Directors Club. March 13, 2018

Transcription

1 Directors Club March 13,

2 The Tax Wars 2

3 Business tax highlights of tax reform bills Reduction of corporate tax rate: Permanently reduces the 35% corporate income tax rate to a flat 21%, beginning in Repeal of AMT: Repeals the corporate alternative minimum tax (AMT), beginning in (Refunds are available for AMT credits). Limitation of NOL deduction to 80% of taxable income for losses arising after Increased bonus depreciation: 100% bonus depreciation; Effective for property placed in service after September 27, 2017, and before January 1, Gradual phase out the amount expensed from 100% in 2022 to 0% in Participation exemption : Domestic corporations allowed a 100% deduction for the foreign-source portion of dividends received from 10% owned foreign subsidiaries. (Deduction not available for capital gains or directly-earned foreign income). One time transition tax: Transition tax on deferred foreign earnings: 15.5% / 8%. 3

4 Business tax highlights of tax reform bills Change of related definitions and new anti-deferral provision (GILTI): New broad-based anti-deferral provision taxes global intangible low-taxed income (GILTI) on a current basis at 10.5% effective tax rate (some FTCs are available). Foreign-derived intangible income deduction (FDII): New deduction for foreign-derived intangible income (effective tax rate % increased to 16.4% in 2026) Limit on interest deduction: Limits interest deduction to 30% of Adjusted Taxable Income (EBIDTA), and starting % of EBIT. Base erosion anti-abuse tax (BEAT): Anti-base erosion measures include minimum tax of 10% (5% in 2018, and 12.5% starting 2025), applied on income determined after adding back certain deductible payments made to related foreign persons. Executive compensation: Expands definition of covered employee ( 162m) 4

5 Participation Exemption Participation Exemption 100% deduction for the foreign-source portion of qualified dividends received by domestic corporations from 10% owned foreign corporations (the Dividend Received Deduction or DRD ). No credit or deduction for any foreign taxes. Holding period - 1 year. Section 1248 deemed dividends arising from a domestic corporation s sale or exchange of stock in a foreign corporation held for one year or more qualify for the DRD. DRD does not apply to the extent of subpart F income and GILTI. Note that Section 956 was not repealed. Solely for the purpose of determining a loss, a domestic corporate shareholder's adjusted basis in the stock of a specified 10-percent owned foreign corporation is reduced by an amount equal to the portion of any dividend received with respect to such stock from such foreign corporation that was not taxed by reason of a dividends received deduction allowable under section 245A in any taxable year of such domestic corporation. Effective for tax years of foreign corporations that begin after December 31, 2017, and for tax years of U.S. shareholders in which such tax years of foreign corporations end.

6 One Time Transition Tax (Sec 965) New 965 imposes a one-time transition tax on a shareholder s pro rata share of a specified foreign corporation s ( SFC ) post-1986 tax-deferred earnings accumulated as of 2/11/2017 or 31/12/2017 (based on the highest). All E&P (positive + negative) are aggregated. Foreign tax credit is partially taken into account. Shareholder 10% SFC SFC Tax liability arise in Can be paid in 8 installments (8% first 5 years, 15%, 20% and 25% in years 6-8 respectively). Effective Tax Rate: Corporate taxpayers: 15.5% of E&P held in cash or liquid assets; 8% of non-liquid E&P. Individuals and trusts: 17.54% of E&P held in cash or liquid assets; 9.05% of non-liquid E&P (assuming TY 2017 as the transition year). SFC 6

7 One Time Transition Tax (Sec 965) Who is subject to the Tax 10% Shareholder = Any person (e.g., citizen or resident individual, corporation, fund) That holds 10% by vote or value in a Specified Foreign Corporation ( SFC ). Which foreign corporation is relevant = SFC = (foreign corporation held in more than 50% (vote or value) by 10% Shareholder ; or Any foreign corporation with at least one 10% corporate shareholder Example 1 Example 2 Example 3 Example 4 F shareholders and Non- Investors partnership 10% 45% Shareholders 45% F Shareholders U.S. Corporation corporation 10% F Funds / Not 80% partnership 10% partnership 10% corporation Not Individual 80% 10% Foreign Corporation 7

8 Change of related definitions and new anti-deferral provision (GILTI) = a foreign corporation that is more than 50% owned (by vote or value) by U.S. Shareholders. Old Shareholder definition = a person holding at least 10% by vote. New Shareholder definition = a person holding at least 10% by vote or value. As a result More foreign corporation will become s. Why does it matter? A foreign corporation that is a can easily become a PFIC under the PFIC assets test that will be applied on adjusted basis in the assets (vs. FMV) affecting all small shareholders of the foreign corporation. 10% Shareholders will be subject to Subpart F, 956 and new GILTI inclusions. 8

9 Global Intangible Low-Taxed Income A 10% U.S. shareholder of any is required to include in gross income for the current tax year profits of the referred to as "GILTI", regardless of whether such profits were actually distributed. In general, GILTI is computed as the income of the (aggregated for all the s of that Shareholder) that is in excess of 10% return on certain tangible property of the. A Corporate Shareholder is entitled to: 50% deduction + 80% of FTC for foreign tax paid at the level as a result it will be taxed at maximum 10.5% and there will be no additional tax if the GILTI was subject to foreign tax of at least %. A individual is taxed at the ordinary tax rate on such GILTI income (37%) with no 50% deduction and no indirect FTC. If it holds at least 10% it can make an election to be taxed at 21% corporate rate with indirect FTC, but still with no 50% deduction. Example 1: Example 2: F Shareholders individuals 45% U.S. Corporation Foreign individuals partnership 45% LTD () 10% individual Shareholder 9

10 FDII Foreign-Derived Intangible Income (FDII) Domestic corporations are provided with reduced rates of U.S. tax on their foreign-derived intangible income ( FDII ). Deduction allowable Foreign- Derived Intangible Income Deduction Eligible Income 37.5% of FDII (ETR of %) Taxable years of domestic corporations beginning after December 31, 2017, but on or before December 31, % (ETR of 16.4%) Taxable years of domestic corporations beginning after December 31, 2025 The excess (if any) of: (i) gross income of the corporation determined without regard to: the Subpart F income inclusion, the GILTI inclusion, any financial services income, any dividend received from a corporation which is a of the domestic corporation, any domestic oil and gas extraction income of the corporation, and any foreign branch income, over (ii) the deductions (including taxes) properly allocable to that gross income.

11 FDII Foreign-Derived Intangible Income (FDII) (cont d) Foreign- Derived Deduction Eligible Income Special Rules for Related Party Transactions Deemed Intangible Income QBAI Any deduction eligible income derived in connection with (generally): Property sold/leased/disposed of to any non- person that is for a foreign use (i.e., use/consumption/disposition outside of the United States), or Services provided to a person or with respect to property located outside of the United States Sold, sells, and sale includes any lease, license, exchange or other disposition. If property is sold to a foreign related party, It is not treated as for a foreign use unless such property is ultimately sold by a related party, or used by a related party in connection with property which is sold or the provision of services, to another foreign unrelated party and taxpayer establishes that it is for a foreign use. Sale of property treated as a sale of components thereof If a service is provided to a related party not located in, service is not treated as for a foreign use unless the taxpayer establishes that such service is not substantially similar to services provided by the related party to persons located within. The excess, if any, of: The corporation s deduction eligible income, over Its deemed tangible income return (i.e., 10% of the corporation s qualified business asset investment, QBAI ). The average of the corporation's aggregated adjusted bases as of the close of each quarter of that tax year in specified tangible property: (A) used in a trade or business of the corporation, and (B) of a type with respect to which a deduction is allowable under Code Sec. 167 (depreciation).

12 Section 163(j) interest deduction limitation Prior to the tax reform, the "old" Section 163(j) generally limited the deductibility of interest expenses paid to related non- persons if (1) the payor's debt-to-equity ratio exceeded 1.5 to 1 (the safe harbor ratio); and (2) the payor's net interest expense exceeded 50% of its EBITDA. The new Section 163(j): Applies to interest payments to related as well as to third parties, foreign and. Does not contain a safe harbor; and Limits the deductibility of interest to 30% of the EBITDA until December 2021 and 30% of the EBIT from January 2022 onward. For partnerships, the interest expense disallowance is determined at the partnership's level and any deduction for interest is taken into account in the non-separately stated taxable income of the partnership. i.e., the partnership is treated as an entity. ATI of each partner is determined without regard to partner s distributive share of any items of income, gain, deduction or loss of the partnership. Example: Prior to the tax reform $ for acquisition After the tax reform Check 30% limit LTD SPV Target Tax rate: 23% Interest payments Tax rate: 40% Consider moving excess debt to other jurisdictions where the deduction is valuable/contribution to capital Consider other financing methods (factoring) For parent companies consider checking the box on high taxed foreign subsidiaries. 12

13 Base Erosion and Anti Abuse Tax (BEAT) Applies to all corporations with average annual domestic gross receipts of $500M over the preceding three tax years, That pay base erosion payments, and The base erosion payment exceeds 3% of their total expenses. In general, Section 59A imposes an additional tax in an amount equal to the excess of: 10% (5% for taxable years beginning in 2018; 12.5% for taxable years beginning after 2025) of the modified taxable income (generally taxable income computed after disallowing deductions for base erosion payments); OVER The corporation s regular tax liability for the year generally reduced by allowable credits. Base Erosion Payments : Deductible amounts paid or accrued by the corporation to a related foreign party (including amount paid to buy depreciable property from a related foreign party). Exclusions: Payment subject to full WHT; Reductions of income incl. COGs, unless paid to inverted foreign related party.; Certain derivative payments; Payments for services eligible to be charged at cost described at (e.g., certain back office services, accounting, auditing, payroll, budgeting, not R&D services or reselling). Example 1: Payments that do not qualify as COGS Example 2: Cost plus for R&D LTD INC INC Cost plus for pre sale IP Limited risk distributor LTD F F Cost plus for R&D 13

14 Action Items Consider new rules under the tax reform when putting in place a new corporate structure, structuring a supply chain, and positioning new IP: tax rates (including FDII) vs. Israeli tax rates. New rules regarding use of NOLs. /PFIC/GILTI issues to investors Other considerations (e.g., WHT issues) Consider implications of the new rules on existing structures: Section 163(j) limitation Consider GILTI potential implications and changes in legal structure to mitigate effect. Consider change of supply chain to overcome BEAT issues (e.g., sales through a branch) 14

15 Action Items One time transition tax any corporate or individual shareholder or fund that owns 10% interest in a foreign corporation must: Map whether the foreign corporations are SFCs. Check whether the foreign corporations have positive E&P. If so, compute transition tax and available foreign tax credit. Change of related definitions and new anti-deferral provision (GILTI) funds as well as foreign funds must: Confirm /PFIC status of their foreign corporations. Consider change of holding structure if inefficient. Section 163(j) interest deduction limitation Check limitation on interest expense on debt of corporations/partnerships. Measures should be taken to handle excess interest situations. 15