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Collaborative Cap-X process pays benefits: an integrated capital expenditure process allows a company to pool opportunities across business units and to utilize information from multiple stakeholders to realize enhanced benefits and streamline the data collection process.

Instituting a managed capital investment process within an organization allows the CFO to drive value, reduce cost and manage risk associated with those investment decisions.

Diligent management of both the expenditures for and indirect taxes associated with capital equipment, and for investments in people (the "Cap-X" process), has become a critical factor in successful investment decisions. That management--coupled with strict monitoring of the process, using a team approach--is emerging as a growing global trend for companies recognized as achieving significant benefits.

Why the increased focus on the Cap-X process? With significant decision factors that cannot be controlled, from energy costs to political instability, a well-managed Cap-X process offers the rare opportunity to use quantitative data to reduce costs and generate savings. That is accomplished, in part, by aligning corporate priorities with the tangible support offered by jurisdictions throughout the world to secure the capital investment and employment that are the foundation for future economic growth.

Thus, economic development and tax incentives are becoming an increasingly important component of the investment decision process of many financial executives.

There are common factors to putting a successful Cap-X process in place: data, common process, stakeholders and a full understanding of the opportunities, and each factor is key to driving the ultimate benefit.

Data. The data gathered to feed a Cap-X process should include projected spending information, focusing on both extraordinary and routine budget estimates, for personal and real property and human capital investment. Many savings opportunities are closely aligned with employment and future job creation, so it is important to understand current headcount by location and possible increases and decreases in employment at each of those locations over a three- to five-year time span.

Consolidations of employment, even those intended to reduce overall headcount, can stimulate a benefit in the jurisdiction affected by the employee movement. Moreover, most businesses today train employees, often continuously, and assistance is available to reduce related costs.

Understanding the tax position in each jurisdiction and any existing inducements already enjoyed by the business also are valuable inputs. Businesses with this key data can enjoy a productive Cap-X process.

The Process. Although each company has unique needs and priorities, Cap-X has worked best as a continuous process that is maintained at scheduled intervals and sustained over time. The process begins with reviewing the data to identify potential opportunities for evaluation.

To qualify the opportunity, an inventory of applicable programs is necessary, including understanding funding levels, key criteria and relevant application and decision timelines. Using this information, a business can prioritize which programs may be most beneficial.

Consider the example of a significant new investment in pollution control equipment: For purchasing and installing pollution control equipment, a cash grant may be available to offset the increased investment. The business now is ready to pursue the selected programs, aligning the pollution control investment project to program parameters, introducing it to the awarding body and preparing and submitting an application, with scheduled follow-up to ensure any questions are immediately addressed, such as clarification of the level of increased pollution mitigation enabled by new equipment.

When such a campaign is managed well, a company is then in position to obtain its benefits, frequently in the form of a written offer letter; that may sometimes be finalized with additional negotiations on timing or amount, allowing for a request to extend the pollution control implementation timeline if circumstances warrant.

Nearly every benefit requires that a company comply with certain terms and reporting requirements; documentation of successful usage can be required for pollution control certification and continued payment of the grant to the business. Alternatively, when the project is delayed or curtailed for business reasons, an active compliance component will alert the business that the cost-saving benefits may be in jeopardy.

Compliance requires the collection of data that allows for more opportunities to identify other areas of cost-savings: Can a sales tax refund be secured for the purchase of this equipment? Can additional credits be secured for the cost of the equipment purchase? Can an accelerated depreciation method be used for tax purposes? The answers to these questions start the Cap-X cycle again.

Stakeholders. Real estate or facilities managers, tax directors, human resources executives, operations leaders and government affairs liaisons are likely represented in facilities decisions, regardless of industry or jurisdiction. One individual or one business division alone is unlikely to have adequate information resources to structure cost-effective investment decisions, whether in existing locations or in potential new markets.

Yet, data initially produced in isolation can become a valuable source of savings when incorporated into a Cap-X review. Based on the authors' experience, the indirect tax staff and the procurement department--the front-line agents in realizing and possibly identifying such savings--are rarely included when evaluating capital investment decisions. For both new and routine expenditures, a close examination of asset classification prior to procurement and/or placing assets in service can result in significant savings in federal, state and local taxes.

Corporate officials at headquarters may be unaware of some of the benefits that have been secured on the company's behalf. This leaves the company ill-prepared to realize savings. Conversely, sharing this information can actually expand savings throughout a company.


For example, a manufacturer undertaking a training program in Hungary could receive cash assistance to cover some training costs; yet at a sibling central distribution center nearby, costs for training employees on new standards may not be reimbursed by the government because the facility was unaware of the savings opportunity. In the U.S., some states limit the number of applications a company can file for benefits. If a single business unit applies without communicating through a managed process, it could preclude several other business units in the same jurisdiction from accessing a program, cutting the overall benefit potential to the company.

As multiple stakeholders are identified and involved for a comprehensive Cap-X process, companies can risk jeopardizing the benefits through a lack of oversight. Many companies are utilizing consulting resources, at least initially, to organize the process, tap established relationships within the economic development and tax agencies and capitalize on their global reach and knowledge of program attributes.

The Benefits

A number of companies have achieved success using a "one-off" approach to pursue jurisdictional incentives, and by focusing only on extraordinary projects. So, why change? Cap-X gives the company power to drive cost reductions for capital expenditures: An integrated process allows the company to pool opportunities across business units and to utilize information from multiple stakeholders to affect enhanced benefits and streamline the data collection process.

Having these functions integrated and managed drives significant value by:

* preventing the company from paying tax that is not owed on certain expenditures;

* identifying "soft cost" opportunities for public participation in a project (such as providing targeted services or infrastructure related to water supply, waste water or utility infrastructure);

* realizing savings in indirect tax savings through effective asset placement and managed procurement;

* prioritizing benefits to pursue that have actual value to the company;

* providing a central collection of the benefits and monitoring the value realized; and

* focusing on investment related to, and benefits associated with, employees.

Using this integrated approach, companies can expect to realize benefits ranging from 10 to 25 percent of their capital expenditures. The variance is primarily driven by where the Cap-X investment is taking place and the nature of those expenditures.

Risk reduction is another significant benefit in the current regulatory environment. In a large organization with a decentralized tax and incentive process, there could be a number of jurisdictional agreements in place. Corporate officers may be aware of or have been instrumental in securing some of those benefits and are confident that incentives secured for one-off projects don't rise to the level of significance to warrant reporting from a financial perspective.

In a decentralized process, however, those corporate officers may not recognize the aggregate value of incentives and may not be aware that, in total, they meet a level of significance and have associated risk (such as not acknowledging the potential repayment requirement for non-performance of incentive agreements).

Strategic business investment is the driver of successful business growth--continuous throughout history, consistent across borders and constant in all industries. The eventual financial impact of investment decisions related to capital expenditures can vary widely, based on how those decisions are made and the structure in which they are implemented. Companies that succeed in optimizing such investment decisions clearly gain a competitive advantage.

Paul Naumoff ( is National Director of the Business Incentives Practice in New York; Rebecca Truelove ( is Director of the New York Business Incentives Practice; and Mary Faye LaFaver ( is Director of the Mid-Atlantic Business Incentives Practice, all for Ernst & Young LLP.

RELATED ARTICLE: Incentives Can Go a Long Way to Cut Cap-X Costs

According to the 2006 report on Total State and Local Business Taxes, published by Ernst & Young LLP and the Council on State Taxation, companies have seen U.S. state and local tax bills rise faster than overall state and local tax revenues, with businesses paying more than half of the total increase in 35 states from FY2002 to FY2005.

In 2005, payments for indirect taxes such as property taxes, sales and use taxes and excise taxes totaled more than $350 billion, representing nearly 75 percent of tax payments by businesses. With such a significant portion of the tax burden associated with items integral to activities evaluated throughout the Cap-X process, achieving savings in those areas can drastically reduce costs.

Grants or cash incentives are available for a variety of new investments and initiatives: expansions and restructurings; new market entry; training and retraining of employees; research and development, and even environmental modifications. For routine spending, indirect tax savings opportunities and other inducements exist as potential cost offsets.

According to preliminary results of the 2005 U.S. Investment Monitor published by Ernst & Young, some states were very effective at "attracting" investment from other jurisdictions, with Alabama, Illinois and Virginia each attracting more than $3 billion of investment. The 2005 European Investment Monitor from E & Y highlighted a similar increase in the cross-border investment being undertaken by European-based businesses.

Competition for investment is no longer limited to external factors; many jurisdictions have plants that are competing with more updated or lower-cost facilities within the same organization around the world. To achieve greater savings on investment projects, quantitative data becomes the basis for continuously identifying, qualifying, pursuing, obtaining and complying with targeted cost-saving opportunities.

Many business leaders assume incentives and related savings are primarily directed at large, "blockbuster" capital expenditure projects, especially in the U.S. Although these large projects do generate significant benefits in the jurisdictions where they locate, the Ernst & Young U.S. Investment Monitor also shows that the bulk of new employment is actually generated from mid-size investments (defined as over $20 million in investment or 20 employees). In Europe, projects generating more than 1,000 new jobs provided less than 2 percent of projects reviewed in the European Investment Monitor.

The diversity of investment and employment generated by mid-size projects is desirable, and induced by incentives. While large initial investments make the biggest headlines, projects garnering inducement benefits are not restricted to gleaming new construction.

Of $1.3 trillion invested in projects considered by the 2005 U.S. Investment Monitor, approximately $420 billion was spent on new facilities for expanding domestic industrial capacity, but more than double that--$900 billion--was directed at replacing or modernizing existing facilities and equipment.

In some state and local jurisdictions, larger corporations may engage in routine spending significant enough to trigger benefits. Just as with the extraordinary spending, assessing the routine spending early allows the company to make informed tax and procurement decisions, and potentially to pursue meaningful incentives.


* Diligent management of both the expenditures for and indirect taxes associated with capital equipment, and for investments in people, has become a critical factor in successful investment decisions.

* Cap-X has worked best as a continuous process that is maintained at scheduled intervals and sustained over time. The process begins with reviewing the data to identify potential opportunities for evaluation.

* A close examination of asset classification prior to procurement and/or placing assets in service can result in significant savings in federal, state and local taxes.
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Title Annotation:capital budgeting
Author:LaFaver, Mary Faye
Publication:Financial Executive
Geographic Code:1USA
Date:Jun 1, 2006
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