Tax cuts and jobs act - KPMG

Tax Cuts and Jobs Act Impact on U.S. Inbound Companies

Fred R. Gander

9 November 2017

Program agenda Background for U.S. corporate income tax reform 1

— Where are we now? — Perspective — Overview of Tax Cuts and Jobs Act Key provisions for U.S. inbound companies — Lower 20% corporate tax rate — Immediate 100% expensing for qualified property acquisitions — Significant new limitations on interest expense

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— Mandatory repatriation tax on deferred overseas CFC earnings — Foreign dividends participation exemption/foreign tax credit modification — New 20% excise tax on certain payments to foreign affiliates — New ‘global minimum tax’ of “Foreign High Return” Income/Subpart F modifications — Notable U.S. international tax provisions left unchanged

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Legislative timeline and process

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Action steps for immediate consideration

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 722556

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Background and perspective

Tax reform

Where are we now? For the first time since 2006, the Republican Party control the House, Senate, and White House simultaneously After months of stop/start action and delays, U.S. tax reform process is finally accelerating On November 2, 2017, the Tax Cuts and Jobs Act draft legislation was released

Ambitious goal of 2017 calendar year-end enactment into law

Although release of first actual draft legislation is a major step forward, significant additional and politically complicated steps still required to achieve enactment


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Largest reform since 1986–HR1

Released Nov 2, 2017

$1.5 Trillion Cut

Effective Jan 1, 2018


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The Tax Cuts and Jobs Act Lower Corporate Rate – 20% Immediate Expensing But Strengthened Interest Expense Limitation Rules

Participation Exemption & Mandatory Repatriation

Global game-changing tax reforms New ‘Imports’ Excise Tax

Modification of FTC & Subpart F

‘Global Minimum Tax’


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U.S. inbound company-specific considerations

Key provisions for U.S. inbound companies Corporate tax rate

Corporate tax rate lowered to 20% beginning in 2018


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Key provisions for U.S. inbound companies (continued) 100% expensing for qualified property acquisitions — For 5-year period, immediate expensing allowed for capital investments in certain depreciable assets acquired and placed in service after September 27, 2017 and before January 1, 2023 - Does not apply to goodwill or other amortizable intangible assets - Does not apply to property used in a real estate business — Certain property acquired prior to September 28, 2017 but placed in service 2017 eligible for 50% expensing with a phase down from 40% to 30% for certain property placed into service through 2020 — New 100% expensing applies to new and used property acquired in an arm’s length transaction — Not applicable to property acquired in a non-taxable exchange such as a tax-free reorganization or from certain related parties


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Key provisions for U.S. inbound companies (continued) Net interest expense limitation – 30% rule — Net U.S. interest expense limited to 30% of ‘Adjusted Taxable Income’ (‘ATI’) - ATI is generally defined as taxable income without regard to NOLs, business interest income, amortization / deduction, and non-business gains or losses - Applies to ALL debt (related and third-party obligations)

— Applies to corporate and non-corporate entities (e.g., partnerships) — Carryforward of disallowed interest limited to 5 years (Sections 381/382 apply) — Small businesses and real estate industry largely exempt — Current Section 163(j) repealed; Section 385 regulations????? — Effective for taxable years beginning after 31 December 2017


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Key provisions for U.S. inbound companies (continued) Disproportionate U.S. interest expense limitation – 110% rule — In addition to the 30% ATI limit, new limitation where U.S. interest expense disproportionate relative to multinational financial reporting group’s total financial statement reported interest expense — Deductible interest is limited to the ‘Allowable Percentage’ of 110% of the U.S. corporation’s interest expense paid or accrued (net of its interest income) — The Allowable Percentage is based on the U.S. corporation’s ‘Allocable Share’ of the multinational group’s reported net interest expense over the U.S. corporation’s reported net interest expense — The Allocable Share of the group’s reported net interest expense is determined based on the portion of the group’s total EBITDA that is attributable to the U.S. corporation


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Key provisions for U.S. inbound companies (continued) Disproportionate U.S. interest expense limitation – 110% rule — Applies to large global groups – global gross receipts > $100M annually — Consolidated U.S. tax group generally treated as single entity for computations — Apply both limitations (i.e., 30% or 110%); allow lower amount of deduction — Disallowed interest expense carried forward for up to 5 years — Effective for tax years beginning after 2017


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Key provisions for U.S. inbound companies (continued) Targeting base erosion

Global Minimum Tax

NonProportionate Interest Expense Limitation

‘Imports’ Excise Tax


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Key provisions for U.S. inbound companies (continued) Imports excise tax Certain Deductible Payments

Related Foreign Corporation

20%

Excludes Interest

Excise Tax Unless ECI Election Made


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Key provisions for U.S. inbound companies (continued) Imports excise tax — New 20% excise tax on certain deductible payments (‘specified payments’) made to certain 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 — Only applies to large multinational groups with significant U.S. intragroup payments - Global group gross receipts > $100M annually - In aggregate, U.S. companies (and U.S. branches) must make annual average $100M+ ‘specified payments’ to certain foreign affiliates over 3-year period — Effective for tax years beginning after 2018


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Key provisions for U.S. inbound companies (continued) Imports excise tax Alternative Elective ECI Regime — Election to avoid 20% excise tax regime and treat ‘specified payment’ amount as U.S. net trade or business income - Subject to U.S. tax as if foreign affiliate has a U.S. taxable presence and ‘specified payment’ is U.S. trade or business income (20% net income tax rate) - U.S. net taxable income based on global group reported profit margins by relevant product line Other — FTCs available???? — Authority for anti-conduit rules — Limited exception applies to ‘at cost’ intercompany services and certain commodity transactions


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Key provisions for U.S. inbound companies (continued) Mandatory repatriation tax on deferred overseas earnings — Deemed Mandatory Repatriation of historical profits of foreign subsidiaries subject to a one-time tax charge - 12% rate on cash & cash equivalents - 5% rate on non-cash - Election to spread tax liability payments ratably over 8 years — Applies to 10% or more U.S. shareholders (regardless of CFC status) — Include in income foreign corporation’s non-previously taxed E&P as of: - November 2, 2017 or December 31, 2017 (whichever E&P amount is greater) - Generally, aggregate E&P not reduced by distributions in 2017 — Scaled back FTCs – but excess credit carryforward available — Effective January 1, 2018


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Key provisions for U.S. inbound companies (continued) Modifications of credits/NOLs/tax incentives Preservation of R&D credits Net Operating Loss (NOL) modification — The use of NOL carryforwards would be limited to 90% of the loss corporation’s taxable income in a given year — Carryforward for an indefinite period of time — No carrybacks except in certain casualty and disaster losses — NOL carryfowards would be increased by an interest rate adjustment factor to preserve its value — Effective for NOLs arising in tax years beginning after 2017

Eliminations of tax incentives/ deductions — No deduction for domestic production activities (Section 199) for tax years beginning after 2017 — No deduction for certain costs related to entertainment, membership dues, fringe benefits provided to employees, and other similar expenses for tax years beginning after 2017 — Tax free ‘like-kind exchanges now limited to real property only for transfers occurring after 2017 (however, denial of ‘like-kind exchange’ treatment to non-real property largely offset by grant of 100% expensing for used property)


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Key provisions for U.S. inbound companies (continued) Participation exemption for dividends but NOT share gains Replacement of FTC and deductions with a 100% foreign source dividend exemption regime — Distributions made after 2017 — 10% or greater foreign subsidiaries — Expenses allocable to exempt dividend not deductible

Repeal of current taxation of CFC investments in U.S. property (i.e., Section 956 income) — Effective for tax years beginning after 2017

Stock basis adjustment for exempt distributions to limit loss transactions from sale of stock


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Key provisions for U.S. inbound companies (continued) Foreign Tax Credit Modification No indirect FTC or deduction generally allowed with respect to dividends qualifying under new Participation Exemption Regime:

But, FTC or deduction allowed for: — Subpart F Income - On a current year basis; - Without regard to pools of foreign earnings kept abroad


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Key provisions for U.S. inbound companies (continued) Subpart F modification: Overview

Subpart F rules retained and mostly unchanged

Look-thru rule for related CFCs permanent

Expanded stock attribution rules for determining CFC status

30-day CFC ownership Subpart F rule eliminated


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Key provisions for U.S. inbound companies (continued) Subpart F: Modification of stock attribution rules Current

— U.S. corp may constructively own stock held by certain related parties, affiliates, and shareholders

Proposed

— PLUS… constructive ownership through stock held by its foreign shareholder

— Potentially significant increase in CFCs – Creates CFCs from foreign corporations brother-sister to U.S. Shareholder


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Key provisions for U.S. inbound companies (continued) Global minimum tax on foreign high profit subsidiaries High-Level Basics — 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 basis — Current income inclusion under Subpart F system - Current U.S. taxation limited to pro-rata share of 50% of ‘foreign high returns amount’ across entire group of foreign subsidiaries — Special FTC regime – - Capped at 80% of foreign taxes paid - New separate basket, and - No carryforwards or backwards


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Key provisions for U.S. inbound companies (continued) Global minimum tax on foreign high profit subsidiaries High-level mechanics — Foreign high returns amount - (a) Total net income of foreign subsidiaries LESS (b) deemed routine return on aggregate tax basis in depreciable trade or business tangible property, adjusted downward for interest expense - Deemed routine return rate = 7% plus U.S. federal short-term rate (e.g., 1.27%) - Excludes U.S. ECI, Subpart F income, and certain other income Effective date — Effective tax years beginning after 2017 for foreign corps, and for tax years of U.S. shareholders in which or with which such tax years of foreign subsidiaries end.


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Key provisions for U.S. inbound companies (continued) Notable U.S. international tax rules left (Mostly) unchanged

Anti – Inversion Rules

FIRPTA

Section 385 Regs ???

PFIC


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Legislative timeline/path to enactment

Timeline and next steps; Proposed path to enactment In October 2017, U.S. House approved the Senate’s budget plan, which allows tax reform to move forward with a simple majority (51 votes) in the Senate via arcane ‘Budget Reconciliation’ procedure On November 2, 2017, the Tax Cuts and Jobs Act draft legislation was released Starting today, House Committee on Ways and Means will commence markup with aim to conclude mark-up this week By November 23, 2017 (Thanksgiving), full House to vote on U.S. tax reform legislation Senate will launch a parallel process led by Senate Finance Committee (expect initial Senate U.S. tax reform draft legislation as soon as this week) Senate to vote on Senate version of legislation by late November/early December Joint House and Senate Conference Committee (“Joint Committee”) to convene to resolve differences between Senate and House versions and agree unified tax reform bill By December 25, 2017 House and Senate to vote on (and pass) Joint Committee legislative draft By January 1, 2018, President Trump to sign U.S. tax reform bill into law Any slight delay to any of the above steps could significantly delay and derail prospects for enactment in 2017! IT WILL CERTAINLY NOT BE EASY….


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Senate 2017

Majority Leader: Mitch McConnell (R-KY) Chairman, Senate Finance: Orrin Hatch (R-UT)

Democrats

48

Republicans

52


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House 2017

Speaker: Paul Ryan (R-WI) Chairman, Ways and Means: Kevin Brady (R-TX)

Democrats

194

Republicans

241


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Action steps

Action steps for immediate consideration 1. Develop high-level economic model of overall effect on the company’s tax position 2. Consider investment in U.S. capital equipment to benefit from immediate expensing 3. Consider restructuring related-party supply chain to avoid ‘imports’ excise tax 4. Evaluate U.S. and global debt levels under new interest expense limitation rules 5. Compute E & P to the extent of exposure to mandatory repatriation tax 6. Evaluate opportunity to defer income to 2018 and accelerate expenses/losses in 2017 7. Evaluate DTA/DTL book impact of the legislation


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Thank you

Fred R Gander Lead Partner KPMG U.S. Tax Services (London) LLP [email protected] +442073112046

Notice The content presented in this presentation is for discussion purposes only and is not intended to be ‘written advice concerning one or more Federal tax matters’ within the scope of the requirements of section 10.37(a)(2) of Treasury Department Circular 230. To the extent that you decide to act, or not to act, based on any information contained in this presentation you acknowledge that the information was prepared based on facts, representations, assumptions, and other information you provided to us, the completeness and accuracy of which we have relied on you to determine. In addition, the information contained herein is based on tax authorities that are subject to change, retroactively and/or prospectively, and any such changes could affect the observations made or any conclusions reached that are contained herein. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The advice or other information in this document was prepared for the sole benefit of KPMG’s client and may not be relied upon by any other person or organization. KPMG accepts no responsibility or liability in respect of this document to any person or organization other than KPMG’s client. Any advice in this document is preliminary in nature and is should not be construed as final. In various parts of the document, for ease of understanding and as a stylistic matter, we might use language (such as ‘should’) that could suggest that we reached a final conclusion on an issue. Such language should not be so construed. No inference should be drawn on any matter not specifically opined on.


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Tax cuts and jobs act - KPMG

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