, and Network World (IDG). Fred is also a founding member of the non-profit Center for IoT Security.
Fred McClimans