US tax reform joint bill released

On Friday, 15 December 2017, the Tax Cuts and Jobs Act was released out of conference and is now in the process of being voted on in the US House of Representatives and US Senate. It is anticipated that this will be the final version of the US tax reform bill. Once President Trump signs it into law, potentially before the holiday break, it will bring with it the most comprehensive overhaul of the US tax system in over 30 years.

The below includes our initial thoughts on some of the key corporate and international provisions. A copy of the EY US Washington Council Alert that includes a more detailed summary of the bill is attached for your reference.

Rate Reduction and Immediate Expensing

  • Corporate Income Tax Rate Reduced to 21%. The rate reduction is effective on 01 January 2018 for both calendar and fiscal year taxpayers.   
  • Immediate Expensing of Qualified Property. The joint bill provides for temporary immediate expensing of tangible assets (excluding land and buildings) though generally not applicable to intangible assets.
  • Corporate Alternative Minimum Tax. Corporate AMT is eliminated.
  • Net Operating Loss Limitations. For losses arising in tax years beginning after 2017, the NOL deduction would be limited to 80% of taxable income.

Prevention of Base Erosion

  • Interest Expense Limitations. US interest deductions on related and unrelated party debt are limited to 30% of EBITDA (restricted to EBIT beginning in 2022). The additional worldwide debt capacity limitation on interest expense was eliminated from the joint bill (a welcome change for a lot of EMEIA groups).
  • Anti-Base Erosion Provisions. The Senate base erosion anti-abuse tax (BEAT) was retained. The BEAT is essentially an alternative minimum tax that may disallow a deduction with respect to certain related party deductible payments, excluding COGS but including interest to calculate minimum taxable income. Such minimum taxable income would be subject to US tax at a 5% rate for the first year and a 10% rate thereafter (increasing to 12.5% after 2025). The BEAT applies to US groups with: (i) gross receipts in excess of $500m; and (ii) that have made related party deductible payments totaling 3% or more of total deductions.
  • Anti-Hybrid Rules. No deduction would be allowed for payments to a related non-US hybrid entity or payments to non-US related parties on hybrid instruments. The statue grants the right to Treasury to issue regulations to target certain arrangements.

International Proposals

  • 100% Dividend Participation Exemption. Dividends received from 10% owned non-US subsidiaries would be exempt from US tax, though capital gains would still generally be subject to US tax.
  • Mandatory One-Time Transition Tax. A one-time transition tax is levied on a US corporation’s foreign accumulated untaxed earnings at a 15.5% rate for cash/cash equivalents and an 8% rate for the balance.
  • Additional Controlled Foreign Corporation Rules. The existing US CFC rules are retained and expanded to include a new category of CFC income – global intangible low-taxed income (GILTI). The GILTI regime subjects to US tax currently 100% of the aggregate profits of all CFCs in excess of a 10% routine return on tangible assets. Foreign tax credits (FTCs) may be available to offset a portion of the income. The GILTI regime effectively subjects the offshore earnings to US tax at a 10.5% rate (increasing to 13.125% after 2025). 
  • New Foreign-Derived Intangible Income Rules. A 13.125% rate of US tax (increasing to 16.406% after 2025) is applied to certain export income (including royalties, services, sales) earned by US companies. The provision that provided temporary tax free repatriation of intangible property was not included in the joint bill.

Rikard Ström

 

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Rikard Ström
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