TAX EFFICIENT GLOBAL SUPPLY CHAINS IN 2018

Transcription

1 TAX EFFICIENT GLOBAL SUPPLY CHAINS IN 2018 Michael Hardgrove Paul Flignor June 14,

2 1 Global Supply Chain: Transactional Flow and Principal Concepts

3 Global Supply Chain: Operational Perspective 2

4 Global Supply Chain: Transaction Simplification View Typical Intercompany Transaction Flows Streamlined Intercompany Transaction Flows Mfr A UK Mfr A UK Mfr B Denmark Mfr B Denmark Mfr C France Mfr C France Mfr D Germany Mfr D PRINCIPAL COMPANY Germany Mfr E Italy Mfr E Italy Mfr F Spain Mfr F Spain Mfr G Other Other Other Mfr G Other Other Other 3

5 Global Supply Chain: Variable Complexity DRAFT: For Discussion Centralized Services Contract Manufacture Toll Manufacture Support Transactional Model Agreement Simplification Mitigate Transactional model conversion risk Less transactional complexity Mitigate FBC Sales exposure For 3 rd party Limit Fee Deductibility Exposure Limit ERP Systems Changes Limit impact to Vendors Limit impact to Customers Increase centralization of risks and functions in Principal location 4

6 Global Supply Chain: Tax and Legal View International Structure of Holding & Operating Companies Intangible Property Rights developed, protected and exploited globally Revenue Recognition location (S) for invoicing and cash collection Intercompany Transactions with Local Sales and Service operations Parent Company Management Services and Financing Non-US Principal (low-tax rate applicable) Centralize International IP, Risks and Cash-Flows Coordinate/Fund Distribution and Services Residual Profit Limited Risk Distributor ( LRD ) (often high-taxed) Customer Product or Service Activities Limited Profit Revenue Limited Risk Service Provider ( LRS ) (often high-taxed) Development and Support Activities Limited Profit Revenue Global Tax Rate Makers, JP Morgan (May 2012) 5

7 Principal Structure Example: Consumer Products Non-US Supply Chain 3 rd Party Manufacturers Physical Product Mass Merchandisers Hong Kong Supply Chain Company Limited Profit Swiss Principal US Parent Company Residual Profit R&D Marketing Shared Services 3 rd Party Manufacturers Physical Product Affiliate Distributor German Retailer Limited Profit 6

8 Relationships among entities in Principal Structures Software Company - European Principal Structure Function U.S. Swiss UK/Germany Other Economic Principal Italy/Austria Europe Character Sales Routine Cost-Plus Cost-Plus European Leadership Entrepreneurial Marketing/ Planning Ongoing Royalty Preexisting Preexisting Entrepreneurial License Product IP Routine Application Development Cost-Plus Buy-in Cost-Plus Routine Cost-Plus Manufacturing Routine 7 7

9 Principal Structure Necessary Vocabulary Principal: Centralized functions or company that owns or manages the supply chain and has the highest profit potential within the group Routine Companies: Arm s Length Standard: Deferral: Intangible Assets: Substance: Companies that support the Principal through distribution, R&D, management manufacturing services and earn lower, more stable returns Tax principle that transfer of any asset or service between related parties must be priced fairly. Cannot arbitrarily set a lower price to reduce tax liability Principle under old US tax law that income earned overseas would only be taxed when that income was returned to the US. Tax could be deferred as long as the cash remained outside of the US. High profit potential assets that are typically controlled and managed by the Principal and justify its high potential returns. Similar to key success factors. Management personnel and important activities that justify the Principal earning high potential profits. Lack of substance jeopardizes the principal structure 8

10 2 The Changing Tax and Legal Landscape

11 Point 1: Tax Cuts and Jobs Act (TCJA) The Good News for Global Supply Chains 1. Lowered top Federal income tax rate to 21% Thus make it more cost-effective for income from global operations to be resident in the U.S. 2. Eliminated deferral Thus U.S. tax-free repatriation of cash/income to the U.S. 3. Incentivized exports (FDII) Temporarily reduces income tax rate on export income to 13.5% (applies to goods and services) Intended to be game changer for repatriation of IP and manufacturing 10

12 Point 2: Tax Cuts and Jobs Act (TCJA) The Bad News for Global Supply Chains 1. Lower Federal income tax rate, but state taxes of 3-4%, plus Some deductions are now more limited (such as interest), Foreign tax credits severely limited New BEAT tax for companies with large outbound service payments or royalties 2. Eliminated deferral, BUT Kept anti-abuse provisions of Subpart F, Added minimum tax of 10-15% on foreign income (aka GILTI) 3. FDII rate expected to increase in 3-4 years, BUT FDII is under attack as unfair incentive by WTO Does not require U.S. manufacturing (actually disincentive for U.S. business assets (QBAI) 4. Effective tax rate of operating in the U.S. could be 5-10 points HIGHER than Fed rate of 21% 11

13 Point 3: Tax Cuts and Jobs Act (TCJA) Example of ETR Before & After Tax Reform 2017 Actual 2018 Est. Change Comments U.S. tax rate 35.0% 21.0% -14.0% Effective January 1, 2018 State taxes - net State rates unchanged and less federal benefit FDII deduction Temp 13% rate Mfg. deduction Manufacturing deduction repealed Executive comp Benefit of lower foreign tax rates R&D credit Limitation on executive comp expanded Lower U.S. tax rate reduces differences Now measured against higher income (limited after 2019) Interest limitation Interest expense deduction limited Limited FTC Global Rate 28.9% 22.8% -6.1% Loss of foreign tax benefit for high taxed foreign earnings 2018 rate rounded to 22% for guidance purposes 12

14 Point 4: BEPS - Overview Base Erosion & Profit Shifting BEPS Comprehensive, global initiative to curtail perceived corporate tax abuse, with 15 Action Steps, over 6 years Main BEPS initiatives 1. Eliminate stateless income or double non-taxation 2. Give tax authorities greater access to information sharing 3. Consistent application of arm s length standard to avoid unfair transfer of intangible assets 4. Tightening of rules on intercompany loans BEPS is empowering tax authorities to be more aggressive in tax audits 1. UK -- Diverted Profits Tax 2. Australia Multinational Anti-Avoidance Law 3. US - TCJA broadens definition of intangibles, creates minimum tax standards 13

15 Point 4: BEPS - Implications Company Actions Moving Principals from islands without substance (Bermuda, Cayman, Dutch Antilles) to locales where substance can be developed Migrating intangible assets from vulnerable structures (Dutch CV-BV, Irish non-resident, etc.) Adding substance in principals (management activities, people, etc.) Moving more supply chain activities into Asia Country Actions General compliance among 100+ member countries with BEPS initiatives, legislative action and responding to public outcry But many countries are trying to maintain favorable status as a country that is business friendly or have a general view that corporate tax fairness is secondary to increasing foreign investment 14

16 Point 5: EU State Aid Apple Example European Court of Justice has levied injunctions against offending countries to force imposing taxes on companies, such as: Luxembourg: Fiat-Chrysler, Amazon Netherlands: Starbucks, IKEA 15

17 Point 6: EU Proposed Digital Tax On March 28, 2018 the EU Commission proposed two broad new internet tax policies Proposal 1: Long-term digital profit tax Tax where end-users reside, not where a company records sales. Do not need a physical presence What will be taxed: Profits from user data (e.g., advertising) Online market place transactions Digital services Proposal 2: Interim digital sales tax 3% sales tax on above three items Applies if global revenue > 750 M, EU revenue > 50 M Applies to activities that are not currently effectively taxed 16

18 Point 7: EU General Data Protection Regulation Scope of GDPR The GDPR is effective from 25 May 2018 when it replaced the existing EC Data Protection Directive, bringing new legal rights for individuals, extending the scope of responsibilities for data controllers and processors and enhancing the regime for enforcement. Includes fines at up to 4% of worldwide annual turnover. The territorial application of the GDPR covers wide scope as applies to: EU-based entities, in relation to their activities, irrespective of whether data is processed within the EU or outside the EU; and Organizations from outside the EU, in relation to the offering of goods and services to data subjects in the EU or the monitoring of their behaviour as far as their behaviour takes place within the EU. Thus, if a company provides services to EU individuals or businesses, it is likely that the GDPR applies. 17

19 3 Conclusion

20 Not the Same Tax Efficient Global Supply Chains But. 1. Many countries now have higher income tax rates than the U.S. Many in excess of 21% (state tax may be applicable) 2. Some countries have income tax rates below U.S. Ireland 12.5% for trading activity Switzerland 12% to 16% depending on the Canton Hong Kong 8-10% for offshore claim income Singapore 10% to 17% depending if qualified U.K. 19%, dropping rate to 17% by WSJ article Monday quoted CBO as estimating the new U.S. tax reform law will only reduce the benefits of tax planning by U.S. multinationals by about 20% (the federal rate was lowered by 40%). 4. So, its still a competitive world, and countries will (just like the U.S.) continue to incentivize foreign investment 19

21 Principal Structure: Still Delivering Benefits Business Ops Savings Combined Benefits Delivering global strategy to regions and markets, by driving consistency in business performance Lower Tax Costs Increases global earnings, cash flow and company valuation Tax Efficiency 20

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