U.S. Business Tax Reform: What Happens Next? May 8, 2014

Transcription

1 U.S. Business Tax Reform: What Happens Next? May 8, 2014

2 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. 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. 1

3 Agenda The Drivers of Business Tax Reform The Status of Tax Reform The Elements of the BEPS Initiative 2

4 The Drivers of Business Tax Reform Highest nominal corporate tax rate Discourages direct foreign investment and encourages off-shoring But average effective rate is 27%--roughly the same as the OECD Many multinationals have effective tax rates below 25%, many domestics are at the nominal rate Efficiency goal should be to have income taxed at same effective rate no matter the industry or the source Competitiveness No question that U.S. companies may be at a competitive disadvantage in countries with tax rates lower than the U.S. Trade competitors have moved to territorial systems No question that current system provides an incentive to keep money offshore Lock-out effect can be cured by taxing off-shore income at U.S. rate currently Administration believes territoriality leads to domestic job loss and base erosion Administration concludes that domestic detriment offsets whatever benefit U.S. multinationals could get from territoriality 3

5 The Status of Tax Reform Budget Agreement/Debt Ceiling No new revenues Extenders Wyden v. Camp The Administration FY15 Budget Framework for Business Tax Reform The House of Representatives Camp Discussion Draft The Senate Baucus Discussion Drafts The Ryan Budget Organisation for Economic Co-operation and Development s (OECD) Base Erosion and Profit Shifting Initiative (BEPS) 4

6 Estimated Revenue Effects of Administration s FY15 Budget (in billions) Reserve for Long-Run Revenue Neutral Business Tax Reform Incentives for manufacturing, research, clean energy, insourcing and creating jobs Tax relief for small business Incentives to promote regional growth Reform international tax system Reform treatment of financial and insurance industry institutions and products 31.1 Eliminate fossil fuel preferences 48.8 Other revenue changes and loophole closers Total General Tax Proposals Incentives for job creation, clean energy and manufacturing Incentives for investment in infrastructure -6.9 Tax cuts for families and individuals Upper-income tax provisions Modify estate and gift tax provisions Reform treatment of financial industry institutions and products 59.9 Loophole closers 85.0 Other revenue raisers Reduce the tax gap 75 Simplification 11 User fee 1.1 Total Source: U.S. Treasury, General Explanations of the Administration s Fiscal Year 2015 Revenue Proposals (2014) 5

7 The Administration s FY15 Budget Non-International Tax Proposals included in the Reserve for Long-Run Revenue-Neutral Business Tax Reform Enhance and make permanent the Research and Experimentation Tax Credit Modify and permanently extend the Renewable Electricity Production Credit Extend increased expensing for small business Require that derivatives contracts be marked to market at ordinary income rates Expand pro rata interest expense disallowance for COLI Eliminate fossil fuel preferences Repeal LIFO and LCOM Modify depreciation for general aviation passenger aircraft Modify like-kind exchange rules for real estate 6

8 The Administration s FY2015 Budget International tax proposals Proposals from FY2014 budget Defer deduction for interest related to deferred income of foreign subsidiaries Determine foreign tax credit on a pooling basis Tax currently excess returns on intangible property transferred offshore Limit shifting of income through intangible property transfers Disallow deduction for untaxed reinsurance premiums paid to affiliates Modify tax rules for dual capacity taxpayers Tax gain from sale of partnership interests on look-through basis Prevent use of leveraged distributions from related foreign corporations to avoid dividend treatment Extend section 338(h)(16) to asset acquisitions Remove foreign taxes from section 902 corporation s foreign tax pool when earnings are eliminated 7

9 The Administration s FY Budget International tax proposals (cont d) New proposals in FY2015 budget Restrict deductions for excessive interest of members of financial reporting groups New Subpart F category for transactions involving digital goods and services Prevent avoidance of foreign base company sales income through manufacturing service arrangements Restrict use of hybrid arrangements that create stateless income Limit application of Subpart F exceptions to reverse hybrid transactions that create stateless income Limit the ability of domestic entities to expatriate 8

10 Administration FY15 Budget Revenue Estimates for International Provisions (in billions) Defer deduction of interest expense related to deferred income of foreign subsidiaries Determine the Foreign Tax Credit on a pooling basis Tax currently excess returns associated with transfers of intangibles offshore Limit shifting of income through intangible property transfers Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates 43,138 74,672 25,965 2,728 7,568 Restrict deductions for excessive interest of members of financial reporting groups 17,883 Modify tax rules for dual capacity taxpayers Tax gain from the sale of a partnership interest on look-through basis Prevent use of leveraged distributions from related corporations to avoid dividend treatment Extend section 338(h)(16) to certain asset acquisitions Remove foreign taxes from a section 902 corporation's foreign tax pool when earnings are eliminated Create a new category of Subpart F income for transactions involving digital goods or services Prevent avoidance of foreign base company sales income through manufacturing service arrangements Restrict the use of hybrid arrangements that create stateless income Limit the application of exceptions under Subpart F for certain transactions that use reverse hybrids to create stateless income Limit the ability of domestic entities to expatriate Total Source: Department of the Treasury, General Explanations of the Administration s Fiscal Year 2015 Revenue Proposals (2014) 10,382 2,795 3, ,660 24, ,336 17, ,305 9

11 Camp Discussion Draft Individual Rates Two brackets: 10%, 25% and 35% (income in excess of $400,000 single/$450,000 married filing jointly) Rate capped at 25% for qualified domestic manufacturing income Excludes 40% of capital gains and dividends, taxes remainder at ordinary rates Value of certain preferences limited to 25% rate ( Buffett Rule ) Excluded health, accident and defined contribution retirement benefits Deduction for self-employed health premiums Deduction for HSA contributions Standard deduction and all itemized deductions except charitable contributions Excluded foreign earned section 911 income Tax-exempt interest Untaxed Social Security benefits Repeals individual AMT 11

12 Camp Discussion Draft - Individual Other changes Increases standard deduction Repeals personal exemptions Phases out 10% bracket, standard or itemized deductions, child credit starting at $200,000 single/$250,000 married filing jointly Repeals deduction for state and local taxes Reduces principal cap for home mortgage interest from $1 million to $500,000 Limits charitable contribution deduction Converts excludable 401(k) contributions to Roth 401(k) Modifies and consolidates credits for educational expenses Modifies allowable contributions to Roth IRAs 12

13 Estimated Revenue Effects of Tax Reform Act of 2014 (Individual) Provision Billions _ Lower Individual Rates -$ Dividends and Capital Gains $ 44.7 Increase Standard Deduction -$ Increase Child Credit -$ Modify Earned Income Tax Credit $ Repeal Personal Exemptions $ Education Provisions (10 items) $ 27.4 Repeal Dependent Care Credit $ 26.0 Cut Itemized Deductions $ Roth IRAs $ Eliminate IRA Limits $ 16.7 Fringe Benefits $ 39.0 Pension Limit Adjustments $ 64.0 Other Individual (44 items) $ 83.1 Total Individual Reform $ Repeal Individual Alternative Minimum Tax -$ 1,331.8 Repeal Corporate Alternative Minimum Tax -$ Source: Joint Committee on Taxation, Estimated Revenue Effects of The Tax Reform Act of 2014, JCX-20-14, Feb. 26,

14 Camp Discussion Draft - Business General Corporate rate 25% Phased in over 5 years, beginning in 2015 (reduced revenue cost) Repeals corporate AMT Territorial taxation of foreign earnings, with 95% DRD Revenue offsets (highlights) Accelerated cost recovery repealed; lengthened recovery lives for property placed in service after 2015 (basis indexed to chained CPI) Amortization of research expenses Amortization of advertising expense Phase-out of manufacturing deduction Limit use of NOLs Treat partnership carried interest income as ordinary Repeal like-kind exchanges Repeal LIFO, LCOM Bank tax: 0.14% of total assets in excess of $500 billion 15

15 Camp Discussion Draft - Business International 95% DRD for 10% shareholders of CFCs (1.25% rate) No foreign tax credit; no expense allocation Retain Subpart F for passive and highly mobile income Thin capitalization rule for excess US debt Base erosion rule (Option C): Worldwide CFC intangibles income treated as subpart F income, with 40% deduction Intangible income defined as income in excess of 10% of depreciable basis Transition: Deemed repatriation of foreign earnings by 10% shareholders Two rates: 8.75% for cash and cash equivalents; 3.5% for the remainder Miscellaneous CFC look through rule made permanent Active financing exception extended for 5 years for income subject to a foreign rate of at least 12.5% 16

16 Estimated Revenue Effects of Tax Reform Act of 2014 (Business) Provision Billions 25 Percent Corporate Rate (phased in) -$ Reform Depreciation $ Limit Net Operating Losses $ 70.5 Amortize Research $ Amortize Advertising $ Small Business Expensing -$ 54.9 Section 199 (phased out) $ Repeal Like-Kind Exchanges $ 40.9 Limit Cash Method $ 23.6 Terminate Private Activity Bonds $ 23.9 Insurance Company Reforms (15 items) $ 75.6 Extend and Modify Research Credit -$ 34.1 Repeal Last-In, First-Out $ 79.1 Other Business (145 items) $ Total Business Reform $ Deduction for Foreign Dividends -$ Tax on Unrepatriated Earnings* $ Subpart F Reform $ Other Foreign Business -$ 5.7 Total Foreign Business Reform $ 68.3 Total Tax-Exempt Entities Reform $ 8.0 Total Administration and Compliance Reform $ 4.6 Repeal Medical Device Tax -$ 29.5 Excise Tax on Financial Institutions $ 86.4 Other Excise $ 1.4 Total Excise Reform $ 58.3 Grand Total $ 3.0 *This estimate would be $ billion except that that amount is designated for deposit in the Highway Trust Fund. Source: Joint Committee on Taxation, "Estimated Revenue Effects of 'The Tax Reform Act of 2014,'" JCX-20-14, Feb. 26,

17 Baucus/Camp International Tax Proposal Comparison Baucus Proposal Option Y Option Z Camp Foreign Active Income 100% DRD for 10% corporate shareholders of CFCs Current taxation but 40% exempt 95% DRD for 10% shareholders Exceptions: Sub F Income Passive Income U.S. Related Income Low-Taxed Income (less than 80% of US rate) Repeal base company rules Non Active Foreign Market Income (including passive income) Non-exempt portion of active foreign market income Retains current subpart F rules Certain low-tax and/or intangibles income taxed at U.S. rate with 40% deduction Interest Expense Allocation Permanent disallowance for interest expense allocated to exempt foreign active income Worldwide apportionment Permanent disallowance for excess domestic indebtedness Worldwide apportionment Foreign Tax Credits Six 904 limitation categories No FTC for fully exempt income Repeal 902 Three 904 limitation categories 60% FTC for foreign active income One 904 limitation category Repeal 902 Repeal 902 Branch Activities Subject to current taxation Subject to current taxation Subject to current taxation 18

18 Baucus International Tax Proposals-Other major common elements Base erosion Check-the box electivity is partially repealed Definition of intangibles is expanded Addresses hybrid instruments, transactions and entities Partially repeals the portfolio interest exemption Replaces the title-passage rule for sourcing sales Permanently adopts an amended active financing exception Repeals DISC and dual consolidated loss provisions Reforms the PFIC rules 19

19 Baucus Cost Recovery Proposals Replaces current cost recovery system for tangible personal property with 4 recovery pools End of year pool adjusted basis is multiplied by an assigned percentage to determine cost recovery deduction for the year Cost recovery percentages are designed to replicate economic depreciation adjusted for inflation Assets are assigned to pools based on specific asset classes 20

20 Baucus Cost Recovery Proposals continued Real property cost recovered over 43 years Like kind exchange provision (IRC section 1031) repealed Major capitalization requirements Research and experimentation expenses are capitalized and amortized over 5 years Half of advertising expenses are capitalized and amortized over 5 years Section 179 expensing is increased to $1 million and definition of qualified property is expanded Five year recovery for qualified extraction expenditures Repeal of percentage depletion Amortization period for acquired intangibles is increased to 20 years 21

21 Baucus Tax Accounting Proposals Cash method expanded to entities with less than $10 million in average annual gross receipts (approximately 97% of businesses) and restricted for those above that amount LIFO and LCM repealed Eight year income inclusion period 22

22 Common Themes All the business tax proposals anticipate a reduction in the corporate rate (Camp 25, Administration for manufacturing, Baucus unspecified) All contemplate a mandatory tax on unrepatriated foreign earnings (Administration has not specifically stated that but has said it would be on the table in the context of overall reform). All contemplate some form of limitation of interest deductions at the corporate level All include significant base erosion provisions. This should put the US based multinationals on notice. All include changing cost recovery to economic depreciation All repeal LIFO and LCM Baucus and Camp require capitalization of R&E expenses and part of advertising expense Camp and Administration would deal with carried interests although the Camp proposal is different The Camp individual surtax coupled with the repeal of many itemized deductions and limitation of home mortgage interest and charitable contribution deductions is not conceptually dissimilar from the Administration s limit oo the value of itemized deductions and minimum tax. 21

23 BEPS/Tax Morality/ Tax Transparency I. Base Erosion & Profit Shifting (BEPS) OECD-coordinated initiative motivated by high level political interest of key jurisdictions to collaborate to address aspects of the international rules that are perceived to facilitate profit shifting, allow double non-taxation and contribute to the erosion of domestic tax bases Focus is on reform, not enforcement II. Tax Morality Public naming and shaming Politically charged (public hearings in the UK and the US) Public conversation has converted into a tax morality debate III. Tax Transparency Demanded as part of public debate Being evaluated as a potential solution for addressing technical BEPS concerns in the OECD process 23