German Business Network (GBN)

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1 German Business Network (GBN) Webcast United States of America: Update on US Tax Reform December 12, 2017 Page 1

2 German Business Network (GBN) Alexander C. Opaschowski Partner GBN Leader North America and Mexico Phone: Mobile: Mail: Background Alexander is partner at EY GSA, currently working in the EY s US practice, based in New York, and GBN Leader North America & Mexico He is a German Certified Public Accountant and German Certified Tax Advisor In more than 22 years with EY, Alexander has gained broad experience providing audit and financial accounting & advisory services (e.g. fast close, IFRS conversions, internal control systems) for multinational clients He is member of the Global EY IFRS Consumer Products network, member of the IFRS expert group and an accredited IFRS expert partner Alexander has extensive experience in working on large international group audits both as primary and component team Page 2

3 Your hosts today Dirk Egbers Partner EY Global Leader of the German Business Network (GBN) Phone: Mobile: Mail: Gary J Gasper Partner EY Co-director of Washington Council EY Phone: Mobile: Mail: gary.gasper@wc.ey.com Andrew Brown Partner TAX, International TAX Services Phone: Mobile: Mail: abrown9@uk.ey.com Anne Bouse Senior Manager TAX, International TAX Services Phone: Mobile: Mail: anne.bouse@de.ey.com Alexander C. Opaschowski Partner EY GBN Leader North America and Mexico Phone: Mobile: Mail: alexander.opaschowski1@ey.com Page 3

4 Agenda I. US Tax Reform and Legislative Updates Gary Gasper, Andrew Brown, Anne Bouse II. Income Tax Accounting Considerations Alexander C. Opaschowski III. Q & A/Wrap-Up Page 4

5 I. US Tax Reform and Legislative Updates Page 5

6 State of Play Tax reform The House tax reform approved its tax reform bill November 16; the Senate December 2 Government funding, other end-of-year items Both bills are titled Tax Cuts and Jobs Act and follow same basic framework Government funding expires December 22; many other priorities for year-end bill Long-term funding parameters for remainder of FY 2018 have not been set: without Congressional intervention, Budget Control Act sequester spending limits are $549 billion for defense and $516 billion for non-defense Cut or limit current provisions for individuals and businesses to fund rate cuts Corporate rate: 20% (Under Senate bill, rate not effective until 2019) Move to more competitive territorial tax system, one-time transition tax at lower rate Significant differences Income tax brackets Pass-through taxation Rates for the mandatory transition tax and approaches to preventing base erosion Senate bill repeals ACA individual mandate, leaves estate tax on the books Republicans want to increase defense caps Democrats demand equal increase for non-defense spending Democrats want action on Dreamers/Deferred Act on Childhood Arrivals issue Other priorities for year-end bills: ACA market stabilization, CHIP reauthorization, disaster relief, tax extenders Page 6

7 Congressional agenda Potential issues on table as part of December 8 funding negotiations Deadline Government funding expires December 22 National Flood Insurance Program expires Children s Health Insurance Program (expired September 30) Spending deal to lift discretionary caps for remainder of FY 2018 Changes to Affordable Care Act (ACA) DREAMERS/Border Wall Disaster relief, with new urgency for wildfires Other priorities Tax reform GOP targeting Dec. 31 Debt limit ( extraordinary measures available to Treasury into 2018) March or April 2018 Federal Aviation Administration funding/reauthorization March 31, 2018 Congressional schedule Tax Cuts and Jobs Act conference committee first public meeting expected Week of December 11 Alabama special election December 12 State of the Union Address January 30, 2018 Page 7

8 Tax Reform process 1 Unified Framework released Outline reflecting a consensus of Big Six negotiators released September 27 2 Ways and Means Committee Approved Tax Cuts and Jobs Act November 9 3 House floor vote Approved bill November 16 4 Senate Finance Committee Committee approved its own version of Tax Cuts and Jobs Act November 16 after two Hatch modifications 5 Senate floor consideration Senate passed its amended version of the Tax Cuts and Jobs Act 2 December 6 Final version, signature House, Senate agree to, pass final version; President signs GOP wants enactment by Christmas Page 8

9 Tax bill conferees House December 4 voted to go to conference with Senate on Tax Cuts and Jobs Act (H.R. 1) Senate followed with a vote December 6; public meeting could be held the week of December 11 Senate Republican conferees: 1. Finance Committee Chairman Orrin Hatch (R-UT) 2. Budget Chairman Mike Enzi (R-WY) 3. Energy and Natural Resources Chairman Lisa Murkowski (R-AK) 4. Senator John Cornyn (R-TX) 5. Senator John Thune (R-SD) 6. Senator Rob Portman (R-OH) 7. Senator Tim Scott (R-SC) 8. Senator Pat Toomey (R-PA) Senate Democratic conferees: 1. Finance Ranking Member Ron Wyden (D-OR) 2. Budget Ranking Member Bernie Sanders (I-VT) 3. Energy and Natural Resources Ranking Member Maria Cantwell (D-WA) 4. Senator Patty Murray (D-WA) 5. Senator Debbie Stabenow (D-MI) 6. Senator Robert Menendez (D-NJ) 7. Senator Tom Carper (D-DE) House Republican conferees: 1. Conference Chair: Ways and Means Committee Chairman Kevin Brady (R-TX) 2. Rep. Devin Nunes (R-CA) 3. Rep. Peter Roskam (R-IL) 4. Rep. Diane Black (R-TN) 5. Rep. Kristi Noem (R-SD) 6. Natural Resources Chairman Rob Bishop (R-UT) 7. Rep. Don Young (R-AK) 8. Energy and Commerce Energy Subcommittee Chairman Fred Upton (R-MI) 9. Rep. John Shimkus (R-IL) House Democratic conferees: 1. Ways and Means Ranking Dem Richard Neal (D-MA) 2. Rep. Sander Levin (D-MI) 3. Rep. Lloyd Doggett (D-TX) 4. Natural Resources Ranking Dem Raúl Grijalva (D-AZ) 5. Rep. Kathy Castor (D-FL) Page 9

10 Major drivers of Tax Reform High US statutory corporate tax rate Worldwide system of taxing foreign earnings Less competitive US tax system relative to other nations Lowering the corporate rate and moving to a territorial system seen as generating economic growth, which is hindered by current uncompetitive tax code Drivers are not the same as 86 Tax Reform Act, which focused on individual rate reduction Page 10

11 House and Senate Tax Cuts and Jobs Act individual House Rate Taxable income (joint filers) 12% first $90,000 (benefit phased out for AGI over $1,200,000, for 45.6% bubble rate ) 25% in excess of $90,000 35% in excess of $260, % in excess of $1 million Senate Rates Taxable income (joint filers) 10% First $19,050 12% in excess of $19,050 22% in excess of $77,400 24% in excess of $140,000 32% in excess of $320,000 35% in excess of $400, % in excess of $1 million Chained CPI for indexing brackets for inflation effective beginning in 2018 Provision House Senate Individual tax title of Senate bill would sunset after December 31, 2025 Standard deduction $24,400 joint; $12,200 single $24,000 joint; $12,000 single Child credit $1,600, phased out at $230,000 $2,000, phased out $500,000 AMT repealed repealed Personal exemption repealed repealed Mortgage interest $500,000 cap, no second homes repealed for home equity Medical expense deduction repealed retained, AGI threshold reduced/2 yrs Student loan interest deduction repealed retained State and local tax deduction income repealed, property cap $10,000 income repealed, property cap $10,000 Estate tax ~$11m exclusion, repealed after 2024 ~$11m exclusion, tax stays on books ACA individual mandate retained repealed Page 11

12 Business tax highlights of House and Senate Tax Reform plans US House of Representatives US Senate 20% corporate rate, beginning 2018; AMT repealed 20% corporate rate, beginning 2019; AMT retained 25% tax rate generally applied to passive business activity income plus capital percentage (generally 30%) of active income Limits interest deduction to 30% of earnings before interest, tax, depreciation and amortization (EBITDA) with additional limit based on global group income Immediate expensing five years Expands definition of covered employee ( 162m) Establishes territorial exemption system for dividends received by US corporations from 10%-owned foreign corporations Transition tax on deferred foreign earnings: 14% / 7% New broad-based anti-deferral provision taxes foreign high return amount (FHRA) on a current basis at 10% effective tax rate (some foreign tax credits (FTCs) available) 20% excise tax on certain deductible payments to related foreign persons with alternative effectively connected income (ECI election) 23% deduction for domestic qualified business income from a partnership, S corporation, or a sole proprietorship Limits interest deduction to 30% of earnings before interest and tax (EBIT) with additional limit based on global debt to equity (phased in) 100% bonus depreciation five years; additional five year phase out (20% reduction each year starting in 2023) Expands definition of covered employee ( 162m) Establishes territorial exemption system for dividends received by US corporations from 10%-owned foreign corporations Transition tax on deferred foreign earnings: 14.5% / 7.5% New broad-based anti-deferral provision taxes global intangible low-taxed income (GILTI) on a current basis at 10% effective tax rate (some FTCs available) New deduction for foreign-derived intangible income Anti-base erosion measures include minimum tax of 10% or 11%, applied on income determined after adding back deductible payments made to related foreign persons Page 12

13 House and Senate Tax Cuts and Jobs Act international Provision Senate House Foreign dividends 100% exemption 100% exemption Transition tax One-time transition tax 14.5% / 7.5% One-time transition tax 14% / 7% Look-through rule for subpart F determination CFC rules Hybrid payments Intangibles redefined Look-through rule made permanent to exclude passive income from subpart F treatment if the earnings in the hands of the distributing foreign corporation would not be treated as subpart F income Stock ownership for US shareholder status determined by also considering whether 10% of value owned Stock attribution turned back on to cause US person to own foreign stock held by related foreign persons for purposes of determining CFC and US shareholder status Requirement removed for foreign corporation to maintain CFC status for 30-day period before being a CFC Denies deduction for interest or royalty payments to related party, where there is either no income inclusion or a double benefit is provided (i.e., a deduction in US and foreign jurisdiction) Broadens definition of intangibles to end disputes over the value of intangibles that have been transferred for purposes of taxing the transfer or valuing the transfer. The meaning would include work force in place, goodwill, going concern, as well as residual value not attributable to tangible property. Same Same, except US shareholder rule Not addressed Not addressed Page 13

14 House and Senate Tax Cuts and Jobs Act international (continued) Provision Senate House Excess returns minimum tax US incentive for US sales Intangible property Outbound base erosion payments Global Intangible Low-Taxed Income ( GILTI ) minimum tax (approximately 10%) on foreign returns in excess of 10% of tangible asset bases; increases to 12.5% after 2025 Foreign-derived intangible income reduces 20% tax rate to 12.5% (via a deduction), increases to 15% after 2025, for US-earned intangible income, measured as an excess of US corporation s net income (excluding certain foreign income) over 10% of tangible asset bases 3-year period to bring intangibles back to the United States tax-free Base erosion payments 10% tax on excess of modified taxable income over regular tax liability with offset for R&D credits. Applies to taxpayers with at least $500 million in gross receipts and deductions from base erosion payments of at least 4% of all deductions. MTI is taxable income grossed up for all base erosion payments (excluding COGS). Foreign High Return Amount ( FHRA ) minimum tax (approximately 12.5%) on foreign returns in excess of approx. 8% of tangible asset bases (less interest expense) Foreign returns are CFC net income excluding income taxed under provisions like subpart F and preferred items like AFE-qualifying income Not addressed Not addressed Foreign affiliate payments 20% excise tax on gross amount of payments made to foreign affiliates (excludes interest, commodities, and services provided at cost), or election to treat such payments as ECI. ECI election would allow an offset for deemed expenses measured as ratio of the foreign corporation s expenses relevant to the group) and a portion of FTCs to be used. Page 14

15 Key differences, House and Senate bills Provision House Senate Statutory corporate 20% beginning in 2018 tax rate 10-year revenue: -$1.456t Pass-through 25% tax rate generally applied to passive business activity taxation income plus capital percentage (generally 30%) of active income 10-year revenue: -$600b Individual rates Top rate 39.6% 10-year revenue for all individual rate cuts: -$1.09t Interest Limit net interest deductions to 30% of adjusted taxable income deductibility including depreciation 10-year revenue: $172b Transition tax rates 14% rate for cash, 7% rate for illiquid assets 10-year revenue: $293b Worldwide interest Limit the deduction for net interest expense of domestic corporations that are part of a worldwide group, based on a comparison of the domestic corporation s EBITDA to worldwide EBITDA of group 10-year revenue: $34b Anti-base erosion 20% excise tax on gross amount of payments made to foreign affiliates (excludes interest, commodities, and services provided at cost), or election to treat as ECI 10-year revenue: $95b Estate tax ~$11m exclusion, repealed after year revenue: -$151b ACA individual Retained mandate 20% beginning in year revenue: -$1.329t 23% deduction for qualified business income of pass-thru entities 10-year revenue: -$477b Top rate 38.5% 10-year revenue for all individual rate cuts: -$1.17t Limit net interest deductions to 30% of adjusted taxable income excluding depreciation 10-year revenue: $308b 14.5%, 7.5% 10-year revenue: $298b Limitation would be based on a comparison of the debt that could be incurred if the US group had a debt-equity ratio in proportion to the worldwide group s debt-equity ratio 10-year revenue: $8b Base Erosion and Anti-Abuse Tax 10-year revenue: $140b ~$11m exclusion, tax stays on books 10-year revenue: -$83b Repealed 10-year revenue: $318b Page 15

16 II. Income Tax Accounting Considerations Page 16

17 Income Tax Accounting Considerations Accounting for deferred taxes Overview The table below shows how differences between the carrying amount of an asset or a liability and its tax base ( temporary difference ) relate to deferred tax assets and liabilities Deductible temporary difference Temporary difference that will result in deductible amounts in future years when the related asset or liability is recovered or settled Taxable temporary difference Temporary difference that will result in taxable amounts in future years when the related asset or liability is recovered or settled When multiplied by the enacted tax rate (i.e. tax effected), results in a Deferred tax asset (DTA) Deferred tax liability (DTL) Page 17

18 Income Tax Accounting Considerations Tax rates and tax laws Period of enactment IAS and 47 provide at which tax rate current and deferred tax assets and liabilities shall be measured: Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Enactment date: Date bill signed by the President Although IAS 12 does not permit companies to account for changes in US tax law until the President signs the legislation, companies should understand the proposed legislation now so they can evaluate and prepare for the financial statement income tax accounting implications. Page 18

19 Income Tax Accounting Considerations Reduction of tax rates Accounting implications Reduction of the federal corporate income tax rate from 35% to 20%, effective for tax years beginning after 31 December 2018 Current income taxes for fiscal year 2017 will still be calculated with a tax rate of 35%. A lower corporate income tax rate will require to remeasure the future benefits of existing deductible temporary differences and carryforwards, such as accruals for pension liabilities and net operating loss (NOL) carryforwards, and the future costs of taxable temporary differences Remeasurement shall be made at the rate at which they are expected to reverse in future periods Companies need to determine how much of their temporary differences and loss carryforwards will reverse in years beginning before 1 January 2019 and continue applying the 35% corporate tax rate to those amounts The resulting deferred tax is recognized in profit or loss, except to the extent that it relates to items previously recognized outside profit or loss (i.e. within OCI) Page 19

20 Income Tax Accounting Considerations Reduction of tax rates Accounting implications Example: The difference between the carrying amount of an asset and its tax base ( temporary difference ) is expected to develop as follows: IFRS 1, Tax Temporary Difference CU of the temporary difference will reverse in CU will reverse in 2019 or later. DTL as of No enactment in x 35% = 70.0 Enactment in x 35% x 20% = 47.5 Effect in 2017: 22.5 CU Page 20

21 Income Tax Accounting Considerations Other changes Further implications The plan provides further changes which will have additional accounting implications to be considered, e.g. Limitation on deduction of interest Disallowed interest carried forward may result into DTAs (if usage is probable) Limitation on deduction of NOLs Limitation may reduce the probability of using NOLs in the future valuation allowance Bonus depreciation Accelerated depreciation may create additional NOLs and temporary differences between carrying value and tax base of assets Page 21

22 III. Q & A/Wrap-Up Page 22

23 Page 23 Thank you!

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