www.gmsasia.pwc.com United States: Enactment of tax reform what actions to consider now December 2017 In brief The US Congress has made dramatic progress pursuing historic tax reform. A House and Senate conference committee resolved differences in the two versions of tax reform legislation and Congress passed a final bill (hereinafter the Bill) on December 20, 2017. The final Bill was signed and enacted into law when signed by President Trump on December 22, 2017. For a high-level summary of the final Bill provisions, please see the Global Mobility Insight. Actions to consider now Given the potentially very short window between enactment and the effective date of many provisions, companies with globally mobile workforces should consider what actions may be warranted now. Employers with tax reimbursement or equalisation type policies for globally mobile workforces should consider immediately whether and how their policies would apply under tax reform. They should identify areas of possible inconsistency or unintended results, and consider what changes to such policies may be appropriate given the enactment of the new tax law. Policy revisions can require approval from various stakeholders who will consider cost, fairness to employees, and process impact. Employers also should confirm whether revisions for employees currently covered under a tax reimbursement policy may be implemented immediately based on the specific terms contained within the policy or plan. In addition to tax reimbursement policy modifications, consideration also should be given to other impactful actions that can be taken by employers as well as individuals. The cost and benefit of changes related to tax reform and planning opportunities will vary on a case-by-case basis, with cost/benefit recipients often depending on whether employees are held to a US or non-us hypothetical tax or no hypothetical tax at all. Legislation has virtually immediate effect The new law contains a lengthy list of changes. Many provisions represent a significant change from current law with virtually immediate effect. This Insight provides a practical guide of critical actions that employers with mobile workforces should consider based on the new final Bill.
In detail Next steps actions to consider now Businesses with global workforces should consider the following six steps: (1) Evaluate mobility tax reimbursement policies Employers that have adopted tax reimbursement policies (e.g., equalisation or protection) should review how these tax law changes could impact their tax reimbursement liabilities and gross-up costs for mobile employee populations. Companies should immediately evaluate their tax reimbursement policies and consider any modifications, taking into account that many of the tax law changes generally are effective January 1, 2018. Analysis and consideration by various parties may be necessary, not only from a cost and process perspective but also legal. For example, does the policy allow revisions mid-assignment as deemed necessary by the company (e.g., due to changes in tax law), or will current assignees need to be grandfathered under current policy? What specific policy provisions may need revision? The current tax equalisation policy may have assumed certain variables that no longer would be appropriate. Consider the following areas: Does the hypo tax policy reference what may soon become old law? For example, does it reference miscellaneous itemised deductions, personal exemptions, deductions for foreign real property taxes, and the moving expense income exclusion all of which will be repealed? Are there itemised or standard deduction assumptions? For example, if the policy states that itemised deductions are assumed to be 12 percent of taxable income, should this guideline be changed? Similarly, will standard deduction assumptions in policies be unnecessarily costly when new tax law provisions are implemented? How are state and local income or property taxes taken into account under the policy? Does it provide for a deduction for hypothetical state and local income taxes even if such taxes are no longer fully deductible under new law? How does the policy address various deductions? Would the loss of deductions for hypo tax purposes mean savings for the company? For example, employees may lose a portion of their deduction for mortgage interest for debt on a new home purchase in which a binding contract was entered into on December 26, 2017. In this situation, should employees be entitled to a deduction for purposes of hypothetical tax (if a deduction is only lost due to the timing of the purchase)? For moving expenses, does it make sense to offer lump-sum allowances since qualified moving expenses are no longer excluded and significant administrative expenses can be saved with a lumpsum arrangement? (2) Identify mobility-related processes and controls that may be impacted Various mobility-related processes should be reviewed now to identify any changes that may need to be implemented as of January 1, 2018. These processes include, for example: Payroll for example, the coding of qualified moving expenses as a taxable benefit. In addition, withholding tax rates on supplemental compensation will change as US individual tax rates change. Policy and practices need to be updated as bonus payments and stock awards are settled in early 2018. Revised hypo tax calculations to consider impact of new law in addition to normal annual updates for inflation-related adjustments (for example). Preparation of cost projection estimates and revision of cost accruals for budgeting and other purposes. Substantiation and documentation (e.g., moving expenses treated as incurred in 2018 no longer need to meet accountable plan requirements.) (3) Evaluate expected costs and savings, and consider appropriate actions The resulting costs and benefits from changes relating to tax reform will vary on a case-by-case basis. Are employees held to a US or non-us hypothetical tax or no hypothetical tax at all? US tax decreases applicable to a particular individual may benefit the employee for those held to a US hypothetical income tax but benefit the employer for those held to a non- US hypothetical tax and working in the United States. In addition, caution should be given to assumptions that certain demographics will determine whether an individual s US tax costs will increase or decrease as a result of tax reform given the many nuances of the new law. Are there specific mobile populations in which costs may increase? Mobility professionals should identify specific populations that may be impacted by a particular change, and communicate expected impacts to relevant parties (e.g., employees/ 2
partners not covered by tax reimbursement policies, business units responsible for covering costs under policies, and global mobility policy owners who may wish to alter benefits currently provided). For example, are there US citizens working overseas that are paying real property taxes for their foreign residence? If yes, their real property taxes will be no longer deductible as an itemised deduction. Another example may be mobile employees home-based in certain hurricanedamaged areas such as Houston, Texas who may be able to claim additional personal casualty losses in 2017 the final Bill allows taxpayers to avoid the 10% of adjusted gross income (AGI) threshold. These examples could result in additional tax costs for the mobility program. Business units and contract negotiators may need accurate estimates of the additional costs of these changes (and similar changes) if they tax equalise using a US hypo calculation. Similarly, certain individuals with socalled carried interest arrangements (i.e., a profits interest in a partnership, typically a private equity or hedge fund) may experience increased tax costs unless the new three-year holding period (increased from one-year) is met for underlying assets or the profits interest itself to achieve capital gains tax treatment. Individuals and companies that provide tax assistance related to this income may see increases to the extent gains from such arrangements are now taxed at ordinary rates. The interplay of income sourcing and foreign tax rules (including treaties) will be important to this analysis. (4) Consider specific tax planning opportunities Individuals and employers may wish to consider the following opportunities: Pay state and local taxes in 2017 if a benefit would arise This includes personal property and real estate property taxes (US and foreign) that otherwise are obligated to be settled in early 2018 but that relate to the 2017 tax year and may be payable in 2017 under state law and practices. For example, the state of New York is allowing prepayments of New York real property tax. State income tax payments otherwise paid in 2018 (e.g., 2017 fourth quarter estimates and extension payments, including those not paid as the fourth quarter due to safe harbor coverage), may also be paid in 2017 to potentially claim a larger deduction. Note that pre-payment of state income tax for a future taxable year beyond 2017, however, does not result in the benefit of avoiding the $10,000 dollar limitation under the final Bill such payments will be treated as paid in the year to which they relate. Careful consideration should be given to individuals who may be subject to the alternative minimum tax (AMT) it may not be beneficial for those taxpayers to accelerate payment of these taxes to 2017 (or for employers to fund such taxes in 2017). Foreign tax credits should also be examined. Defer certain income-related items into 2018 (such as payment of bonuses, exercise of stock options) This assumes that employees at issue will benefit from the rate reductions in tax reform legislation and will not be impacted by other potential provisions such as the inability to fully deduct state and local income taxes. A potential deferral of income should be weighed against the expected benefit of a deduction to the employer for paying such items in 2017, taking into account Section 162(m) limits and corporate rate changes effective for 2018. Individuals residing in higher taxed states may be better off accelerating income into 2017 given the effect of changes to the state and local tax deduction on their effective federal tax rate. This may be particularly true of long-term capital gains that will not see a rate decrease under the new law. Accelerate payments for deductions that may be repealed Companies and individuals may consider accelerating the payment of moving expenses, as these amounts may not be deductible or excludable from income in 2018. As a general rule, if an employer pays a mover to move employee s household goods and effects, the employee is considered to have received payment at the time the employer pays the mover (not the move date.) Employers should consider payments to movers and relocation vendors in 2017 so as to claim the income exclusion and deduction benefit before it is repealed. Careful consideration should also be given to companies that have established a payroll cutoff date for the timing of recording moving expenses as taxable income. The mortgage interest deduction will not be repealed but will be further limited under the final Bill, applicable for acquisition indebtedness incurred after December 15, 2017. An opportunity no longer exists for the acceleration of mortgage interest on acquisition indebtedness to avoid the tighter limitation. However, taxpayers with home equity debt may consider interest payments prior to year-end. Change the timing of specific transactions If a nonresident alien is selling a US partnership interest, he or she may wish to consider selling such interest before the end of 2017. Income from such a sale generally will be treated as effectively connected income (ECI) subject to 10 percent withholding of the amount realised. Analysis of foreign law and interpretation under treaty should be considered 3
to confirm whether foreign tax credits (or similar relief) will be allowed. This also may be an unusual instance where a US foreign tax credit may be permitted to a nonresident alien on Form 1040NR. A high-net worth individual planning to formally expatriate may benefit from delaying the expatriation to post-2017. The final Bill would increase the exemption amount for estate and gift tax purposes. As a result, the benefit of a gift and go approach would increase if performed in 2018. Individuals who are in the process of entering into divorce and separation agreements may want to consider accelerating this process before 2019, depending upon the payor or payee status. Alimony would not be deductible and alimony received not taxable if paid under (i) agreements entered after 2019, or (ii) an agreement entered into before that date that is modified after 2019 (if it contains language that this new provision would apply.) Note that if a mobile employee is selling his or her principal residence, the employee should no longer consider changing the timing of their contract or closing date before 2018 for purposes of maximising the exclusion. The rule that provides an exclusion from capital gain of up to $250,000 (or $500,000 for joint filers) if they owned and used the house for two out of five years is not changed under the final Bill. (5) Understand the interplay with a corporate tax rate change One important point for mobility professionals to recognise when considering US tax reform is the impact of the expected reduction in the US corporate income tax rate. This reduction is important to mobility professionals because it: highlights the need for international employee assignment-related costs to be properly allocated (charged out) to foreign affiliates that benefited from the employee s services, and enhances the value of minimising employee gross up costs where possible given the higher individual income tax rates under current law. (6) Create a communication plan A communication plan is strongly recommended for mobility programs due to historic tax reform. Employers will wish to consider communicating to employees or partners about possible actions to consider, revisions to equalisation policies, and hypothetical tax updates, as well as providing answers to frequently asked questions. There also should be communication to the C-suite or to responsible business units, particularly for material cost impacts. Mobility programs should anticipate the various questions that may arise and prepare a frequently asked questions list that all team members can utilise to provide consistent answers. For example, it is likely that mobile employees will want to understand why their paycheck may have changed in an adverse way, or why their paycheck did not change (if they anticipated a tax cut.) In addition, if employees lose a particular deduction, they will likely inquire as to whether they or the company will bear the resulting tax costs. The takeaway Preparedness pursue a tailored approach Mobility professionals will need to assess their specific mobile populations, tax costs, and policies to gauge what actions are the most critical. No one size fits all. However, the enactment of tax reform can provide an opportunity to showcase mobility-related functions and the mobility program s ability to respond quickly and with agility to this historic event. Actions to help reduce mobility costs are always a priority. But the need to swiftly and concisely communicate with all affected stakeholders mobile employees as well as the C-suite will also be a critical task. The C-suite will want to continue to pursue their strategic agenda using mobile workforces without any disruption. Identifying and remedying those processes that could be impacted by these tax changes will also be important to accomplish in a quick timeframe so that the focus remains on strategic business goals. 4
Let s talk For a deeper discussion of how this issue might affect your business, please contact your Global Mobility Services engagement team or one of the following team members: Global Mobility Services Hong Kong/China James Clemence, Asia Leader +852 2289 1818 james.clemence@hk.pwc.com Berin Chan +852 2289 5504 berin.db.chan@hk.pwc.com Robert Keys +852 2289 1872 robert.b.keys@hk.pwc.com Jane Cheung +86 (21) 2323 3031 jane.kc.cheung@cn.pwc.com Theresa Chan +852 2289 1887 theresa.ky.chan@hk.pwc.com Steven Lim +852 2289 3998 steven.lim@hk.pwc.com The information contained in this publication is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PwC International Assignment Services Holding Pte Ltd. ( PwC ) or any other entity within the PwC network. PwC has no obligation to update the information as law and practices change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC client service team or your other advisers. The materials contained in this publication were assembled in December 2017 and were based on information available at that time. 2017 PwC International Assignment Services Holding Pte Ltd. All rights reserved. In this publication, PwC refers to PwC International Assignment Services Holding Pte Ltd, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 5