KPMG’s vice chair of tax, Greg Engel, is anticipating another year of tumultuous changes in the Big Four firm’s tax function as its clients deal with the ongoing coronavirus pandemic and the expectation of new policies from the incoming Biden administration.
Engel took the helm of KPMG’s tax function in July, only a few months after the firm was forced to shift to a largely remote workforce due to the pandemic.
“Like every business, we had to pivot very rapidly toward working from home,” he told Accounting Today. “We had the same challenges with our professionals, starting from the basics of getting them proper equipment and things in their homes. I found it to be remarkable how quickly we adapted and our clients adapted. It was remarkable, maybe a testament to where technology has gone.”
During the pandemic, KPMG has been helping its clients not only with the traditional tasks of filing their tax returns and doing their financial reports and audits, but simply staying in business. “A lot of attention turned to the disruption they were facing, so cash flow became a very important thing,” said Engel. “Tax deferral strategies, and things companies might look at for cash purposes — it might be distributions from foreign subsidiaries — things that generally aren’t a high focus became a high focus because of what the businesses were faced with, and the need to help their businesses.”
KPMG also helps its clients cope with the various provisions of the CARES Act, as it will be doing with the new round of COVID relief legislation introduced in Congress on Monday. “Companies had new rules to digest, and they were looking for help there, so our teams had to get trained up, we had to learn the new rules, we had to help our clients with the new rules, whether that was the employee retention credits, or just simply understanding other elements of the CARES Act,” said Engel. “Then, not to be missed, were a lot of global tax policies that continued to move forward, between what was going on with BEPS and the digital services tax, and those potential changes and challenges companies cared about. Our teams had to lean into that.”
Along the way, companies were still digesting the Tax Cuts and Jobs Act of 2017, and the thousands of pages of regulations produced by the Treasury Department and the Internal Revenue Service just this year. “That necessitated a lot of analysis as well as modeling for what are the ways we should look at these different provisions that impacted our clients,” said Engel.
Clients are increasingly outsourcing their tax functions to large firms like KPMG to help them handle all the complexity. “CFOs are saying they’ve got to manage costs, and if the tax function is able to deliver what they need to deliver at less money, there's a high interest in that,” said Engel.
KPMG has also been helping clients with the wave of mergers and acquisitions that got underway after the initial shock from the pandemic had eased. “We would help them look at the tax structuring,” said Engel. “And then there's the private equity money where they're creating funds and they're buying small businesses to hold them or to flip them or do whatever. As each one of those opportunities is presented, there's tax structuring and there is modeling of future cash flows. As you value the business, many aspects come into play. It's been well discussed and debated about what the tax rates will be in the future with a new administration, so if you're trying to get a business sold, you might want to sell it before the rates go up. Some of that stimulates companies looking at buying or selling businesses or assets.”
Bracing for potential change
While all this is going on, both KPMG and its clients have been dealing with all the uncertainty about what tax policy might look like in the Biden administration and which party will control the Senate after the runoff election in Georgia in early January.
“We can all guess what might happen, but we don't even know who's going to control the Senate at this point in time,” said Engel. “You start trying to handicap the likelihood of Biden's tax provisions without the Senate and his ability to do what he might want to do. You have to start there. Most of our clients understand there's uncertainty, but try to model it under both scenarios. What do you think might happen? And the big question is, how quickly could it be done? If you just assume corporate rates will go up in some fashion under a Biden administration, then the question becomes, could it be as early as next year? In which case I need to do some things today. But if you don't think they'll get around to it until 2022, I have some time. I think most people would agree that eventually that's the direction the administration wants to go. But as we all know, Congress is the one that sets the tax laws. The president makes proposals. So if Congress is divided, it may not be that easy.”
He noted that many companies expect the tax rates to go up, but are unsure how much. “Trump took the corporate tax rates from 35 to 21 [percent],” said Engel. “I don't think many people believe they're going all the way back up to 35. So there is that middle ground, wondering where it might land. We're not going to try to be fortune tellers for our clients, but we can give our views based on our insights from people we know on Capitol Hill. Most of our large clients have their own people on the Hill that can help them. We'll be more apt to help them think through the different scenarios in which the rates might go up.”
One possibility could be a minimum tax rate for corporations. “That would be a way to raise revenue because the game in Washington is raising revenue, and they can raise revenue against corporates a lot of different ways,” he said. “They don't necessarily have to take the rate from 21 to 28. They could leave the rate at 21, but introduce some sort of a minimum tax, which then raises money for the government. Obviously a minimum tax is going to affect some clients very differently than other clients. That's when companies start to try to understand which provision they might want to get behind as it might impact them more or less.”
Engel has plans for expanding KPMG’s investment in tax technology to help with making such determinations.
“The area that we've been heavily focused on and will continue is very, very significant investments in technology, the tools our professionals need to adequately serve our clients,” he said. “It’s very important to our professionals and to our clients. The scale in which we can make investments in technology is much larger than any single client can make. We believe if we build some technology platforms and use them in a way that covers our client base, that's a good return for us and a good return for our client. Our Tax Reimagined platform is very focused on technology. We have ignition centers that we have created, physical sites where we have the latest and greatest tech tools, but also the highest experts with knowledge of those tools. We will do workshops with clients around what might work in your fact pattern and what are some tools you potentially could use that are already developed and what might be some tools where you would need to do further development, and maybe we could help you do that. Obviously, we're not doing those meetings in person today because everybody's shut in their homes, but we have been able to do them virtually and continue on that journey.”
KPMG’s international tax clients have also been able to leverage the technology developed by the firm. “We have created some sharing tools that are dashboard-type tools where our clients can get quick access to what’s going on in Poland and what’s going on in China,” said Engel. “Our global network can keep everybody up to speed. With the CARES Act and the stimulus that was out there, a lot of companies were able to access different tax provisions around the stimulus bill. Well, every single country in the free world was passing similar stimulus bills. So we have something we call Digital Gateway, which gives our clients the ability to get a lens right into every country in which they work. A couple of clicks away, they could see a summary of the economic tax stimulus in all the countries in which they operate. Those are the kinds of global-type investments we’re investing in, and we think we need to continue to invest in it in a significant way.”
KPMG also helps its multinational clients deal with lawsuits brought by countries abroad who are seeking to have them pay more in taxes. “We’ve certainly seen no shortage of governments around the world challenging large companies,” said Engel. “There are a lot of very, very high-stakes tax controversies that are continuing each and every day. So we are putting together quite a network of very competent tax professionals and tax lawyers around the world so that we can help our clients address those controversies as they come up.”
The firm has also been helping more clients deal with environmental, social and governance, or ESG, issues such as sustainability. “With the disclosures that companies have started to make in a major way around sustainability, but also around social issues and governance issues and carbon footprints and the like, as companies are embracing broader disclosures about what they're doing in those three key areas, obviously tax becomes a part of that,” said Engel. “Many times, those disclosures will include what they're doing around tax. We’ve been involved in projects to help companies figure out what that footprint looks like. If you take, for example, a multinational energy company, the taxes they pay around the globe, it’s not just income tax, it’s all the sales tax and employee tax and property tax, etc. To say what’s the total and where is it by country, that’s a pretty big exercise. That fits in with disclosure of sustainability and also governance.”
The firm also helps its clients claim tax credits for renewable energy and other forms of clean energy. “If there’s any business where there’s credits available, be it research credits or other types of credits, we’re going to help them make sure they know all those credits and do what they need to qualify," Engel said. "There are some credits which are designed for investors to put their money behind an initiative, and there are credits that enhance those returns. Low-income housing credits have been around a long time, and there are other credits that continue to come up. In that regard, we're oftentimes helping our clients understand the consequences of credits, how they're calculated, and whether or not they qualify. The one thing we don't do is we don't market them or do anything like that. We're more the subject matter expert to help them understand the consequences. There are other people out there who will put them together and package them and bring them to bear. That is not something that we do.”
DE&I
In line with the social changes that have been happening this past year with the Black Lives Matter movement, KPMG has also been trying to bring greater diversity and inclusion to its ranks and to the tax and accounting profession at large.
“With our new management committee — Paul Knopp, our new chairman, and we have vice chairs of audit, tax and advisory — one of Paul’s single biggest initiatives right out of the gate was something we call Accelerate 2025,” said Engel. “That entire mission was to make sure we had inclusion and diversity at the forefront of what we were trying to accomplish, to make sure it’s embedded in our strategy, that it’s not just something we do in addition to what we’re doing. The tone from the top was the entire management committee was the executive sponsor of what we were doing, and we’ve been working together pretty much all summer on a bunch of extremely bold initiatives to really change the way that we might be viewed as a profession.”
KPMG is trying to become more diverse. "We are very focused on changing the way the incoming population of diverse candidates, which potentially means we get back into the high schools," said Engel. "We have to start back there because if we wait to see who comes out of the business schools, you don't have any diversity or not enough.”
Engel sees more demand from clients for diversity. “It's easy to marry it to our strategy because it’s a business imperative to get this right. It's not just do it because it’s nice to do. It's also a key business imperative," he said. "We are seeing on proposals with companies, ‘Tell us about your technology. Tell us about diversity and inclusion. Tell us what you're doing as a firm.’ We’ve even seen companies go so far as to say, 'We need your engagement team to look a little different. What can you do?' It's socially very important out there with our clients, and we absolutely are committed. I think we're going to be one of the leaders and that's what we want to get to. There's hardly a day goes by that I don't have something where we’re kind of looking and pushing all these different initiatives forward.”
