TEI How to tackle Tax Reform and its impact on Tax Departments going forward

Transcription

1 TEI How to tackle Tax Reform and its impact on Tax Departments going forward Monday, February 26, 2018

2 Agenda Introduction What Tax Reform questions do shareholders, investors and analysts have? How are you going to tackle Tax Reform? Taking Action 2

3 Today s Presenters Bobby Marandi US Energy Leader Bobby is the PwC US Tax Energy Leader. He works with clients in various sectors of the oil and gas industry including independent producers, integrated oil companies and oilfield services and drilling companies. Bobby has extensive experience in a variety of tax areas and has been a frequent speaker on tax matters related to the oil and gas industry and ASC 740 at numerous conferences. Chris Kontaridis, Principal, Tax Reporting & Strategy John Swilling, Federal Tax Partner Chris leads the US Deals team for PwC s Tax Reporting & Strategy practice. Chris is recognized as an industry leader in operational aspects of mergers, acquisitions, spinoffs, divestitures and legal-entity strategy and simplification. For more than 19 years, Chris has advised multinational businesses and private equity investors on identifying, understanding and managing complex issues related to transactions. John specializes in helping multinational companies in areas such as tax compliance, tax accounting, tax structuring/planning, and IRS examination management. In addition, he has broad experience focusing on enhancing the Income Tax Lifecycle and has worked with numerous companies to improve the end-to-end income tax process. 3

4 What Tax Reform questions do shareholders, investors and analysts have? 4

5 You talked on tax expectation for effective tax rate, but you also touched a little bit on how this will allow you to invest in people, in operations, organic, internal-type growth. Can you provide us with some details? Any specifics on how to think about CapEx? Post-tax reform, how do you look at the M&A market in utilities? Does tax reform make M&A more or less difficult? As you think about financing benefits from 100% expensing as a result of tax reform, what are some of the benefits in terms of equipment costs? How does that change your financing plan on the near side? It's hard for us to kind of parse through the impact of tax reform. Give me your overview of how big of a deal is that for you? And obviously, on the repatriation issue as well, is that relevant, is that meaningful to you? Can you comment on the interest deductibility caps of U.S. tax reform and the exemption for utilities? How does that impact the company? Any mitigating strategies you might have to offset those impacts? 5

6 Can you talk a little bit about how much incremental capital in the U.S. you're going to spend as a result of the tax changes? A question on tax reform, as you go through the process and think about the possibility for reinvestment, can you talk about the process, what you're considering? With the significant cash savings you're laying out from tax reform, are there any areas of the business you're looking to potentially accelerate investment in? 6

7 Do you have a new effective tax rate guidance that you think about following the tax reform? Also, how do you think about cash flow benefits from the tax reform? Does the tax reform in the U.S. impact the way that you think about investment at all over the next five years, either from - in terms of an increase in cash flow or from an improved rate of return from associated or particular projects? Or should we think that you will generally continue to err on the side of capital constraint? How does it figure at all in terms of how you look at allocating capital over the next five years? In terms of third party acquisitions, what is the potential appetite for acquisitions? 7

8 The Takeaway There is external presure on the need to communicate information to shareholders and investors There is also internal pressure for tax leadership in companies to work even more closely to the C-Suite to evaluate both the business and operational impacts of tax reform Overall, there will be more value arising out of the tax function. The tax function has become more relevant after reform, and more interdependent on many business functions. 8

9 How are you going to tackle Tax Reform? 9

10 How are you going to tackle Tax Reform? With the enactment of the Tax Cut & Jobs Act of 2017; How do you determine and communicate the impact of the law change (one-time and recurring)? How do you account for the financial reporting post-reform (interim reporting)? How do you ensure internal controls over the financial reporting are updated, including consideration of new risks How do you develop new ongoing processes and approaches -- including to what extent new or existing technology will be utilized How are you going to assess, plan for, and then implement changes to the existing business structure or value chain in response to the law change (short-term, midterm and long-term strategic planning)

11 Tax Reform approach has to be cross-functional Finance/Treasury e.g., location of 3rd party debt, intercompany debt, cost of capital calculations, material effect to FS, cash projections, decreased US cash tax, toll charge, withholding, etc. Operations e.g., supply chain, location of IP, competitive pricing, etc. HR/Payroll e.g., withholding tables, employee communications, executive compensation, employee mobility, etc. IT e.g., data requirements, systems updates/upgrades, etc. Legal e.g., Tax Receivable Agreements, Tax Sharing Agreements, etc.

12 Successfully managing Tax Reform It all begins with a cross-functional plan You should identify the impacts to your organization and design a detailed action plan, identify key stakeholders within all functions, and develop deadlines as a starting point -- before transitioning into the project management aspects of Tax Reform. The plan should provide actionable steps to drive your end-to-end response to Tax Reform. The illustrative workplan is intended to provide an example of the level of detail and design of an organization s overall project plan.

13 Things to consider in your Tax Reform Plan: Interim reporting prioritizing needs and actions Assess impact related to calendar 2017 financial close SEC SAB 118 provisional estimates (bucket 2) or sufficient information not available (bucket 3) - Accounting should be completed as soon as possible, not to exceed one year - Some elements are likely to be completed before others and should be recorded as completed - Each company s facts & circumstances will impact accounting completion Identify gaps discovered in year-end processes around data gathering Prioritize identified process, technology & data issues to be addressed during 2018 Focus on 2018 interim reporting / year-end Annual ETR needs to incorporate period charges for GILTI, BEAT and all provisions effective in 2018; impacts to ETR and cash forecasts Increased importance of legal entity forecasts Revised forecast/ AETR & 2018 interim 2017 tax returns & true-up 2018 calendar year- end reporting

14 Things to consider in your Tax Reform Plan: Tax Life Cycle Year-end 12/31/ interim & revised forecasts 2017 tax returns & true-up Year-end 12/31/2018 Impact of 21% rate to deferred tax assets/liabilities Transition tax + 8 year spread Impact to FTC + attribute tracking 100% expensing of fixed assets + impact to states Impact of tax law changes flow to operating results Revisions to cash tax forecasting for 2018 law changes Statutory Rate change in Forecast Changes Model to forecast 21% for tax law changes to incorporate Projected 2018 rate changes for Interim at legal entity level: Cash Tax forecast (multi-year Statutory impact) rate change in forecast model to 21% Projected rate Revise for Interim Models for Cash tax forecast Consolidated (multi-year complex impact) Global calculations Calculation Provision Revise global Update modeling provision Forecast & ETR workpapers Workpaper Update forecast analysis updates & ETR analysis Update for items impacting 2017 taxable income: Data sources Workpapers Analytics Alignment to provision Open filing Open information filing & information to be & format to submitted be submitted for for Transition Tax All 2018 legislative impacts incorporated into global tax accounting process & technology Immediate impacts Closely following 2017 year-end 6-9 months 1 year

15 Things to consider in your Tax Reform Plan: New Complex Calculations and Processes Considerations for interim periods beginning after December 31, 2017: AETR for 2018 should consider all provisions of the new legislation effective as of January 1, AETR for US jurisdiction should be based on 21% statutory rate Fiscal year filers face additional complexity with blended tax rate for FY18 Incorporate new complex calculations / processes: Global Intangible Low-tax Income (GILTI) Base Erosion and Anti-abuse Tax (BEAT) Foreign-derived Intangible Income (FDII) Interest deduction disallowance Importance of forecasted book income by legal entity remains a challenge for many companies, and increases in importance under a territorial regime Finalize calculation of tax legislation impacts and true-up of estimates within twelve months of enactment Enhance analytics and reporting to enable decision-making

16 Next step to take after designing your Tax Reform Plan 16

17 Operationalizing your organization s Tax Reform plan Launch Manage Monitor & Report Engage with all functions Design custom Tax Reform work plan Define roles and responsibilities Determine project cadence for execution and reporting Identify tools and accelerators to be utilized Coordinate with project/work stream leaders to ensure work plan execution Collect, review and finalize materials for status updates Collect and drive resolution for action items, open questions and issues Conduct status meetings in accordance with established cadence Escalate project risks and dependencies Executing on change management and communications plan Transition & Close-out Conduct knowledge transfer to project team Ensure all required documentation is finalized Complete transition plan and review with all functions involved

18 Operationalizing financial reporting changes - An approach to incorporating complex calculations Data needs Calculation logic Review process and internal controls Feed to ETR / Tax provision Many new requirements, with new or expanded data sources Critical to begin discussions with Finance & IT stakeholders to set expectations Most organizations focused on interpreting tax reform, running targeted calculations, and planning Forecasting process will increase focus on projecting legal entity income Companies will need to have ongoing focus on internal controls Planning / org changes will increase complexity New calculation requirements fed into overall provision Manual processes will be significantly stressed Individual calculations should be incorporated into E2E process

19 Operationalizing financial reporting changes Annual Effective Tax Rate Data and calculation challenges & opportunities Forecasting pre-tax ordinary book income and local statutory pre-tax profit by legal entity and jurisdiction o Align with Financial Planning & Analysis (FP&A) to understand build-up of regional/global forecasts - how can these be combined differently to approximate legal entity forecasts? o Determine practical approach to apply transfer pricing methodologies & Intercompany allocations o If FP&A is pursuing predictive analytics to better forecast earnings, how can Tax align? Forecasting permanent and temporary differences by jurisdiction o Determine source data for forecasting material elements of the calculations (ie, Capital Spending & Product forecasts) o Update for legislative changes to calculations and models Modeling capabilities for planning opportunities and forecasting rate impact, with flexibility to respond to emerging rules clarification 19

20 Operationalizing financial reporting changes Example of data needs: GILTI calculation Following is an example of specific issues that must be considered: U.S. Shareholder's pro rata share of qualified business assets Quarterly average of tax basis of trade or business tangible assets using ADS U.S. Shareholders ownership percentage which tax year ends on or within U.S. Shareholder s year-end Current year E&P and Subpart F calculations U.S. GAAP Income US Taxable Income/E&P adjustments Detailed Subpart F calculations ECI calculations for each CFC, if any High tax exception calculations Calculation for Subpart F exception for insurance income, if any Foreign oil and gas extraction income, if any Intercompany dividend information De minimis calculation, if applicable Foreign tax credit calculation workpapers to determine GILTI FTC utilization Fixed Assets using ADS method LE tracking database ERP(s) & Subledgers Enabled by: Data Hub Reports to analyze & group data Calculations ETL Tools Tax Provision Software Tax Compliance Software Analytics, Trending, Reporting 20

21 Operationalizing financial reporting changes Example of data needs: BEAT calculation Following is an example of specific issues that must be considered: Identification and quantification of base erosion payments/benefits Quantifying the aggregate amount of allowable deductions (with consideration to exceptions) Identification of service payments for analysis of composition (cost component vs markup) Unbundling of intercompany payments that have been netted down to identify potential base erosion payments ERP(s) & Subledgers Payee Align trading partners Analysis & Classification of Payments & Benefits Payor Calculations Enabled by: Data Hub ETL Tools Analytics, Trending, Reporting 21

22 Operationalizing financial reporting changes Example of data needs: FDII calculation Following is an example of specific issues that must be considered: Deduction Eligible Income Total gross income of the U.S. Consolidated Group Subpart F income GILTI Financial service income Dividends received by CFCs Domestic Oil and Gas income Foreign branch income Expenses properly allocated pursuant to sections 861, 864 and 904(d) Deemed Tangible Income Tax basis of trade or business tangible assets computed pursuant to ADS ERP(s) & Subledgers Foreign Derived Deduction Eligible Income Gross income for property sold, leased, licensed, exchanged or disposed to any person that is not a U.S. person for use, consumption or disposition outside of the U.S. If sold, leased, licensed, exchanged or disposed to related party that isn't a U.S. person, the property must be sold to an unrelated party who isn't a U.S. person and is for foreign use. Property that is sold to an unrelated person does not qualify if such person further manufactures or modifies the property in the U.S., even if ultimately for foreign use. Service income for person from services provided to any person, or with respect to any property, not located in the U.S. Service provided to a related party not in the U.S., does not qualify if the related party provides substantially similar services in the United States. Services provided in the U.S. does not qualify Foreign tax credit workpapers to determine expenses properly allocated pursuant to sections 861, 864 and 904 (d) Payee Enabled by: Data Hub Align trading partners Payor Tangible Assets using ADS method Calculations ETL Tools Tax Provision Software Tax Compliance Software Analytics, Trending, Reporting 22

23 Operationalizing financial reporting changes Example of data needs: Interest deduction limitation Following is an example of specific data elements that must be considered: Determining business interest income properly allocable to trade or business (excluding investment income) Business interest expense (any interest paid or accrued on indebtedness properly allocated to a trade or business) Adjusted taxable income - taxable income computed without regard to: any item of income, gain, deduction, or loss which is not properly allocable to a trade or business any business interest or business interest income, any amount of Section 172 NOL deduction the amount of any deduction allowed under Section 199 or Section 199A ERP(s) & Subledgers Interest Income Interest Expense ETL Tools Iterative process as taxable income changes Calculations Analytics, Trending, Reporting Tax Provision Software Tax Compliance Software 23

24 Taking action Identify the potential impacts to your organization Engage with all functions & identify key stakeholders Design a detailed Tax Reform Plan Launch your Tax Reform Plan Operationalize your Tax Reform Plan Monitor for government guidance, legislative changes and non-us collateral impacts 24

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