The die is cast! After weeks of busy discussion and negotiations, the US Congress voted to approve the “Tax Cuts and Jobs Act” (H.R. 1). The changes represent the most significant and fundamental tax reform in the US in over 30 years. The rumors abound as to when President Trump will hold a signing ceremony for the Bill, but it could be as late as early January.
The developments remain exciting, but what should Swiss and foreign groups with US operations be doing now to prepare? We shine the spotlight on the key business provisions that could affect them and consider what Swiss groups should be doing.
Reduction of the rate and changes in tax base
As highlighted in our previous blogs, the reform focuses on creating a more competitive corporate regime in the US, attracting more investment and leveling the playing field for US versus non-US-parented companies. This includes the following features:
- Reduction of the federal tax rate from 35% to 21%, applicable as of 1 January 2018
- Full expensing of capital expenditures that generally apply to tangible property that is new to the taxpayer
- An interest deduction limited to 30% of EBITDA that applies to all interest. In addition, deduction is denied for interest and royalties that are paid or accrued to a related party in connection with a hybrid transaction and/or hybrid entity. The group disproportionate debt rule (“110% rule”) has been removed from the unified Bill
- Limitations of net operating losses (NOLs) to 80% of the corporation’s taxable income
Move to territorial regime and mandatory repatriation
The Bill represents a shift to a territorial regime with a participation exemption on foreign dividend income (but not on capital gains). Due to such fundamental change, US shareholders with an interest in a foreign corporation must include the undistributed, previously non-taxed foreign earnings that would be subject to mandatory repatriation. As a result, tax is immediately payable at a rate of 8% for illiquid assets and 15.5% on liquid assets.
The Bill includes rules from the Senate’s Bill that lead to an immediate taxation in the US of passive and mobile income from foreign corporations of a US group (with deductions that lead to a lower effective tax rates on such income).
Limiting base erosion: “BEAT”
A Base Erosion Anti-Abuse Tax (BEAT) will be imposed on “bad” payments. Unlike the excise tax, bad payments under BEAT do not include costs of goods sold but do include interest, royalties or service payments to foreign related parties. It operates as a minimum tax imposed if the US company’s ‘modified taxable income’ computed at a rate of 10% exceeds its regular US tax liability.
Further details and our initial observations about the Billed passed at Congress can be found here.
What now for Swiss companies?
As highlighted above, the changes in the tax system are fundamental and there is little guidance regarding application of these new rules. Swiss groups are well advised do the following:
- Depending on the date of signing by President Trump, the impact for financial reporting may vary. In any case, the 2017 financial statements will have to take it into consideration, at least as a disclosure. In order to prepare companies should in particular look into the following fields:
- Evaluate deferred tax assets/liabilities and further financial reporting impact of the legislation
- Compute earnings and profit to the extent of mandatory repatriation tax exposure
- To understand the impact of the new rules, companies should model and assess the impact of the various measures as follows:
- Develop high-level economic model of overall effect on group’s tax position/effective tax rate
- Evaluate US and global debt levels under interest expense and hybrid mismatch rules
- Companies should also look at planning measures in order to mitigate the impact of the new measures:
- Evaluate opportunity to defer income to 2018 and accelerate expenses/losses in 2017
- Consider investment in US capital equipment to benefit from immediate expensing
- Evaluate benefits, including possibly inbounding foreign subsidiary IP to the US and modeling deduction for foreign intangibles income
- Consider restructuring related-party supply chain to minimize base erosion payments tax
KPMG’s experienced and dedicated tax professionals and sophisticated modeling tool can assist your company as you navigate the US tax reform landscape.