Skip to content

Why are Businesses Hoarding Cash and not Hiring?

2 min readBy: William McBride

Sales are up, consumption spending has fully recovered, and profits are at an all-time high. So why are businesses hoarding cash, both from retained earnings and borrowing, and holding back on hiring? The answer seems to be uncertainty, about a lot of things but particularly Europe’s debt crisis, the looming U.S. debt crisis, and the ensuing possibility of another freeze out in the credit markets.

Another source of uncertainty is taxes. In their latest survey of business and government leaders, Ernst and Young find some very disturbing trends:

“Rarely have taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. function leaders, tax administrators and tax policy-makers been in such agreement: a convergence of trends has created the ripest environment for tax controversy in years. Audits are more frequent and aggressive, and thus more costly to defend or litigate; assessments and penalties have now entered the realm of billions of dollars; and companies face unprecedented scrutiny and reporting of their tax affairs by advocacy groups and the news media, often hurting brand reputation and – in the worst cases – shareholder value, even when such coverage is unwarranted or inaccurate.

  • 75% of companies say they have experienced a rise in the volume or aggressiveness of tax audits.
  • 97% of tax administrators reported that they will increase their focus on tax risk related to international structures and cross-border transactions in the coming three years.
  • 57% of tax administrators identified transfer pricing as being their leading tax risk focus area in the next 12 months. Transfer pricing was also the leading risk focus area for companies.
  • Indirect taxes are another key risk focus, with more companies identifying indirect taxAn indirect tax is imposed on one person or group, like manufacturers, then shifted to a different payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not individual payers, and collected by the retailer or manufacturer. Sales and Value-Added Taxes (VATs) are two examples of indirect taxes. compliance as their second leading tax issue.
  • 94% of tax policy-makers predict some or significant growth in general anti-avoidance rules (GAAR) and other similar measures in the next three years.
  • 65% of tax administrators believe the incidence of double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. will stay the same or increase. Only 35% believe it will decrease.
  • 75% of tax directors in the largest companies (those with more than US$5 billion in annual revenue) report heightened risk or uncertainty around tax legislation. This figure rises to 78% for BRIC-based companies and 83% for US-based companies.
  • 78% of companies report that they have experienced an increase in disclosure and transparency requirements made upon their company in the last two years.”

More on complexity and compliance costs here and here.

Follow William McBride on Twitter @EconoWill