KPMG Global Tax Webcast

Transcription

1 KPMG Global Tax Webcast Global Asset Management and U.S. Tax Reform What you should know today to help plan for tomorrow December 20, 2017

2 Notices The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. Tax reform developments have been moving at a fast pace. Developments relevant to the content of this deck can be expected to occur as tax reform moves through the legislative process. Thus, some material in this deck may no longer be current at a future date. Please follow developments through KPMG s TaxNewsFlash-Tax Reform. 1

3 Moderator and speakers Kevin Valek (Moderator) Partner National Segment Leader Private Equity Funds Alternative Investments, KPMG in the U.S. Deanna Flores Principal, National Tax Industry Leader, Public Investment Management, KPMG in the U.S. Jay Freedman Principal, National Tax Industry Leader, Alternative Investments Hedge Funds, KPMG in the U.S. Carol Kulish Director, Federal Legislative & Regulatory Services, Washington National Tax, KPMG in the U.S. David M. Neuenhaus Principal, Tax, Global Lead, Institutional Investor Group, KPMG in the U.S. Sam Riesenberg Principal, US International Tax, WNT, KPMG in the U.S. Chris Turner Partner, National Tax Industry Leader, Building, Construction & Real Estate, KPMG in the U.S. 2

4 Administrative Continuing Professional Education (CPE) regulations require that online participants take part in online questions: - Must respond to a minimum of three questions per 50 minutes - Polling questions will appear on your media player - Results will be reviewed in the aggregate; no responses will be tracked back to any individual or organization. To ask a question, use the Ask a Question box on your media player. Technical issues: use the but in the upper-right corner of your Webcast player to access our new online help portal. - If this does not resolve your issue, please submit a question through the Ask a Question box, and you will receive a reply from our technical staff shortly in the Answered Questions box. 3

5 Agenda Welcome and introductions A potential path to tax reform Highlights for asset management Q&A 4

6 CPE question #1 What is the type of your organization? A. Hedge B. Private equity C. Real estate D. Regulated investment company E. Fund of funds F. Hybrid G. Other 5

7 A potential path to tax reform

8 A possible path to tax reform House Bill introduced 11/2/17 Ways and Means Chairman releases mark 11/3/17 Markup by Ways and Means Committee 11/6/17 11/9/17 Final bill sent to President Trump for signature Treasury and Internal Revenue Service begin process of implementing the new law Senate Finance Chairman releases mark 11/10/17 Senate House votes and passes 11/16/17 Ways and Means approves bill 11/9/17 White House Resolve differences and send back to House and Senate for vote on identical legislation Markup by Senate Finance Committee 11/14/17 Senate Finance Committee approves bill 11/16/17 Senate passed 12/2/ KPMG LLP, a Delaware limited Cooperative liability partnership ( KPMG and International ), the U.S. member a Swiss firm entity. of the All KPMG rights reserved. network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS Joint Conference7

9 Provisions that may impact asset management

10 Rate reduction H.R. 1 Senate Bill Conference Bill Corporate rate 20 percent; effective for taxable years beginning after December 31, percent; effective for taxable years beginning after December 31, percent; effective for taxable years beginning after December 31, Individual owners of passthroughs and sole proprietorships Business income rate capped at 25 percent. Rate applicable to net business income from passive business activities and to a percentage (the capital percentage ) of net business income from active business activities. Default capital percentage is 30 percent, however service businesses, including financial service, brokerage firms and those who invest, trade or deal in certain securities ( specified service activities ) generally would have a deemed capital percentage of zero. Creates a 23 percent deduction to be taken against qualified business income. Service businesses generally excluded. Limitations apply. Sunsets after Generally follows Senate except: Creates a 20 percent deduction to be taken against qualified business income., resulting in a 29.6 percent effective rate. Service businesses generally excluded, including performance of services that consist of investing and investment management trading or dealing in securities, partnership interest or commodities. Includes limitations based on greater of 50 percent of W-2 wages or (25 percent of W-2 plus 2.5 percent of qualified property). Excluded services and W-2 limitations are not applicable to income below specified threshold amounts. Alternate method may allow the 25 percent rate to apply to a deemed return (short-term AFR plus 7 percent) on certain property used n the trade or business. Trust and estates are eligible for the 20 percent rate. Rates expire on December 31, Individual rates 12%/25%/35%/39.6% 10%/12%/22%/24%/32%/35 %/38.5% Individual proposals under the senate plan would expire on December 31, %/12%/22%/24%/32%/35%/37% Retains individual Alternative Minimum Tax. Retains Net Investment Income Tax. Rates expire on December 31,

11 Rate reduction 1. Do asset managers qualify for the reduced partnership tax rates? 2. Choice of entity evaluation in light of proposed tax rates and dividend rates. 3. What is business income? Does a trader fund convert income into business income? 4. Active participation by real estate professionals. 10

12 Securities identification H.R. 1 Senate Bill Conference Bill Securities identification No provision. Requires taxpayers (except for regulated investment companies [RICs]) to use the first-in first-out method to determine cost basis of specified securities sold, exchanged, or otherwise disposed of on or after January 1, 2018 (i.e., repeals specific identification method). Retains the rule allowing the average basis method for certain securities (e.g., stock of a RIC). No provision. 11

13 CPE question #2 What is your organization doing around tax reform planning? A. Monitoring only B. Internal modeling C. Engaged outside consultants D. Very little E. Other 12

14 Interest expense limitation H.R. 1 Senate Bill Conference Bill Interest expense Domestic corporation interest expense limitations Disallows net business interest deductions in excess of 30 percent of adjusted taxable income ; adjusted taxable income generally is taxable income without regard to interest expense, interest income, net operating loss, depreciation, amortization, or depletion; would not apply to small businesses, real estate businesses, and utilities. Potentially limits deductions of net interest expense of certain domestic corporations that are part of an international financial reporting group. Generally the same as the House proposal; however, the limitation is generally more restrictive as adjusted taxable income is reduced for depreciation and amortization. Disallows the deductibility of net interest expense of a domestic corporation by reference to whether it has excess debt relative to its worldwide affiliated group. Generally follows the Senate but for years beginning after December 31, 2017 and before January 1, 2022, adjusted taxable income is computed without regard for depreciation, amortization and depletion. Indefinite carryover. Special rules for partnerships and S corps. Not included in Conference Bill. 1. Impact to blocker corporations and leveraged blocker structures 2. Impact on leveraged investment strategies 3. Impact on tax planning (zeroing out taxable income) 4. What is business interest? Trader versus investor 5. What is interest? 6. Portfolio companies 7. Carryforward provisions 13

15 Carried interest Carried Interest H.R. 1 Senate Bill Conference Bill Three-year holding period for long-term capital gains (LTCG), anything less than three years is short-term capital gains. Three-year holding period would be required for sales of assets held (directly or indirectly) 1. Impact to private equity by the applicable partnership, or, in the case of 2. Alternatives? the sale of an applicable partnership interest, the applicable partnership interest itself. The partnership interest must be transferred to, or held by, the taxpayer in connection with the performance of substantial services by the taxpayer, or a related person, in any applicable trade or business. Certain interests held by a corporation and capital interests excluded. Similar provision. Similar to Senate. 1. Impact to private equity 2. Treatment of partnership interests 3. Section 1256 contracts, Section 1231 gain and qualified dividend income 4. Effective beginning in 2018; no grandfathering 14

16 Expensing of assets Expensing of assets H.R. 1 Senate Bill Conference Bill In general, 100 percent expensing would be allowed for property that currently qualifies for bonus depreciation if such property is acquired or placed in service after September 27, 2017 and before January 1, Would also include used property. Property used in a real property trade or business under Section 469(c)(7)(C) is not eligible for expensing. Similar to House, although used property would not qualify. Also expanded qualifying Section 179 property to include personal property used in hotels and apartment buildings, as well as certain other assets/improvements made to nonresidential real property. Allowed through 2022, reduced in 20%, increments In general, 100 percent expensing would be allowed for property that currently qualifies for bonus depreciation if such property is acquired or placed in service after September 27, 2017 and before January 1, Would also include used property. Then: % % % % Increases amounts for longer production period and certain aircraft in all years including

17 Net operating losses and AMT Net operating losses H.R. 1 Senate Bill Conference Bill No carryback, indefinite carryforward, but limited to 90 percent of taxable income. Carryforwards are increased by an interest factor annually. Similar to House. 90 percent limitation of taxable income reduced to 80 percent for tax years beginning on or after December 31, No indexing of carryforward amounts. Similar to the Senate except 80 percent limitation of taxable income for tax years beginning on or after December 31, 2017 and only for NOL s generated in years after December 31, No indexing of carryforward amounts. Business losses of noncorporate taxpayers No provision. Excess business losses for individuals are limited to $500,000/250,000 per year. Same as Senate. Alternative minimum tax Repeal for individual or corporate taxpayers. Individual AMT retained, but exemption amounts increased. Corporate AMT retained. Individual AMT retained, but exemption amounts retained. Corporate AMT repealed.. 16

18 Tax-exempt investors H.R. 1 Senate Bill Conference Bill UBTI Unrelated business income tax would apply to an organization exempt from tax under section 501(a) even if the organization is also exempt or excludes amounts from gross income by reason of another provision. No provision. No provision. UBTI netting No provision. A tax-exempt organization would not be allowed to use UBTI losses from one unrelated trade or business to offset income from another unrelated trade or business. Such UBTI losses would be carried over to offset future UBTI income of that same unrelated business. Excise tax No provision. Creates new 1.4 percent excise tax on net investment income of private colleges and universities. Same as Senate. Creates new 1.4 percent excise tax on net investment income of certain private colleges and universities. 1. State pension funds will continue to be exempt from UBTI even though considered a super tax-exempt: a) Investments in funds b) Investments in management companies 17

19 CPE question #3 Which of the following provisions will most change how you do business? A. Rate reductions B. Interest expense limitation C. Capital expenditure deduction D. International provisions E. Other 18

20 International

21 Key proposals International H.R. 1 Senate Bill Conference Bill Participation exemption system Creates a 100 percent exemption for dividends received from 10 percent owned foreign corporations. Same, except does not apply to hybrids; clarifies/adds exemption for 1248/964(e) dividends. Generally the same as the Senate Bill. Repatriation of existing earnings and profits (E&P) Foreign earnings accumulated under old system deemed repatriated; rate of 14 percent for cash/cash equivalents and 7 percent for illiquid assets; the tax is payable over eight years; E&P determined as of November 2 or December 31 (whichever is higher). Foreign earnings accumulated under old system deemed repatriated; rate of 14.5 percent for cash/cash equivalents and 7.5 percent for illiquid assets; the tax is payable over eight years; E&P determined as of November 9 or December 31; recapture upon inversion within 10 years. Foreign earnings accumulated under old system deemed repatriated; rate of 15.5 percent for cash/cash equivalents and 8 percent for illiquid assets; the tax is payable over eight years; E&P determined as of November 2 or December 31; recapture upon inversion within 10 years. Gain on sale of partnership interest No provision. Gain or loss from the sale of a partnership interest is effectively connected with a U.S. trade or business to the extent the transferor would have ECI had the partnership sold all assets. Generally the same as the Senate Bill with an effective date for sales after November 28, 2017 but withholding will apply to sales after December 31, U.S. funds or U.S. partners that own 10 percent or more of a specified foreign corporation (foreign corporations with a 10% U.S. corporate shareholder) a) Impact to 2017 tax returns 2. Dividends received deduction 3. Repeal of Grecian Mining 20

22 International proposals Inbound alternatives investors Tax reform will impact topside fund structuring (that is, how non-u.s. investors invest into funds with U.S. tax exposure). How? It depends: Federal rate reductions on corporate income compared to individual rates may make blocker structures more tax effective No (apparent) movement on treaties and withholding/branch taxes means interactions with rate reductions result in new structuring choices Restrictions on interest deductibility may mean some existing structures will need to be modified to achieve optimal tax efficiency Elimination or reduction of SALT deduction may impact typical inbound tax planning. New section 267A will need close consideration Applies to hybrid entities and hybrid transactions denies royalty or interest deduction where paid or accrued to a related party where paid to or pursuant to such entity Law itself somewhat unclear how it applies to basic inbound structuring But broad regulatory authority here FIRPTA reform no provisions under either bill Let us walk through some basic investment structures and the potential rate impact 21

23 International proposals Inbound investors example rates (nontreaty) Investor jurisdiction Trust Corp Individual United States U.S Blocker U.S. Blocker U.S. Blocker Fund Fund Fund Trust Direct Trust Blocker Foreign Corp Direct Foreign Corp Blocker Individual Direct Individual - Blocker Income Current Law Income Tax Reform Exit Gains Current Law Exit Gains Tax Reform 39.6% 54.5% 54.5% 54.5% 39.6% 54.5% 37% 44.7% 44.7% 44.7% 37% 44.7% 20% 35% 35% 35% 20% 35% 20% 21% 21% 21% 20% 21% 22

24 International proposals Inbound investors example rates (treaty) WHT/BPT Rate: (0%) (5%) (15%) Investor jurisdiction Trust Corp Individual United States U.S. Blocker U.S. Blocker U.S. Blocker Fund Fund Fund Income Current Law Income Tax Reform Exit Gains Current Law Exit Gains Tax Reform Trust Direct Trust Blocker Foreign Corp Direct Foreign Corp Blocker Individual Direct Individual - Blocker 39.6% 35% 38.25% 38.25% 39.6% 44.75% 37% 21% 24.95% 24.95% 37% 32.85% 20% 35% 35% 35% 20% 35% 20% 21% 21% 21% 20% 21% 23

25 International proposals Outbound U.S. alternatives investors Most significant immediate impact to existing structures may likely be from CFC reform (mandatory repatriation in particular). For existing holdings: Mandatory repatriation means current tax considerations on existing structures, possible need for restructuring at fund and investor levels to optimize tax position. For new investments in existing structures: structural changes will likely be implemented to increase tax efficiency for outbound investors coming through fund structures, particularly in PE, infra and potentially real estate. For new fund or co-invest structures, will U.S. investors want a U.S. corporate vehicle now (at least some of the time)? What about GILTI? Note, certain structures with U.S. investors may now be more sensitive to local tax drag (may be less ability to credit in the U.S., where broadly available before with hybrid planning). The PFIC regime appears here to stay 24

26 International proposals International issues for fund managers U.S. sub-advisers of non-u.s. managers Lowered deductibility of state and local taxes may pass on to employers of, e.g., SF, NYbased deal professionals: - May mean cost-plus payments to U.S. sub-advisers could start trending up from higher employer costs? - Tax reform may be the catalyst to consider a different TP methodology for your U.S. subadviser. BEAT could implicate management payments and recharges for larger AM managers with U.S. operations - Restructuring and adjustments may be necessary - Additional entities may be subject to U.S. tax filing obligations US headquartered managers Deemed repatriation will significantly impact some of the larger managers, probably not the majority, however. Restructuring outbound fund management entities likely to be undertaken: - Fund management structures may look very different than today. 25

27 CPE question #4 What do you consider the most important issue being considered? A. Corporate and partnership rates B. Carried interest C. Interest expense limitations and immediate expensing D. International issues (e.g., territorial tax system and mandatory repatriation) E. Other 26

28 Real estate

29 Real estate provisions Like-kind exchanges Similar provisions in House and Senate proposals Section 1031 would only apply with respect to real property (but not dealer property or domestic/foreign exchanges). Applies to exchanges completed after December 31, 2017 Transition rule would exempt exchanges where the first transaction (either forward or reverse exchange) occurs on or before December 31, REIT dividends similar provisions in House and Senate proposals Would qualify for the 20 percent deduction without W-2 limitation except to the extent that the dividends qualified for the lower 20 percent rate with respect to capital gain or qualified dividend income Mandatory repatriation provisions (Senate only): Accumulated foreign income would be excluded from gross income tests Similar eight-year period as regular corps for meeting distribution requirements. FIRPTA reform no provisions under either bill Nonowner contributions to capital potentially taxable to owner under House bill Conference report limits applicability to corporations and excludes contributions in aid of construction and contributions by government or civic groups. 28

30 Recovery periods for real estate H.R. 1 Senate Bill Conference Bill Recovery periods No provision. Recovery period for depreciation deductions: Nonresidential real property 25 years (ADS 40 years). Residential rental property 25 years (ADS 30 years). Qualified leasehold improvements, qualified restaurant, and qualified retail improvement property 10 years (though ADS life is 20 years). For real property trades or businesses that elect to be exempt from the interest expense limitations, all of the above must be depreciated under ADS lives. Recovery period for depreciation deductions: Nonresidential real property 39 years (ADS 40 years). Residential rental property 27.5 years (ADS 30 years). Qualified leasehold improvements, qualified restaurant, and qualified retail improvement property 15 years (though ADS life is 20 years). For real property trades or businesses that elect to be exempt from the interest expense limitations, all of the above must be depreciated under ADS lives. 29

31 Public investment management

32 Notable provisions Conference Bill Favorable treatment for certain REIT (but not RIC) distributions Potential impact on structuring preferences for entities taxed as regulated investment companies (RICs), including business development companies (BDCs). Limitation on net business interest Impact on RICs, including BDCs. International Tax Provisions - Reforms international tax rules impacting global asset managers - Specific provisions for REITs (but not RICs) subject to mandatory repatriation inclusions - RICs, REITs and S Corporations are not subject to base erosion minimum tax. Municipal lending Terminates advance refunding bonds and tax credit bonds. Change in income recognition rules - Requires taxpayers to recognize certain income no later than the tax year in which such income is taken into account on an applicable financial statement - New rule will accelerate inclusion in income of certain fees currently treated as original issue discount (OID) on a debt instrument - Could significantly impact RICs that originate debt, including BDCs. Reduces dividends received deduction (DRD) percentages 31

33 CPE question #5 When do you believe U.S. tax reform will be enacted? A B C D. Unsure 32

34 Transition planning and things to do now

35 Current transactions - pricing implications Pricing models and diligence should take into account the potential effects of tax reform Proposal Tax rates Interest deductibility Pricing impact Increase in value due to increase in cash flow from reduced tax rates. Decrease in value for highly leveraged companies due to decrease in cash flow from reduced interest deductions. Expensing Increase in value for asset intensive businesses due to increase in cash flow from immediate tax deductions Potential expensing of portion of purchase price in asset acquisitions under House Bill approach. International tax Potential benefit for U.S. corporate targets from ability to receive tax free dividends from foreign subsidiaries, but consider expected amount and allocation of Repatriation Tax cost and going forward effect of minimum tax on cash flows For U.S. corporate targets, potential impact of base erosion tax, if applicable, and (under Senate Bill) FDII deduction. NOLs, Credits, and Incentives Value of company s tax attributes or other preference items may be affected. 34

36 Current transactions other issues Analyze whether to close pending deals in 2017 or 2018 Contractual provisions to allocate tax benefits/detriments related to transition issues, such as repatriation tax? 35

37 General transition planning GP/management company - Review management fee arrangements and GP structure to assess qualification for new pass-through rate/deduction - Evaluate potential impact on arrangements with respect to foreign offices/affiliates. Portfolio companies - Accelerate deductions and defer income, including through accounting method changes (see next slide) - If applicable, consider potential impact on deferred tax assets and liabilities - Evaluate and address affected bank covenants - Evaluate current leverage levels and take potential reform into account in planning with respect to incurrence of new debt and refinancings - Assess potential impact on existing and planned value chain arrangements - Consider planning to limit earnings and profits of foreign subsidiaries to amounts as of November 2 so as not to have a larger amount on the December 31 testing date - Review required tax distributions from pass-through entities in light of deduction vs. rate reduction. 36

38 Accounting method changes Accounting method changes are a key planning tool in anticipation of rate reductions and the repatriation tax - Lock in benefit of rate reduction - Optimize earnings and profits in anticipation of repatriation tax. Method changes effective for 2017 tax year will be effective as of January 1, 2017 (for calendar year taxpayers), meaning they will adjust E&P and other tax attributes prior to the November 2/9 cut-off date. Time is running out to make non-automatic method changes (must be filed prior to the end of the year of change ) and for transactional planning (such as changing bonus plans, pension contributions, and prepayments). Taxpayers have more time for automatic method changes, allowing more time to assess what actually happens legislatively prior to having to formally change accounting methods. 37

39 Q&A

40 Today s presenters Kevin Valek kvalek@kpmg.com Deanna Flores djflores@kpmg.com Jay Freedman jayfreedman@kpmg.com Carol Kulish ckulish@kpmg.com David Neuenhaus dneuenhaus@kpmg.com Sam Riesenberg sriesenberg@kpmg.com Chris Turner cturner@kpmg.com For more information on the House bill and the Senate Bill, read: KPMG s report [119 pages] providing initial observations and analysis on the House bill KPMG s report [175 pages] providing initial observations and analysis on the Senate Finance Committee bill (based on conceptual documents available as of December 4 th KPMG report [165 pages] Initial analysis, observations of tax reform conference agreement See TNF-Tax Reform for coverage of current developments regarding tax reform. 39

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42 kpmg.com/socialmedia The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS The KPMG name and logo are registered trademarks or trademarks of KPMG International.