Diving overview:
Planning for potential corporate tax changes is one of the top risk mitigation measures financial leaders say they are taking in preparation for the November presidential election, with one report finding More than half (62%) said they focus on tax planning. A survey conducted by U.S. Bank in July and August of approximately 1,000 U.S. financial leaders. “Both candidates have expressed a desire to change taxes in different ways, and it’s important to note that in either scenario, companies will have no choice but to do things differently,” said Stephen Phillipson, director of Wealth, Corporate, Commercial and Institutional Banking in Minneapolis, Minnesota. It’s clear that they are making us think about how we should position ourselves.” US Bank, where the company is based, said in an interview. Former President Donald Trump, the Republican nominee, has already lowered the corporate tax rate from 35% when he was in office to the current 21%, and Democratic nominee Vice President Kamala Harris is talking about lowering it to 15%. The government plans to raise it to 28% and is proposing a maximum increase of 35%, according to the Tax Foundation, a Washington, D.C., think tank.
Further insights:
The survey also said companies have seen a 60% increase in interest in both interest rate and currency hedging. U.S. Bank said it received most of the responses after it became clear that Vice President Kamala Harris would be the Democratic nominee to replace President Joe Biden.
Phillipson said he was surprised that businesses were sharing their concerns about the likely outcome of the election, particularly about tax issues.
“Typically, when you ask a client a question, you get a boilerplate answer about political events, and they say it doesn’t affect their approach,” he says. “But it’s clear they’re preparing for both scenarios.”
He said it wasn’t too surprising that companies reported hedging activity, which was something U.S. Bank had been keeping an eye on throughout the year. It is also likely to be affected by uncertainty surrounding interest rates and how the rate cuts currently expected from the Fed will play out this year.
Earlier this year, CFOs and treasurers were already increasing their hedging against interest rate risk, currency fluctuations and commodity price fluctuations, CFO Dive reported in April.
A previous U.S. Bank survey of CFOs conducted in January and February found that companies are seeking to offset geopolitical risks stemming from the Middle East conflict in the wake of the October 7 attack on Israel and the war in Ukraine. It turns out that these measures are being taken.
Separately, the latest survey released on Wednesday found that 42% of companies said their appetite for large-scale capital investment projects had decreased, while 33% of companies said there had been no change. It was also found that 25% of companies responded. Similarly, corporate interest in issuing corporate bonds has decreased by 41%, while 34% have remained the same and 25% have increased.
But so far this year, companies are hungry for debt because interest rates and spreads have been relatively attractive, Phillipson said. Yields on investment-grade bonds currently average around 4.74%, he said, above the recent low of 1.74% on Dec. 31, 2020, before interest rates started rising, but on Oct. 19 of last year. It is said to be below the all-time high of 6.43%.
He said companies are “bringing forward” issuance to take advantage of these low interest rates and avoid volatility around the election. Despite the findings, it is unclear when the loan rush will end, he said.
“It’s been talked about all year long in terms of when it’s going to end,” he said.
