4 Tax Predictions to Watch in 2023

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In this edition, we’re looking at what tax professionals can expect in the year ahead. Tax departments have had to adapt to new legislation following the passage of the Inflation Reduction Act in August. Additionally, multinational enterprises continue to work through complexities in the 15% global minimum tax proposed by the Organisation for Economic Co-operation and Development (OECD), to prepare for implementation in 2023. We may also see an increased urgency to automate, as tax departments prepare scenario forecasts and project impacts under new laws and regulations.

We spoke to four BDO tax leaders and asked them about their predictions for 2023 on tax automation and innovation, state and local tax, international tax and federal tax. Here are their thoughts:?

Tax Automation – Haley Dobre, Tax Automation and Innovation Leader?

“As tax functions continue to elevate their roles, by automating manual compliance-based tasks and providing value through forward-looking analysis of the effects of global tax reform, we continue to field questions regarding which market solutions will be most agile to meet tomorrow’s needs today. Before we can answer the best-in-class technology question, we ask clients and prospects in return, ‘how good is your data?’ Too often still, the tax department doesn’t have access to the tax-ready data required, an issue that must be addressed before the technology solution conversation can begin.?

To that end, and when a complete Enterprise Resource Planning (ERP) system overhaul is not already underway, we can expect expanded use of low-code or no-code solutions in the year ahead. These tools streamline bottlenecks in existing processes required to manipulate, organize and transfer transactional data to turn it into information and insights. We still see opportunity for middle to large tax departments to take advantage of these tools to potentially realize high returns for relatively little investment. ?

There are clear indicators of tech vendor investment in two primary areas going into 2023. First, the development of custom modules to contend with pending tax changes, such as those implemented by the OECD’s Pillar 2, and second, broader availability of application programming interfaces (APIs). APIs allow for real-time integration and direct connectivity across different software. This is critical because over time, companies deploy a patchwork of tech across the finance organization that often is not seamlessly integrated.” ?

State and Local Tax – Rocky Cummings, Managing Partner and State and Local Tax Services National Practice Leader ?

“Many states experienced a budget surplus in 2022, so we can expect continued income tax rate reductions and the introduction of additional credits and incentives, as states race to attract businesses and high-income residents. ?

States are continuing to look for ways to export tax burdens to out-of-staters. Specifically, more states are looking to digital commerce to expand their income taxing jurisdiction over out-of-state sellers that sell products to in-state buyers. We are also seeing states expand jurisdiction over intangible digital products, such as software as a service (SaaS), advertising, and more.?

However, don’t expect these attempts at expanded jurisdiction to go unchallenged. For example, a Maryland circuit court struck down that state’s digital services tax (DST) on the grounds that it was discriminatory. We expect other states to learn from the Maryland ruling and pursue similar, but nondiscriminatory, DSTs. ?

Finally, the Inflation Reduction Act goes into effect in the beginning of 2023, but few states are expected to conform because they lack the tax code structures necessary to adopt the new corporate alternative minimum tax (AMT). Given their budget surpluses, few states are likely to feel pressured to conform to the corporate AMT quickly. ?

In 2023, state budget surpluses are encouraging news for businesses, which can expect greater credits and incentives and potentially lower state corporate income taxes.” ?

International Tax – Monika Loving, Managing Partner and International Tax Services National Practice Leader?

“For 2023, we expect global tax to continue to be in flux. Given economic and political pressures, governments around the world will look to tax policy to manage inflation and address tax avoidance. With Pillar 2 implementation set for the end of 2023, corporations are asking for more time to properly apply complex processes. In December, the EU unanimously reached an agreement for the implementation of Pillar 2 via directive, but the U.S. is lagging. It’s unclear whether Congress will adjust the tax on global intangible low-taxed income (GILTI) to bring the regime in line with Pillar 2. That could lead to foreign taxation of U.S. multinationals while foreign multinationals escape U.S. taxation. ?

Additionally, businesses that struggle with supply chain constraints might look to alternative sourcing arrangements, which will require a close analysis of customs, trade, and other indirect taxes, as well as exit taxes and tax incentive opportunities. Insufficient analysis of the tax implications of supply chain decisions could result in large tax liabilities. 2023 will be an interesting year for international tax, as it will put the OECD’s global tax reform project to the test.”

Federal Tax – Todd Simmens, Technical Practice Leader of Tax Policy and Legislation?

“Following the U.S. midterm elections, the country faces a divided Congress and can expect tax policy gridlock in 2023. With Democrats holding a slim majority in the Senate and Republicans taking a slim majority in the House, the prospect of comprehensive new tax legislation is fairly grim. Tax professionals should remain flexible in the face of stalling policy progress and continue to monitor developments that could forecast which tax issues might be at the center of the next election cycle.?

While the expanded child tax credit did not make it into the recent spending bill, Congress might reach a future deal for that credit, as well as for expanded business credits for research and development and some interest payments. However, given the makeup of the House, any such deal may be stalled for a while.?GOP leaders might also seek to extend some of the 2017 Tax Cuts and Jobs Act provisions, but with a Democratic Senate, that is unlikely to occur in the 118th Congress.?With a Republican-led Ways and Means Committee, there may be increased scrutiny on IRS spending in light of the $80 billion in new funding the agency received under the Inflation Reduction Act. Ultimately, with a divided Congress, slim majorities, the Senate filibuster, and continued gridlock shaping the 118th Congress, it is unlikely that much new legislation will come to fruition in 2023.?

Looking Ahead?

With tax policy changes in the U.S. and abroad, we can expect updated technology and tax processes to transform tax departments in the coming year. Equipped with leading-edge software, the tax departments that will succeed in 2023 will have enhanced data organization and analysis, allowing them to be dynamic and responsive with their tax strategies. With significant change comes significant opportunity, and for tax professionals who are able to think ahead, there are many prospects on the horizon.?