US Tax and Regulatory Developments

Transcription

1 US Tax and Regulatory Developments Latin American M&M Tax Forum Lima, Peru May 2017

2 2017 Who s in control? President Obama Republican control of House and Senate President Trump Republican control of House and Senate GOP control of both executive and legislative branches for first time in a decade House, 114th Congress 246R/186D 3 vacancies House, 115th Congress 238R/193D 4 vacancies (Zinke R-MT election May 25; Becerra D-CA runoff June 6; Price R-GA runoff June 20; Mulvaney R-SC election June 20) Speaker: Ryan (R-WI) Majority Leader: McCarthy (R-CA) Democratic leader: Pelosi (D-CA) Speaker: Ryan (R-WI) Majority Leader: McCarthy (R-CA) Whip: Scalise (R-LA) Conf. Chair: McMorris Rodgers (R-WA) Democratic Leader: Pelosi (D-CA) Democratic Whip: Hoyer (D-MD) Asst. Dem. Leader: Clyburn (D-SC) Senate, 114th Congress 54R/46D w/2 independents Majority Leader: McConnell (R-KY) Democratic Leader: Reid (D-NV) Majority Whip: Cornyn (R-TX) Senate, 115th Congress 52R/48D w/2 independents Majority Leader: McConnell (R-KY) Majority Whip: Cornyn (R-TX) Conference Chair: Thune (R-SD) Policy Cte. Chair: Barrasso (R-WY) Conf. Vice Chair: Blunt (R-MO) Democratic Leader: Schumer (D-NY) Minority Whip: Durbin (D-IL) Asst. Dem. Leader: Murray (D-WA) Policy/Comm Chair: Stabenow (D-MI) Chair of Outreach: Sanders (I-VT) Page 2

3 Trump/Republican priorities, 2017 Affordable Care Act (ACA) repeal Tax reform Infrastructure Regulatory reform Immigration Trade House May 4 passed bill to repeal much of Affordable Care Act Would repeal most ACA taxes beginning in 2017 GOP senators concerned over Medicaid cuts, structure of tax credits April 26 Trump outline sticks to campaign plan, newly proposes territorial Omits details on offsets, repatriation rate, position on border adjustability Administration, House Republicans aiming for one cohesive tax plan Trump: We re going to do infrastructure very quickly. We ve got the plan largely completed, and we ll be filing over the next two or three weeks Senate Democrats proposed $1t plan, includes closing tax loopholes April 21 executive order calls for Treasury review of tax regulations, recommendations for mitigating burdens March 28 executive order calls for rolling back Obama climate policies, including Clean Power Plan regulations for electric power plants Trump calling for wall on Mexico border FY2017 spending bill had border security funding, but not for border wall Border wall debate could resurface in context of FY2018 spending bill Trump withdrew US from Trans-Pacific Partnership Wants NAFTA renegotiated quickly; farmers, others concerned Did not act to deem China a currency manipulator Page 3

4 First major piece of legislation recent presidents enacted after taking office Barack Obama Took office January 20, 2009 George W. Bush Took office January 20, 2001 Bill Clinton Took office January 20, 1993 George H. W. Bush Took office January 20, 1989 Ronald Reagan Took office January 20, 1981 American Recovery and Reinvestment Act of 2009 Enacted February 17, 2009 Stimulus legislation, included bonus depreciation Economic Growth and Tax Relief Reconciliation Act of 2001 Enacted June 7, 2001 The Bush tax cuts reduced individual rates, estate tax Omnibus Budget Reconciliation Act of 1993 Enacted August 10, 1993 Increased individual, corporate taxes Omnibus Budget Reconciliation Act of 1990 Enacted November 5, 1990 Increased individual taxes despite no new tax pledge Economic Recovery Tax Act of 1981 Enacted August 13, 1981 Sharply reduced individual, corporate taxes Page 4

5 ACA repeal and replace Many pieces must come together Effect on state budgets Coverage numbers Satisfy conservative and moderate Republicans ACA repeal and replace Senate politics and procedure Market stability Reconciliation rules Page 5

6 Major drivers of tax reform, tax agenda High US statutory corporate tax rate Worldwide system of taxing foreign earnings Less competitive US tax system relative to other nations Economic growth: US tax system is seen as hampering economic growth International tax reform pressures: House Republicans: proposed corporate tax rate of 20%, territorial system Also proposes border adjustability: exempt exports from tax, deny deductions for imports President Trump: proposed business tax rate of 15%, territorial system Administration doesn t like border adjustability in current form, hasn t completely dismissed Trump has called for reciprocal tax to match how US exports are taxed by other nations Page 6

7 Corporate tax rates in the top 30 economies by GDP, 2015 Tax rate 45% 40% 35% 30% 25% 20% GDP-weighted average (excluding US) 27.1% Simple average (excluding US) 25.6% 15% 10% 5% 0% Source: OECD, EY Worldwide Corporate Tax Guide. GDP weighting reflects 2015 GDP estimates from the IMF. Page 7

8 What will tax reform look like? Lower corporate and individual tax rates Lower tax rates on investment income Broader tax base, individuals and corporations: Many deductions, exclusions, credits will go away New international tax system: Move from global tax system to territorial system Anti-base erosion provisions Border adjustment/minimum tax among the options Mandatory tax on accumulated foreign earnings Page 8

9 Tax reform: overall state of play Trump Trump April 26 plan 15% business income rate Territorial system of taxing foreign earnings, no position on border adjustability One-time tax on accumulated foreign earnings, rate unspecified Individual rates of 10%, 25%, 35% Home-ownership, charitable giving and retirement savings will be protected, but other tax benefits will be eliminated NEC Director Gary Cohn House Republican Blueprint for tax reform Border adjustability: exempts exports from tax, denies deductions for all imports Reduced individual tax rates: 12%, 25%, and 33% 20% corporate income tax rate/25% rate for business income of pass-throughs Immediate expensing of capital expenditures with no interest expense deduction Mandatory tax on accumulated foreign earnings Territorial system of taxing future foreign earnings Senate Senate Finance Committee Does not have a tax reform plan, though options are being investigated Chairman Hatch: Senate will conduct its own tax reform process and cannot be expected to just accept House bill Hatch has questions about border adjustability; other GOP senators opposed. Page 9

10 Key issues in tax reform debate Border adjustability Individual taxes Interest deductibility - Exports exempt from tax with cost of goods sold deductible; all imports non-deductible, including costs of goods sold - Faces opposition from retailers, others - Trump won t take as-is, wants reciprocal tax - House GOP proposes top individual rate of 33%; Trump at 35% - Cuts to key individual tax benefits may create political fallout - Cohn: all but home ownership, charitable, and retirement breaks cut - House GOP plan: expensing, eliminate deductibility of net interest expense - Mnuchin: industries are very sensitive to interest deductibility - Is expensing worth losing interest deductions? Pass-throughs - Trump: 15% business rate - House Republicans: 25% pass-through rate, 20% corporate rate - Elimination of benefits to pay for business rate cut affects pass-through entities Revenue - Will reform be revenue neutral? - Reconciliation could require provisions to sunset - Corporate rate cut of only 3 years has out-year revenue effects (JCT) - GOP can lose only 2 Senate votes if using reconciliation Page 10

11 Expensing versus interest deductibility Immediate expensing House GOP: 100% expensing of all tangible, intangible assets except land Mnuchin: We do think some level of expensing is important. Deductibility of net interest expense House GOP: No deductibility for net interest expense Mnuchin: We re sensitive to that certain industries are very sensitive to interest deductibility, and we want to make sure that we don t do anything that creates uncertainty ISSUES Effective dates and transition Will interest on existing debt be grandfathered? What happens to existing basis of assets? Special rules for financial services companies: banks, insurance, leasing? Small business carve-out? Page 11

12 How the Blueprint transforms current corporate income tax The Blueprint represents a major departure from the current corporate income tax system to a destination-based tax on domestic consumption. Currently Corporate income tax levied on firm profits Calculation of tax: Profits defined as revenue minus costs Taxed at 35% rate Capital investment depreciated over period Tax on profits earned overseas minus credit for foreign taxes paid (worldwide tax regime) Blueprint Destination-based tax on domestic consumption Major modifications: 20% corporate tax rate (25% tax rate on passthrough owners income) Capital investments fully expensed Corporate interest expense deduction eliminated All special business provisions repealed except for R&E credit and LIFO Border adjustability exempting exports and taxing imports Territorial tax regime and tax on previously untaxed accumulated foreign earnings Page 12

13 EXPORTS IMPORTS Border adjustability Examples Manufacturer spends $100m in US to make electronics, then exports them for sale to foreign consumers for $130m. Currently the company deducts the COGS and manufacturing expenses, and pays 35% tax on $30m. Under border adjustability, US export sales are tax-exempt. Since the electronics were sold to foreign consumers, export revenues are exempt from tax and the company has a net operating loss of $100m to carry forward. Current Export sales $130m Expenses -$100m $30m US tax rate x 35% Tax $10.5m Border Adjustability Export sales $130m Expenses -$100m $30m Tax $0 NOL $100m US retailer buys $90m in apparel from a foreign vendor and spends $10m in US wages and other costs. Then it sells the clothing to US consumers for $130m. Currently, the retailer deducts all the COGS and pays 35% tax on $30m. Under border adjustability, the retailer still deducts $10m but there is no deduction for the imported goods purchased. Since the clothing was consumed in the US, the retailer is taxed on $120m in net cash flow and owes $24m. Current Domestic sales $130m Cost of imports -$90m Other costs -$10m $30m US tax rate x 35% Tax $10.5m Border Adjustability Domestic sales $130m Cost of imports -$90m Other costs -$10m $120m US tax rate 20% Tax $24m Page 13

14 Mechanics of BACFT border adjustability Overview Border adjustments are a way to tax imports and refund (or credit) taxes paid on business purchases used in the production of exports. Under the BACFT, revenue from US export sales are not taxable, and the cost of imported goods and services are not deductible (or taxed separately). Note: The arrows below are cash flow directional. Purchases and expenses Sales receipts Import Domestic No deduction Deductible US business Exempt Taxable Export Domestic Imports into US Domestic expenses Exports out of US Domestic sales No COGS deduction associated with imported goods Cost of imported services not deductible Domestic expenses generally deductible Includes salaries/wages, capital expenditures, business expenses No tax on revenue associated with exported product Pay tax on revenue associated with product Page 14

15 Regulatory review On April 21, President Trump issued an executive order requiring review of significant tax regulations issued after January 1, 2016 Intended to identify those that are burdensome or complex and to recommend actions to mitigate the burden In January, the White House issued a Regulatory Freeze Pending Review memorandum Outlined steps to ensure that the President's appointees or designees have the opportunity to review any new or pending regulations President Trump also issued an executive order requiring that for every one new regulation issued, two would have to be revoked Page 15

16 Congressional Review Act (CRA) actions revoke select Obama-era energy regulations Deregulatory agenda has strong support with Republican majority in Congress Using authority under the CRA, Congress has passed 13 resolutions which have been signed into law by the president, including 3 nullifying energy regulations SEC rule to implement a Dodd-Frank provision requiring oil and gas and mining companies to disclose payments to foreign governments (Pubic Law 115-4) Interior Department s Stream Protection Rule that restricted coal mining (Public Law 115-5) Interior Department s BLM land use planning rule (Public Law ) Page 16

17 Energy Independence Executive Order seeks to overturn Obama climate policies, end War on Coal On March 28, 2017, President Trump issued a farreaching Executive Order, Promoting Energy Independence and Economic Growth, with coal miners on stage at a signing ceremony at EPA Agencies must review all existing regulations and suspend, revise, or rescind those that unduly burden the development of domestic energy resources Priority given to EPA s Clean Power Plan to reduce electric power plant carbon emissions Obama presidential climate orders revoked or rescinded Federal land coal leasing moratorium lifted Page 17

18 Constraints on the deregulatory agenda On May 5, 2017, the US Senate narrowly rejected a CRA resolution that sought to revoke the Interior Department s waste rule that restricted methane emissions from oil and gas operations on public lands The US legal process for revising or revoking existing federal regulations is complex and time-consuming NGOs, states, and other stakeholders will aggressively pursue litigation to block Trump Administration initiatives to revise or reverse environmental regulations While cabinet-level appointments have been made to Energy, Interior, and EPA, many key positions are not filled, thus delaying actions Page 18

19 Executive Order on tax regulations review (April 21) Calls for Treasury Department to review all significant tax regulations issued on or after January 1, 2016, to: identify undue financial burden or add undue complexity recommend specific actions to mitigate burden Review will include final and temporary regulations (TD 9790) under Section 385 to treat as stock certain related-party interests that otherwise would be treated as indebtedness for federal tax purposes Report identifying regulations due within 60 days Recommendations due within 150 days A final rule may only be through a new Administrative Procedure Act public notice and comment process That plus timeframe for report means it could be some time before regulations are rescinded, if that is what Treasury recommends Page 19

20 Disclaimer 2017 Ernst & Young LLP. All rights reserved. This presentation contains information in summary form, believed to be current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact EY or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this presentation. Page 20