MAPI Tax policy outlook

Transcription

1 MAPI Tax policy outlook Scott McCandless Tax Policy Services February 8, 2018

2 Key tax policymakers in the 115th congress Administration US House of Representatives US Senate President Trump Speaker Ryan Minority Leader Pelosi Majority Leader McConnell Minority Leader Schumer Treasury House Ways and Means Committee Senate Finance Committee Treasury Secretary Mnuchin Chairman Brady Ranking Member Neal Chairman Hatch Ranking Member Wyden 2

3 New US combined statutory corporate tax rate (21% federal rate plus state average) now second lowest among G7 countries United Kingdom United States New US Combined Rate = 25.75% Canada Italy Japan Germany Old US Combined Rate = 38.9% France United States 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Note: 2017 combined statutory rates shown for other G6 countries 3

4 Key tax reform provisions that are permanent or temporary / subject to sunset Note: The business interest expense limitation provision is based on adjusted taxable income as measured by EBITDA through 2022, and as measured by EBIT thereafter. 4

5 General business tax reform proposals Proposal Final tax reform legislation (H.R.1, P.L ) Current Law Corporate tax rates/amt Cost recovery (full expensing) Business interest expense 21% rate for taxable years beginning after 12/31/2017. A blended rate applies for fiscal year taxpayers. Corporate AMT repealed. Prior year AMT credits refunded over % full expensing for investments in new and used property made after Sept. 27, 2017 and before January 1, Five-year phase down of full expensing beginning in 2023 (additional year for certain qualified property with longer production period). Excludes property used by a regulated public utility, real property of a real property trade or business electing out of the interest limitation (below), and a trade or business that has had floor plan financing. Limited to the sum of business interest income plus 30 percent of the adjusted taxable income of the taxpayer for the taxable year. Adjusted taxable income is defined similar to EBITDA for taxable years beginning after December 31, 2017 and before January 1, 2022, and is defined similar to EBIT for taxable years beginning after December 31, Would not apply to certain regulated public utilities and certain electric cooperatives, floor plan financing interest, and at the taxpayer s election certain real property trades or businesses. 35% corporate rate and 20% corporate AMT Recover investment over the investment s applicable life under MACRS or ADS Deductible as incurred Limitation applies to both related party and unrelated party debt. Net operating losses Disallowed interest is allowed to be carried forward indefinitely. Limited to 80% of income for losses arising in taxable years beginning after December 31, 2017; indefinite carryforward; no carryback for losses arising in taxable years ending after December 31, Carryback up to 2 years and carryforward up to 20 years 5

6 General business tax reform proposals Proposal Final tax reform legislation (H.R.1, P.L ) Current Law Pass-through entities Creates a 20% deduction for non-wage portion of pass-through income. (Given the 37% top individual rate, this is effectively a top rate of 29.6%.) Deduction is limited to the greater of 50% of business s W-2 wages or 25% of business s W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property held in the qualified business for taxpayers with income over $315,000 (married) or $157,500 (individuals). The limitation is phased in over the next $100,000 (married) of taxable income and $50,000(individuals). The deduction does not apply to specified services business income, except when income of taxpayers married filing jointly does not exceed $315,000 or $157,500 for individuals. The benefit of the deduction is phased out over the same limits as above. Income is passed through to the owners to be taxed at the individual rates Domestic production R&D The 20% deduction is allowed as a deduction reducing taxable income, but does not reduce AGI for the purpose of income-based phaseouts. Repeals Section 199 for taxable years beginning after 12/31/2017. Maintains R&D credit For tax years beginning after 12/31/2021, certain Section 174 R&E expenditures to be capitalized and amortized over 5 years (15 years for expenditures outside the US). Deduction up to 9% of qualified income for items manufactured, produced, grown, or extracted in US, exception of 6% of qualified income for oil & gas production. Regular credit 20% Permits the immediate deduction for research expenses under Sec

7 International business tax reform proposals Proposal Final tax reform legislation (H.R.1, P.L ) Current Law International tax regime Repatriation toll tax Anti-base erosion regime (Subpart F) Incentive for US production for sale to foreign customers Anti-base erosion regime (Inbounds) Territorial system 100% foreign dividend exemption Previously untaxed foreign earnings: 15.5% cash & cash-equivalents 8.0% non-cash assets Payable over 8 years Proportional reduction in foreign tax credits attributable to previously untaxed foreign earnings Subpart F generally maintained; US shareholders of CFCs subject to current US tax on global intangible low-taxed income (GILTI) with a 50% deduction. An 80% foreign tax credit is permitted. The deduction is reduced to 37.5% for tax years beginning after 12/31/2025. A 37.5% deduction is allowed for foreign-derived intangible income produced in the US. The deduction is reduced to % for taxable years beginning after 12/31/2025. New add-on minimum tax equal to the excess of (i) 10% of taxable income (5% in 2018 and 12.5% for tax years after 12/31/2025) generally determined without regard to amounts paid or accrued to a foreign related party (other than COGS and certain services), including amounts includible in the basis of a depreciable or amortizable asset; over (ii) regular tax liability (determined after reduction by credits other than the R&D credit and capped amounts of certain other general business credits). For tax years beginning after 12/31/2025, the regular tax is reduced by all credits (including GBC). Worldwide system Foreign tax credits to mitigate double taxation Currently no provision. Previously untaxed foreign earnings: 35% corporate rate when repatriated with foreign tax credit Subpart F anti-deferral regime includes CFC s insurance income, foreign base company income, among others with foreign tax credit Not provided 7

8 Individual tax reform proposals Proposal Final tax reform legislation (H.R.1, P.L ) (Individual items generally expire after 12/31/2025) Individual rates/amt Seven rate brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%). Current Law Seven rate brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) and individual AMT Capital gain/ Qualified dividend rates (Individuals) Individual standard deduction Individual itemized deductions Increase the AMT exemption amounts and phase-out thresholds. Same as current law $12,000 for single filers/ $24,000 joint returns (adjusted for inflation based on chained CPI). Chained CPI does not expire after 12/31/2025. No overall limitation on itemized deductions. Deduction for state and local sales, income and property taxes is capped at $10,000. Maximum 20% rate for long-term capital gains and qualified dividends $6,500 for single filers/ $13,000 joint filers (2018) Itemized deduction phase out begins at $320,000 for joint filers and $266,700 for single filers (2018) Estate Tax Doubles exemption amounts Maximum 40% rate for taxable estates exceeding $5.6 million (2018 indexed amount) Carried interest Imposes a three-year holding period requirement for qualification as long-term capital gain with respect to certain partnership interests received in connection with the performance of services ACA Individual Mandate Reduces the amount of the individual mandate payment to $0 beginning after December 31, This provision does not expire after 12/31/2025. Taxed at capital gains rates For tax year 2017, the payment is 2.5% of a household s AGI or a flat rate of $695/adult and $347.50/child, up to a maximum of $2,085. 8

9 What does tax reform means for your business? Lower income tax rates, domestic incentives and territorial taxation could create a more favorable financial environment in the United States Repatriation of revenue located in foreign countries could yield an influx of liquidity. Potential actions Potential actions Shift or relocate manufacturing, distribution, and IP generating activities Evaluate the financial efficiency of global supply chains and pricing approaches Move or domesticate headquarters functions or reconsider prior inversions Make additional capital asset investments (due to new expensing rules) Engage in strategic M&A and divestiture activity to support a pro-growth agenda Adjust global capital, financing, and debt flows to minimize cost Review global workforce planning strategies and the optimal location for talent Re-think incentive compensation and pension plan designs and benefits to align with new structures. Share buy-backs and/or increased dividends and returns to shareholders Change strategy on leverage: lower levels of borrowing to the extent deductible Pay down debt Raise investment in R&D, new products or services, and business innovations Invest in future proofing competitive operations: advanced analytics, connectivity, automation Accelerate inorganic growth strategy 9

10 How will the 2018 mid-term elections affect policy? President Trump s job approval rating: 40.5% Presidential job approval Under 50% 50%- 60% Over 60% Avg. Seat Gain / Loss since Generic Congressional vote preference: Democrats +12.5% Sources: US Congress; Cook Political Report; RealClearPolitics.com poll averages as of January 3,

11 Key Senate races in held by Democrats / 8 held by Republicans Sen. Tina Smith** (D-MN) Sen. Dean Heller (R-NV) Sen. Joe Donnelly (D-IN) Sen. Joe Manchin (D-WV) Solid R Likely R Sen. Jeff Flake* (R-AZ) Sen. Claire McCaskill (D-MO) Sen. Bob Corker* (R-TN) Lean R Toss-up Lean D Likely D Solid D Source: Cook Political Report, January 3, 2018 * Retiring members ** Minnesota has two Senate seats up for election in

12 Political polarization reduces incentives for bipartisan legislation Source: Cook Political Report 12

13 House Ways and Means Committee membership subject to significant election-year changes Republicans not running for re-election Democrats not running for re-election Sam Johnson (R-TX) Patrick Tiberi (R-OH)* Dave Reichert (R-WA) Lynn Jenkins (R-KS) Diane Black (R-TN) Jim Renacci (R-OH) Kristi Noem (R-SD) * Resigning House seat effective end of January 2018 Sander Levin (D-MI) The Ways and Means Committee membership currently is composed of 24 Republicans and 16 Democrats 13

14 Senate Finance Committee Members, 115 th Congress Republicans Orrin Hatch (R-UT), Chairman* Charles Grassley (R-IA) Mike Crapo (R-ID) Pat Roberts (R-KS) Michael Enzi (R-WY) John Cornyn (R-TX) John Thune (R-SD) Richard Burr (R-NC) Johnny Isakson (R-GA) Rob Portman (R-OH) Patrick J. Toomey (R-PA) Dean Heller (R-NV) Tim Scott (R-SC) Bill Cassidy (R-LA) Democrats Ron Wyden (D-OR), Ranking Member Debbie Stabenow (D-MI) Maria Cantwell (D-WA) Bill Nelson (D-FL) Robert Menendez (D-NJ) Thomas Carper (D-DE) Benjamin Cardin (D-MD) Sherrod Brown (D-OH) Michael Bennet (D-CO) Robert Casey, Jr. (D-PA) Mark Warner (D-VA) Claire McCaskill (D-MO) Sheldon Whitehouse (D-RI)** Members with seats subject to election in 2018 are noted in bold, italics * Not running for re-election ** New member in 2018 following Alabama special election change in Senate majority 14