US Tax Reform. Issues for Danish-based multinationals to consider Tax and accounting considerations. 5 December 2017

Transcription

1 Issues for Danish-based multinationals to consider Tax and accounting considerations 5 December 2017

2 Ernst & Young P/S Osvald Helmuths Vej 4 P.O. Box Frederiksberg Denmark ey.com/dk Information in respect of potential impact On the following pages, we have set out a description of material parts of the and how such changes can impact Danish-based multinationals. The description touches upon elements relating to corporate tax with an anticipated broad impact and, thus, does not cover more industry-specific changes, such as change in subsidy to the wind industry, changes in taxation of employees, etc. Bjarne Gimsing Partner Business Advisory Tax M E Bjarne.Gimsing@dk.ey.com Søren Gammelgaard Executive Director Transaction Tax M E Soeren.Gammelgaard@dk.ey.com Søren Kok Olsen Partner IFRS specialist Assurance M E Soeren.K.Olsen@dk.ey.com Furthermore, we have set out how the will impact the 2017 financial statements, depending on the timing of the ongoing negotiations between the House and the Senate. The draft legislation is changing on a daily basis, and thus, the following description is based on currently available information. The current status is that both the House of Representatives (16 November 2017) and the Senate (2 December 2017) have approved tax reform bills and now have to align those into one tax bill. We strongly recommend that anyone using this document should keep themselves updated on the progress in the negotiations and changes made to the. Updated information can be accessed at We and your local EY advisors will be happy to assist you in this respect. Yours sincerely Ernst & Young P/S Bjarne Gimsing Søren Kok Olsen Søren Gammelgaard Page 2

3 Introduction The is moving at a rapid pace. Following the release of draft legislative wording by the House on 2 November 2017, we have seen numerous amendments to this wording by the House that resulted in the bill being passed by the House on 16 November In addition, the Senate's bill was passed by the Joint Committee on Taxation on 16 November 2017, and an amended bill was approved on 2 December The draft legislation changes daily, and therefore, it is difficult to make clear assessments, but areas of agreement are becoming clearer that could have an immediate impact on companies as early as 1 January The main differences between the two tax bills relate to the timing of the reduction of the corporate tax rate, rules on interest limitation, percentages applied for transition tax and whether the Alternative Minimum Tax should be repealed or not. However, there are various other differences where the outcome of the alignment of the two bills could be material to the affected companies/groups. It seems that the managements of many multinational companies may have been surprised by the speed at which things are moving, and there is a real possibility that an act will be adopted before the end of December as both House and Senate leaders have committed to adopting the legislation by year end. As a result, most companies will need to immediately consider a wide range of potential impacts from the tax reform because, even if the bill is not passed prior to New Year, many provisions included in the bill will most likely still have an effective date of 1 January 2018, even if the bill is not passed until Q Given the speed of the reform process, we have gathered some initial thoughts on the key areas of impact that Danish-based multinationals with US operations and/or US customers should consider now and establish contingency plans for, even though the rules are still in flux. EY will continue to monitor and update you as the reform process progresses and will re-assess likely impacts and consequences, as the House and Senate bills evolve into a cohesive final bill. Even though the final legislation has not been released, it is important that managements think beyond modelling and scenario planning and consider the potentially deeper and more impactful proposals that could affect tax, treasury, supply chain, global transfer pricing, etc., so that they are well-positioned to prepare their stakeholders for the changes ahead. In terms of accounting, there will be different challenges depending on the timing of the effective date. The obvious impact relates to the reduction of the corporate tax rate from the current 35% to the proposed 20%. However, as the following slides will show, there are many other substantial changes. Page 3

4 Reduction in corporate tax rate and territorial tax system Corporate tax rate The tax bill includes a reduction in the corporate tax rate to 20% compared to the existing 15-35% tax rate. The House's bill eliminates the Alternative Minimum Tax (AMT), whereas the Senate's bill retains it. Currently, the House's proposal includes effective dates for years beginning after 31 December 2017, while the Senate's proposal includes effective dates for years beginning after 31 December The 20% corporate tax rate might change depending on the final assessment as to whether changes to other elements will increase the costs of the bill. Should activities previously performed and therefore taxed outside of the US be transferred to the subsidiaries in the US utilising the lower corporate tax rates? How will the reduction impact deferred tax assets or liabilities recognised in the financial statements? Can income be brought forward for taxation within the subsidiaries in the US before the end of 2017, ensuring utilisation of prior year tax losses applying the higher tax rate, and thus from an accounting perspective reducing the accounting loss on tax assets? Incentive for sales abroad The Senate has proposed that goods and services provided abroad will be effectively taxed at 12.5%. Territorial tax system US companies will be exempt from US taxes on 100% of dividends received from foreign corporations in which they own 10% or more. Review current group structure, and assess whether changes should be incorporated in order to benefit from the participation exemption. Page 4

5 Debt proposals Interest limitations This is a clear focus area for most companies with US operations, and it seems that punitive debt restrictions will most likely be included in any US tax reform scenario. Both the House and the Senate have a rule restricting deductions to 30% of EBITDA (House) and 30% of EBIT (Senate this is more restrictive). In addition, both the House's and the Senate's bill include a worldwide debt capacity limitation rule that can further restrict the deductibility of US debt based on certain US groups to worldwide group ratios. Many EMEIA headquartered groups with debt-funded US operations could see significant disallowance of US interest deductions under either proposal. The Senate has proposed to implement the limitations gradually in the period Will these proposals impact existing US debt financing? If so, how material is the impact expected to be based on EBITDA/EBIT and/or debt/equity levels? If interest is disallowed, should debt be capitalised? Can it be capitalised without triggering a tax charge? Is it possible to increase US group EBITDA/EBIT, but manage US tax costs via foreign tax credits? Can the US tax base be managed via other forms of deductible payments? Will there be an impact on overall group treasury hedging policy if debt is moved and/or capitalised? Can the US company I. decrease its interest expense by converting nondeductible interest expenses into deductible noninterest expense; and/or II. increase its interest income by converting taxable non-interest income into interest income? Strategies for realising these incentives could involve the use of financial products as well as changes to a variety of ordinary course of business arrangements. Page 5

6 Debt proposals Anti-hybrid proposal The Senate has proposed a rule that would make related party payments to hybrid entities or payments to related parties on hybrid instruments nondeductible. The current proposal is vague, but it does authorise Treasury to write legislation that could expand the scope of targeted structures (i.e. anti-abuse rules). If adopted, it is assumed that "obvious" hybrids would be caught, such as repos and payments to reverse hybrids but queries whether these rules could also stretch to other lending structures with hybrid entities/instruments further removed from the US debtor (e.g. interest-free loan structures). How much debt is currently in hybrid structures vs. non-hybrid structures (including back-to-back hybrid structures)? Could the non-deductible receivable positions be moved to a more tax efficient territory? What impact would the movement have in the current receivable territory? Is there an existing state aid risk and thus a need to revisit the structure regardless of the US tax reform? Will there be Treasury considerations associated with refinancing hybrid structures? Non-hybrid rate arbitrage opportunities due to relatively high US combined state and federal rate (e.g. potentially 25%). Page 6

7 Anti-base erosion proposals Anti-base erosion Both the House's bill and the Senate's bill contain provisions that appear to target so-called "base eroding" payments from the US to a related foreign affiliate that could have a significant impact on supply chains. House excise tax proposal The House has proposed a punitive 20% excise tax (imposed on the US payor) on the gross amount of deductible payments to related parties, notably including payments for COGS, inventory, services, royalties, etc., but excluding interest as well as services charged at cost. Alternatively, the excise tax will not apply if the foreign affiliate opts to be subject to US tax with respect to such payment. Such opt-in would allow the foreign affiliate to be subject to US tax on a net (rather than gross) basis and would allow for a reduced foreign tax credit. The tax on the foreign affiliate would be levied in addition to US tax due on the US company for the US-based activities. The excise tax applies to US groups with base eroding payments in excess of USD 100 million and has an effective date of 1 January Senate base erosion minimum tax proposal The Senate has proposed a base erosion minimum tax (BEMT) that would be calculated by reference to all deductible payments made to a foreign affiliate for the year. The ordinary US tax amount of the US company must be compared to the BEMT a 10% tax rate applied to "modified adjusted taxable income" (calculated without allowance for base eroding deductions) with the higher tax due. The 10% rate is to be increased to 12.5% for years beginning after 31 December The excise tax applies to US groups with average annual gross receipts of USD 500 million or more over three years. The Senate BEMT would apply from 1 January What portion of the company's supply chain could trigger US tax under these proposals? Is the company prepared to act quickly in the event of an 1 January 2018 effective date? How flexible is the supply chain? How might these proposals impact M&A activity? Consider structures and operating models that may not be subject to these provisions (e.g. US service providers versus buy/sell distributors). Page 7

8 Participation exemption and transition tax Participation exemption and transition tax Both the House and Senate proposals include a participation exemption regime for dividends (but not capital gains). In order to pay for the regime, both proposals would impose a one-off transition tax on US groups' accumulated untaxed foreign earnings and profits (E&P). The House's proposal would impose a 14% tax on cash/cash equivalents and a 7% tax on all other assets, whereas the Senate's proposal would impose a 14.5% tax on cash/cash equivalents and a 7.5% tax on all other assets. Any tax due can be paid over an 8-year period. For "sandwich structures" (foreign parented groups with foreign affiliates held by their US groups), there may be a limited window of opportunity to dilute US ownership of foreign affiliates (with a potentially longer window of opportunity for fiscal year groups). Has an earnings and profits (E&P) assessment been performed? What is the potential cash tax impact of the transition tax? Does a dilution opportunity exist? Does a European subsidiary of a US group prepare for payment of dividends to the parent company, including planning dividends from multi-lawyer groups covering various jurisdictions? Page 8

9 Controlled foreign corporation rules Controlled foreign corporation rules Intangible income proposals Both proposals retain the US-controlled foreign corporation (CFC) rules (i.e. Subpart F) mostly unchanged, though an additional category of Subpart F income has been added that targets high intangible profits earned by CFCs and may cause such income to be subject to US tax currently. Notably, the Senate's proposal also includes a reduced US tax rate on income earned on intangibles held by a US group for offshore use. The Senate's proposal also provides a limited window of opportunity for US groups to onshore IP held by CFCs without triggering a US tax charge. Should IP be moved to the US? CFC attribution rules Both proposals include a change to the CFC attribution rules that could impact EMEIA groups with sandwich structures and EMEIA groups with 10% US shareholders. Will the CFC attribution rules impact the group? What sort of US tax compliance filing requirements could be triggered? At what cost? Are there advantageous planning opportunities to use the Subpart F CFC look-through exception. Page 9

10 Tax loss carryforwards Tax loss carryforward rules The tax bill proposes that tax losses generated in years ending after 31 December 2017 will be allowed to be carried forward indefinitely, but tax losses carried forward, generated in years beginning after 31 December 2017, will be capped at 90% of the taxable income (senate plan will cap at 80% for losses arising in tax years beginning after 2022). Carry-back of losses will no longer be permitted. Additional limits might be imposed affecting the ability to use tax losses carried forward. Assess the impact on current tax losses carried forward Assess impact on expected future utilisation of tax loss carryforwards and tax payments Page 10

11 Accounting considerations IFRS and ÅRL impact Recognition and disclosure requirements Pursuant to IAS 12, current and deferred taxes are to be measured using tax rates and legislation adopted or substantively adopted at the balance sheet date. In this case, substantively adopted would be the date when signed by the US President. Signature before 31 December 2017 This would require recognition of the impact of the changes, including changes in deferred tax assets/liabilities due to change in the tax rate from the current corporate tax rate of 35% to the proposed 20%. If the impact of the changes is significant, it should be disclosed in the tax notes as well as in the Management's review. Signature between 1 January 2018 and the date of approval of the financial statements Pursuant to IAS 10, a change in tax legislation, including tax rates, which is adopted or substantially adopted after the balance sheet date is to be considered a non-adjusting event. Instead, this would constitute a subsequent event where the impact is to be recognised in The subsequent event should be disclosed in the 2017 financial statements, if material. No signature before date of approval of the financial statements If the tax bill is still being negotiated between the House and the Senate or is pending signature by the President at the date of the approval of the financial statements, IAS requires disclosure of uncertainty and significant estimates and assumptions the company makes about the future and other major sources of estimation uncertainty at the end of the reporting period that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next financial year. In respect of these assets and liabilities, the notes must include details of a. their nature b. their carrying amounts at the end of the reporting period This means that the uncertainty and the potential quantitative impact on deferred and current tax balances as well as other potential impacts should be disclosed. Page 11

12 Accounting considerations IFRS and ÅRL impact ÅRL The accounting for income taxes under Danish GAAP complies with the recognition and measurement principles in IAS 12. Therefore, there will be no differences in the accounting for the between IFRS and ÅRL. Even though the tax disclosure requirements under ÅRL are limited, the nature of the might be so substantial that disclosures under ÅRL depending on materiality would be the same as under IFRS. Conclusion Unless the is completely taken off the agenda before the approval date of the financial statements, it will have an impact for a significant number of Danish-based multinationals and is thus to be considered in this year's preparation of the financial statements. Page 12

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