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U.S. Tax Reform – What Happened and Where is it Going?

Voorwoord

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Vele vermogensbeheerders worden geconfronteerd met tal van vragen en onzekerheden wanneer zij U.S. klanten voor zich hebben. Dit nummer wordt dan ook helemaal besteed aan de belangrijke fiscale hervorming die men eind 2017 in de U.S. heeft gestemd. Het gaat hier over de meest verreikende hervorming sinds 1986.

In de onderstaande samenvattende bijdrage voor Jubel (Engelstalig) bespreken Andro Petrosovitch, Kai Holderby en Boris Kanchev (Global Business Tax – U.S. Corporate Tax, Deloitte) de krachtlijnen van de recente U.S. Tax Reform en haar potentiële globale impact. Het volledige artikel is te lezen in het recentste nummer van Tijdschrift Beleggingsfiscaliteit.

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Ik wens u veel leesgenot!

Dirk Coveliers, hoofdredacteur

U.S. Tax Reform – What Happened and Where is it Going?

1986 was the last time a major tax overhaul was enacted in the U.S. until President Trump signed the “Tax Cuts and Jobs Act” on December 22, 2017. This reform brings many changes for various taxpayers, specifically fundamental changes to the taxation of multinational companies.

 The “Good”

 The widely-recognized goal of this bill was to attract investment into the United States while simplifying the tax code. Lawmakers intended to incentivize companies through various provisions in the tax code including, most notably, reducing the federal corporate tax rate from a graduated top rate of 35% to a flat 21% rate. The 2017 Tax Act also repeals the corporate alternative minimum tax from 2018.

Bonus depreciation rules under the old law were kept and the bonus amount was increased to 100%. 100% bonus depreciation applies for eligible property – generally property with a depreciable recovery period of 20 years or less not previously used by the taxpayer and placed in service between September 27, 2017 – December 31, 2022. The bonus eligible percentage phases down through 2027. Used property is eligible if ‘new’ to this taxpayer as long as it was not purchased from related parties.

Foreign Derived Intangible Income (“FDII”) effectively creates a new preferential tax rate for income derived by U.S. domestic corporations from selling products and providing services to foreign markets. The new FDII deduction was supposedly using the example of “patent box” regimes to incentivize U.S. companies to develop or bring back intangibles (and substance) in the U.S. The effective U.S tax rate resulting from the complex FDII calculation is approximately 13.125%, but is only available for U.S. companies that have sales, services or license intangible property to foreign customers.

Tax reform was branded as a move from worldwide taxation to a “territorial” regime. However, it seems that the outcome represents more of a hybrid territorial tax system with a limited participation exemption. A full dividend-received deduction is provided to U.S. corporate taxpayers for certain dividends received from non-U.S. subsidiaries. However, preserving the controlled foreign corporation (“CFC”) Subpart F rules and adding a global minimum tax system (“GILTI” regime) achieved more of a global full inclusion system at a lower effective rate.

The “Bad”

The move to the new system was marked by the “transition tax” provision that levies one-time tax on all post-1986 deferred earnings of specified foreign entities held by certain U.S. shareholders. Deferred earnings are taxed at two different effective rates: 15.5% to the extent of assets held in cash and cash equivalents and 8% for earnings held in other assets. Corporate taxpayers (or individuals making certain elections) can offset the transition tax with partial foreign tax credits for taxes paid abroad when calculating this deemed distribution of foreign earnings. The total transition tax can be paid over 8 years if an election is made with the first post-reform return of the U.S. shareholder.

Base broadening measures are highlighted by the Global Intangible Low-Taxed Income (“GILTI”) and Base Erosion Anti-Abuse (“BEAT”) taxes, effective as of 2018. A basic high-level review shows that the GILTI regime requires U.S. shareholders of CFCs to pay an effective worldwide tax of at least 10.5% in any given year before the end of 2025 or 13.125% after that. Complex calculations involving haircut foreign tax credits for taxes paid abroad are required to arrive at the final GILTI tax inclusion. A key take-away is that the non-U.S. effective rate needs to be at least 13.125% (or 16.406% after 2025) for no additional GILTI tax to apply to U.S. shareholders.

The BEAT provisions serve as a minimum tax concept to ensure that foreign-held U.S. companies do not reduce their tax liabilities through base eroding payments to foreign related parties. BEAT rules target large taxpayers and apply only to groups exceeding $500 million or more in average U.S. gross receipts for the past 3 years that must also have deductible related party payments exceeding a certain threshold (3% of total deductible payments in any given year for most, 2% for banks and securities dealers). Generally, base eroding payments are deductible amounts paid or accrued to foreign related parties with certain notable exceptions (e.g. payments included in cost of goods sold). Under the BEAT concept, if the regular tax liability is less than 10% (5% for 2018) of the modified taxable income disregarding base eroding payments, additional BEAT tax is applied.

Interest deductibility in the U.S. was already limited on payments to foreign related parties before 2018. Tax reform brought updated rules similar to the BEPS principle based on which several OECD countries have recently changed their interest deduction limitations, most notably Germany. Under the new rules, the allowable interest deduction is the total interest income plus 30% of EBITDA (Earnings Before Interest Tax Depreciation and Amortization – through 2021) or EBIT (after 2022). The new rules apply to all U.S. groups that have $25m or more in average gross receipts in the last 3 years. The provision also applies to all interest (not only paid to related parties) and to partnerships. Disallowed interest can be carried forward indefinitely, but any current year excess limitation (if all interest paid is deducted) cannot be carried forward and used to increase the limitation in later years.

New net operating losses (“NOL”) provisions prescribe that U.S. federal NOLs incurred in tax years after 2017 can be carried forward indefinitely and do not expire, but are only allowed to offset up to 80% of the corporate taxable income in any given year. In comparison, losses incurred before 2018 would generally be available only for 20 years and expire after that, but could fully offset taxable income.

The “Ugly” / “Unknown”

Major tax overhaul comes with simplification for U.S. individuals and U.S. corporations only involved in domestic activities, but also brings complex reporting requirements to multinational companies.

Transition tax has already caused significant concern for U.S. shareholders in tech and big pharma, while most international groups are looking into optimization to comply with GILTI, BEAT and new interest deduction limitations. Various reports suggest that the reduction in the federal corporate income tax rate has already spurred positive projections for large financial services groups. The FDII incentive has already been challenged in the World Trade Organization (WTO) for providing an unfair advantage to U.S. based business, yet the current U.S. administration seems to be firmly supporting all new rules.

It remains to be seen how additional guidance affects taxpayer decisions and shapes overall economic impact. The U.S. treasury and the Internal Revenue Service have been busy throughout 2018 proposing new rules to clarify transition tax, bonus depreciation, GILTI, etc. and further guidance is expected for BEAT and GILTI in the upcoming months. Various compliance obligations triggered by the new provisions need to be clarified for multinational companies, while U.S. Congress is also discussing proposals to clear technical issues in the 2017 tax act.

As with any reform, the unknowns also include complex politics such as bipartisan support and positions on provisions set to expire in the upcoming years. Each of the 50 U.S. states needs to adopt a position with respect to all new rules which could result in further complexity for multinationals in 2018.

– Andro PETROSOVITCH, Partner, Global Business Tax – U.S. Corporate Tax, DELOITTE
– Kai HOLDERBY, Manager, Global Business Tax – U.S. Corporate Tax, DELOITTE
– Boris KANCHEV, Senior Consultant, Global Business Tax – U.S. Corporate Tax, DELOITTE

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