U.S. Tax Reform. Webinar for Australian MNC & Institutional Investors. Carol Kulish, Justin Davis, Patrick Jackman and Peter Madden.

Transcription

1 U.S. Tax Reform Webinar for Australian MNC & Institutional Investors Carol Kulish, Justin Davis, Patrick Jackman and Peter Madden December 2017

2 With us today Patrick Jackman US - Washington National Tax Tel: pjackman@kpmg.com Peter Madden Australian Tax Practice Tel: petermadden@kpmg.com.au Carol Kulish US - Washington National Tax Tel: ckulish@kpmg.com Justin Davis US - Seconded Australian Partner Tel: justindavis@kpmg.com 2

3 Program Agenda U.S. Tax Reform Current state of play Journey to date, where are we now, next steps Key tax reform measures for Australian MNCs and institutional investors Introduction cornerstone provisions Corporate tax rate Interest expense limitations Example of 163(j) earnings stripping and worldwide debt cap limitations Base erosion measures Example of House Excise and Senate BEAT measures Full expensing Corporate AMT and modifications to NOL usage Participation exemption for foreign dividends Global Intangible Low Tax Income (GILTI) Example of US as a RHQ jurisdiction Anti-hybrid rules Example Q&A and closing remarks 3

4 U.S. Tax Reform Current State of Play

5 A possible path to tax reform House Bill introduced 11/02/17 Ways and Means Chairman releases mark 11/03/17 Markup by Ways and Means Committee 11/06/17 Markup 11/09/17 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 11/09/17 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 Budget Committee votes to send bill to Senate floor 11/28/17 Senate votes and passes by simple majority through budget reconciliation 12/02/17 Joint Conference KPMG LLP, a Delaware limited ( KPMG liability International ), partnership and a Swiss the U.S. entity. member All rights firm of reserved. the KPMG network of independent member firms affiliated with KPMG International Cooperative NDPPS

6 The Tax Cuts and Jobs Act: The numbers tell the story House 1 Provisions Senate 1 $1,456 Reduce corporate rate to 20% $1,329 $597 Pass-throughs $339 $25 Temporary, limited expensing $27 $205 Territoriality $ Onshore IP incentives $99 $293 Repatriation $298 $95 Base eroding payments/transfers $141 $68 Super Subpart F $135 $206 Interest expense reforms $317 $156 NOL reform $158 $95 Repeal section 199 $85 $1,073 Business and int l tax reform deficit (including pass-through) 2 $ Based on scores provided by the Joint Committee on Taxation. U.S. Dollar amounts are in billions. 2. Approximate. 6

7 Key Measures for Australian MNCs and Institutional Investors

8 Cornerstone provisions for U.S. inbounds Lower Corporate Rate 20% Participation Exemption & Mandatory Repatriation Tax Immediate Expensing But Strengthened Interest Expense Limitation Rules Global game-changing tax reforms Net operating loss limitations and enhancements Imports Excise Tax/Base Erosion Payment Tax Tax on overseas excess returns/low taxed IP income 8

9 Key tax reform measures Corporate tax rate reduction with no phase-in period Corporate tax rate lowered to 20% beginning in 2018 (deferred to 2019 in Senate version) Approx. $100B revenue loss per point Potential impact for State and Local taxes? 9

10 Key tax reform measures Net interest expense limitation 163(j) earnings stripping House Net U.S. business interest expense limited to 30% of Adjusted Taxable Income ( ATI ) - ATI is generally taxable income without regard to NOLs, interest income, amortization/depreciation, and nonbusiness gains or losses (similar to EBITDA) - Applies to ALL debt (related and thirdparty obligations) - No grandfathering Applies to corporate and non-corporate entities (e.g., partnerships); real estate industry largely exempt Senate Generally the same as the House version net U.S. business interest expense limited to 30% of ATI - Unlike House version, ATI is determined without adding back amortization / depreciation (i.e., EBIT) Amount disallowed may be carried forward indefinitely U.S. consolidated group treated as single entity for computations 5 year carryforward of disallowed interest (carryforwards are 381/382 limitation item) Effective taxable years beginning after 31/12/17 10

11 Example 30% interest expense limitation Facts and assumptions Overview US domestic corporation (US Co) has EBITDA of $50 and EBIT of $35. US Co has unsecured foreign related party borrowings $200 at 6%, giving rise to $12 related party net interest expense. US Co has secured third party borrowings of $400 at 4%, giving rise to $16 of third party net interest expense. Current rules US tax reform impact S.163(j) currently applies to limit foreign related party borrowings and/or borrowings guaranteed by a related party to 50% of EBITDA This would give rise to a limitation of 50% x EBITDA of $50 = $25 Related party interest expense is only $12 The full $28 interest expense would be deductible No net interest limitation Senate Bill: 163(j) amended to limit all business net interest expense to 30% of EBIT This would limit net interest expense deductions to 30% x EBIT of $35 = $10.5 Earnings impact? Interest deductions allowed = $10.5 Interest deductions denied = $17.5 House Bill: 163(j) amended to limit all business net interest expense to 30% of EBITDA This would limit net interest expense deductions to 30% x EBITDA of $50 = $15 Interest deductions allowed = $15 Interest deductions denied = $13 11

12 Key tax reform measures Net interest expense limitation Worldwide debt cap (WWDC) House Additional limitation where U.S. interest expense is disproportionate relative to the multinational financial reporting group s total financial statement reported interest expense (i.e., based on GAAP interest allocation) Limitation computations, in general, based on 110% of U.S. corporation s share of global group s financial statement EBITDA Applies to large global groups gross receipts > $100M annually Apply both 30% and 110% limitation; allow only lower amount Disallowed expense carried forward 5 years; no excess limitation carryforwards Effective tax years beginning after 31/12/17 Senate Generally similar to the House provision, but is determined by reference to U.S. versus global group debt/equity ratios (rather than EBITDA ratio) by reference to tax values (rather than book) - Phase-in of 110% limitation over 4 years, starting with 130% limitation effective for tax years beginning after 31/12/17 and before 01/01/19 Amount disallowed may be carried forward indefinitely U.S. consolidated group treated as single entity Applies to all global groups regardless of size Global group determined using modified U.S. tax affiliated group definition rather than Housebased financial reporting consolidation 12

13 Example WWDC interest expense limitation Facts and assumptions Overview Australian MNC holds a 50% investment in US corporate and consolidates for accounting purposes. Australian Investor holds a 50% investment in a US corporate or REIT and accounts for the investment at FMV (no consolidation). US tax reform impact Senate Bill: House Bill: Applies to members of a worldwide affiliate group (WWAG) with a 50% ownership threshold Members of an International Financial Reporting Group (IFRG)? - Australian MNC and Australian Investor should both be treated as a member of the WWAG. - - Australian MNC Yes Australian investors No - Based on current drafting an interposed partnership Impact on 110% proportionate EBITDA ratio between the US corporate and other entities would break - Australian MNC The positive/negative impact from the WAG, however this position is open to be regulated including the Australian MNC will simply be driven by the by the IRS. strength of the financials. Impact on 110% proportionate global debt-equity ratio - Australian MNC US corporate debt limitation driven by the Australian MNC global leverage ratio. - Australian Investor As above, depending on investor profile (e.g. institutional investors with lower global debt/equity ratio) certain investor types will be impacted to a greater extent. - Note that in the debt/equity ratio needs to be calculated based on US tax rules. - Australian Investor Not included as part of the IFRG. US corporate interest deductions not impacted by Australian Investor financials. 13

14 Key tax reform measures House Excise vs. Senate BEAT (1/2) House New 20% excise tax on certain deductible payments ( specified payments ) made to related foreign corporations and controlled partnerships Specified payments - Generally, payments that are (i) deductible, (ii) includible in COGS, or (iii) depreciable or amortizable - But excludes (i) interest, (ii) U.S. ECI, and (iii) non treaty-rate reduced portion subject to U.S. gross-basis WHT Excise tax not applicable if recipient makes ECI election to subject net income to tax at 20% corporate tax rates - Complex deemed expense deductions based on product lines Senate Broadly, a minimum 10% tax (17.5% tax in 2018 based on corporate rate remaining at 35% for one year) tax imposed on U.S. companies having certain deductible base erosion payments made to related foreign companies - For tax years beginning after 31/12/2025, 12.5% rate of tax Minimum tax liability equals excess of 10% of the U.S. company s modified taxable income ( MTI ) over its regular U.S. tax liability reduced by certain allowable credits (but not R&D credit) - Slightly harsher minimum tax liability formula to apply after 2025 Broadly, MTI is taxable income plus certain base erosion payments and NOLs allocable to such payments 14

15 Key tax reform measures House Excise vs. Senate BEAT (2/2) House Certain FTCs available against ECI tax liability (in general, 80% of foreign taxes paid on the income) Only applies to large multinational groups with significant U.S. intragroup payments - in aggregate, U.S. companies (and U.S. branches) must make annual average $100M+ specified payments to certain foreign affiliates over 3-year period - relatedness based on 50% common ownership Delayed effective date -- tax years beginning after 31/12/18 Senate Similar to House, base erosion payments include (i) deductible payments and (ii) depreciable/amortizable amounts (and exclude U.S. ECI and non treaty-rate reduced portion subject to U.S. gross-basis WHT) Unlike House provision, deductible base erosion payments generally exclude COGS payments (except to expatriated companies), but include allowable interest expense Only applies to large taxpayer groups, but relatedness based on significantly lower common ownership threshold (only 25%) - Groups with average global gross receipts > $500M over 3-years and - base erosion % (base erosion deductions / total allowable deductions) > 4% Earlier effective date -- tax years beginning after 31/12/17 15

16 Example Base erosion measures Overview US LRD - Facts and assumptions Products manufactured offshore by Foreign Contract Manufacturer (FCN), a related entity, and sold to US LRD, also a related entity, (whether finished or partly finished) who sells to US end customers. Aus MNC US Manufacturer with royalty - Facts and assumptions Products manufactured in the US for sale to US customers with significant royalty payments from US Manufacturer to Foreign IP Holder, a related entity. Aus MNC US LRD Payment for finished/partly finished products Foreign Contract Manufacturer US Manufacturer Royalty payment Foreign IP Holder US tax reform impact House Bill 20% Excise Tax Payments made by the US LRD to acquire product (i.e. COGS) from FCM related party subject to 20% Excise Tax; OR FCM can elect to treat payments from US LRD as effectively connected income (ECI) attributable to a US permanent establishment (PE). In this scenario FCM can claim a deduction for costs based on accounting and a credit for foreign taxes. House Bill 20% Excise Tax The FDAP carve out only applies to non-treaty reduced payments. US Manufacturer royalty payments subject to 20% Excise Tax where Foreign IP Holder is resident in treaty country with reduced royalty withholding tax rates. Senate Bill 10% BEAT Similar to the House Bill, royalty payments will also be treated as a base erosion payment in determining the 10% BEAT to the extent that Foreign IP Holder is resident in a treaty country with reduced royalty withholding tax rates. Senate Bill 10% BEAT Does not apply to COGS payments 16

17 Key tax reform measures Full expensing House Immediate expensing allowed for capital investments in certain new and used depreciable assets acquired and placed in service after 27 September 2017 and before 1 January Does not apply to goodwill or other amortizable intangible assets - Does not apply to property used in a real estate business Senate Generally similar to House version but 100% immediate expensing limited to certain original use property placed in service after 27 September 2017, and before 1 January 2023 Gradual phase down of expensing % for certain property acquired after 31 December 2022 and before 01 January 2027 Not applicable to property acquired from certain related parties or in tax-free exchanges 17

18 Key tax reform measures Repeal of corporate AMT House Elimination of the corporate Alternative Minimum Tax (AMT) Senate Unlike the House version, the Senate Bill preserves the corporate AMT regime Net operating losses (NOLs) House Annual use of NOL carryforwards limited to 90% of the loss corporation s taxable income Carryforwards allowed indefinitely No carrybacks (except certain casualty and disaster losses) Carryforward increased by an interest rate adjustment factor to preserve value Effective for NOLs arising in tax years beginning after 2017 (BUT 90% limitation applies to pre-existing NOLs) Senate Generally, same as House version except no indexation of NOL carryforward amounts and the new 90% limitation does not apply to NOLs from years prior to For tax years beginning after 31/12/22, NOL carryforwards limited to 80% of taxable income 18

19 Key tax reform measures Participation exemption for certain foreign dividends but not share gains (in excess of earnings) House Replacement of FTC (or related deductions) with a 100% foreign- source portion dividend exemption regime - distributions made after 31/12/17 - from 10% or greater foreign subsidiaries - 6 month holding period req. Repeal of current taxation of CFC investments in U.S. property (i.e., Section 956) Stock basis adjustment for exempt distributions to limit loss transactions from sale of stock Senate Foreign source dividend received deduction regime mostly similar to House version, but: - doesn t apply to hybrid dividends (i.e., if payor receives local country deduction for dividend payment) - stricter holding period requirement (1 year w/in 2 year window) - applies also to portion of stock gain treated as dividend income under existing rules 19

20 Key tax reform measures House Global Minimum Tax vs Senate Global Intangible Low Taxed Income (GILTI) House New global minimum tax on U.S. corporate shareholder s pro-rata share of certain foreign subsidiaries earnings ( Foreign high returns amount ) applied on aggregate, global basis effective tax years beginning after 31/12/17 Current U.S. taxation limited to pro-rata share of 50% of foreign high returns amount across entire group of foreign subsidiaries In essence, 10% tax on foreign subsidiaries nonsubpart F / non ECI income in excess of deemed routine return amount on tangible depreciable property (7% + short term AFR) Allowable FTCs: - Capped at 80% of foreign taxes paid - New separate basket, and - No carryforwards or backwards Senate Similar to the House global minimum tax, the Senate s version taxes U.S. corporate shareholders on their portion of a CFC s global intangible low taxed income ( GILTI ) - Current inclusion under subpart F % ETR in 2018 (based on corporate rate remaining at 35% for one year), then 10% ETR threshold ratcheting up to 12.5% ETR threshold for tax years beginning after 31/12/25 - Effective for tax years of CFCs beginning after 31/12/17 Very broadly, GILTI is the excess of the U.S. shareholder s share of each CFC s non-subpart F / non ECI income over a 10% return on tangible depreciable property Allowable FTCs: - Capped at 80% of foreign taxes paid - New separate basket, and - No carryforwards or backwards 20

21 Example US as a RHQ jurisdiction Australia - 20% corporate tax - BEAT / Excise Tax - WWDC / 163(j) - Participation exemption on foreign dividends US - No corporate AMT? - GILTI / FHRA / Subpart F - Gains on shares Americas 21

22 Key tax reform measures Hybrid mismatch rule Senate Only Similar to BEPS Action 2, disallows U.S. tax deductions for interest or royalties paid or accrued to a related party in connection with hybrid transactions and/or involving hybrid entities to extent that: - There is no corresponding income inclusion for recipient under applicable foreign tax law; or - Related party recipient entitled to deduction with respect to payment received Exception applies to extent payment is subject to U.S. tax as subpart F income Treasury granted broad authority to promulgate regulations: (i) conduit rules, (ii) rules for determining tax residence of foreign entity, (iii) application to foreign branches and certain structured transactions and (iv) application when recipient income taxed under a preferential tax regime or eligible for a participation exemption Effective for tax years beginning after 31/12/17 22

23 Example Anti-hybrid rules Australia No Australian CFC implications US Canada Pre-Tax Reform: Deduction on share repo dividend Post tax-form: No deduction Share Repo Exemption on dividends 23

24 Q&A and Closing Remarks

25 Thank you

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