Tax Executives Institute Houston Chapter Tax accounting considerations of recent U.S. tax reform proposals May 4, 2017

Transcription

1 Tax Executives Institute Houston Chapter Tax accounting considerations of recent U.S. tax reform proposals

2 Introductions Bret Oliver Tax Partner, (713) John Swilling Tax Partner, (713)

3 Agenda U.S. Tax Reform Proposals Corporate Rate Reductions Expensing and Interest Limitations Net Operating Losses Mandatory Repatriation and Territorial System Border Adjustments 3

4 U.S. Tax Reform Proposals Tax accounting considerations Tax reform & financial accounting Corporate tax rate reduction Border adjustable tax Impact on effective tax rate Measurement of deferred taxes Assertions on outside basis differences Realizability of deferred tax assets Is it an income tax? Transition how? When to account for? Disclosure Territorial or worldwide system? Business expenses Net Operating Losses & Foreign Tax Credits Pass-through entities Deemed repatriation 4

5 The White House Tax Reform Outline Business Tax Reform 15% business tax rate for corporations and pass-through Territorial tax system Mandatory repatriation tax on dollars held overseas Eliminate tax breaks for special interest Repeal the alternative minimum tax 5

6 U.S. Tax Reform Proposals Key business reform proposals Rate for C corporations Corporate alternative minimum tax Rate for passthrough entities House GOP tax reform blueprint 20% rate 15% rate Repeals corporate AMT 20% maximum (combined entity and individual) Trump tax proposals Repeals corporate AMT 15% (within individual tax regime) Carried interest taxed at ordinary individual rates 6

7 Tax Accounting for Corporate rate reduction ASC 740 requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be settled or realized If the U.S. corporate tax rate is lowered, companies would be required to recognize the impact of the change in the tax rate on existing deferred tax assets and liabilities as a discrete item in the period in which the legislation is enacted Any effect would be reported as part of tax expense or benefit in continuing operations, regardless of the category of income to which the underlying pre-tax earnings or deferred taxes relate A delayed effective date or phased approach to enacting a reduction in the statutory tax rate could add complexity as it would require consideration of the period in which temporary differences are expected to reverse, in order to measure deferred tax assets and liabilities 7

8 U.S. Tax Reform Proposals Key business reform proposals Cost recovery Interest expense R&D Domestic production (Section 199) House GOP tax reform blueprint Full expensing for investments, excluding land Deductible only against net interest income Special rules to be developed for financial services Business credit to encourage research and development Repeal Section 199 deduction Trump tax proposals Businesses manufacturing in the US may elect full expensing for investments (revocable within the first 3 years) Businesses manufacturing in the US and electing full expensing for investments (see above) must forego interest expense deductions Maintains the R&D credit Removes all tax expenditures other than R&D credit 8

9 Full expensing and elimination/limitation on interest expense deduction Companies would need to consider the impact that the full expensing provisions and the limitation (or disallowance) of interest deductions would have on current and deferred taxes. For example, full expensing of business costs for tax purposes could result in significant new temporary differences, including both deferred tax liabilities on the acceleration of deductions for tax purposes and deferred tax assets if full expensing results in a taxable loss. To the extent disallowed interest can be carried forward, the associated deferred tax asset that is recorded will be subjected to a valuation allowance assessment. In some respects, this assessment may be similar to determining the realizability of capital loss carryforwards as both tax attributes would attract a valuation allowance absent taxable income of a particular character. In addition, the changes to full expensing and interest may impact a company s analysis of future taxable income when assessing the ability to realize other deferred tax assets, including net operating loss ( NOL ) carryforwards. 9

10 U.S. Tax Reform Proposals Key business reform proposals NOLs House GOP tax reform blueprint Limited to 90% of the net taxable amount for such year determined without regard to the carryforward. Allows for indefinite carryforward period. Trump tax proposals (Not stated) 10

11 Net operating losses NOL carryforward in any year will be limited to 90-percent of the net taxable income for such year determined without regard to the carryforward. NOLs will be allowed to be carried forward indefinitely, and will be increased by an interest factor that compensates for inflation and a real return on capital. NOL carrybacks would not be permitted under the plan. If enacted, companies would need to consider the impact that any changes in limitations and carryforward periods would have on the ability to realize its deferred tax assets associated with NOLs. This may include deferred tax assets that exist at the time of enactment to the extent new legislation extends the indefinite carryforward period to pre-enactment NOLs. If the law change applies only to post-enactment NOLs, there may be added complexity driven by a need to consider the sources of future taxable income to determine which NOL carryforwards (pre- or post-enactment) are able to be utilized. 11

12 U.S. Tax Reform Proposals Key international reform proposals Mandatory repatriation toll tax International General income tax regime House GOP tax reform blueprint All previously untaxed foreign earnings subject to US income tax, to be paid over 8 years: 8.75% tax on cash and cash-equivalents 3.5% tax rate for non-cash assets paid over 8 years Territorial system, with 100% dividend exemption system Trump tax proposals All previously untaxed foreign earnings subject to US income tax at 10% rate (Not stated) 12

13 Mandatory repatriation If a mandatory repatriation provision is enacted, a tax liability will arise for companies with unremitted foreign earnings regardless of whether or not they have historically asserted indefinite reinvestment. Assuming enactment occurs prior to the effective date, companies would need to record a deferred tax liability (or adjust an existing deferred tax liability) for the toll tax to be levied on all historical earnings and profits ( E&P ) that will be subject to the toll tax. The measurement of deferred taxes on outside basis differences in foreign subsidiaries is inherently complex. In recording this liability, companies would need to critically analyze the planned manner of repatriation to appropriately account for the potential taxes, as well as withholding taxes. Consideration must also be given to the ability to net aggregate foreign subsidiary E&P deficits against aggregate positive E&P and the ability to utilize foreign tax credits, to the extent these provisions (as previously introduced in HR1) are included in enacted legislative guidance. 13

14 Territorial system Enactment of a territorial system with a 100-percent dividend exemption would likely impact a company s global cash repatriation strategy going forward and reduce the likelihood of deferred taxes on the U.S. tax impact of repatriation. However, as outside basis differences need to be considered at every level of an organization s legal entity structure, deferred taxes would still need to be evaluated for outside basis differences in tiered structures. In addition, the effects of any foreign withholding taxes would still need to be considered when repatriation is expected by dividends. It is currently unclear what impact the transition to a territorial system would have on the current U.S. foreign tax credit regime. To the extent deferred tax assets have been recorded for U.S. foreign tax, an assessment will need to be performed regarding the ability to realize such deferred taxes based upon enacted legislative guidance. 14

15 U.S. Tax Reform Proposals Key international reform proposals International Consumption tax regime International Anti-base erosion regime (subpart F) House GOP tax reform blueprint Destination-based cash-flow approach, with border adjustments that exempt exports and tax imports Subpart F reduced to foreign personal holding company income provisions (see border adjusted tax above) Trump tax proposals (Not stated) (Not stated) 15

16 Border adjustments The Blueprint states that a cash-flow based approach will replace our current income-based approach for taxing both corporate and non-corporate businesses and that this consumptionbased tax system will be applied on a destination basis. This destination-based approach to taxation generally will mean that the tax will be based on the place of consumption of goods and services rather than source of income or the residence of the taxpayer. Destination-based taxation is achieved through border tax adjustments, exempting gross receipts from exported goods and services while taxing without deductions goods and services imported into the U.S. The principles of ASC 740 are applicable to taxes based on income. It is uncertain whether the new taxing structure will be accounted for under ASC 740 or if it would be considered a nonincome based tax that would be accounted for outside of ASC 740. The conclusion on the appropriate accounting model will need to be determined once there is sufficient information to clearly understand the tax structure that will be represented in the final legislation. 16

17 Example of Border Adjustment Impact P W C Total Revenue $15M $15M $15M Portion of Total Revenue from Sales Outside the US $0 $12M $0 Total Cost of Inventory Sold $6M $6M $6M Portion of Cost of Inventory Imported $0 $0 $5M Cost of assets purchased and Wages $1M $1M $1M Net Taxable Income before Adjustments $8M $8M $8M Removing Export Sales $0 ($12M) $0 Disallowance of Imported Inventory Cost $0 $0 $5M Adjusted Taxable Income $8M ($4M) $13M Tax at 20% $1.6M ($.8M) $2.6M 17

18 Thank you! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.