KPMG's international tax reform analyzer · KPMG’s international tax reform analyzer 9 KPMG’s...

Modeling the potential impact of tax reform

KPMG’s international tax reform analyzer

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The U.S. tax law enacted in December 2017 (the 2017 Tax Act) is a game changer for many businesses—especially multinational organizations. On the international tax front, the 2017 Tax Act is complicated, introducing a number of new tax concepts that are layered on the existing tax system and may have a significant impact on an organization’s global effective tax rate (ETR) and cross-border tax planning. Even the most experienced international tax practitioners can become mired in the complexity when evaluating the potential impact of these rules on a company’s global operations.

KPMG LLP’s (KPMG) international tax reform analyzer (ITRA) can help.

© 2019 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.

The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 863524

Why KPMG’s ITRAITRA is an Excel-based tool that allows for extensive modeling of international tax rules—both those introduced by the 2017 Tax Act and existing provisions—with support from KPMG’s experienced International Tax partners and professionals to help tailor modeling and assist with identifying significant planning opportunities. ITRA can help you with increased visibility into your global tax profile, the key drivers of your global ETR, and what planning can be considered to potentially improve your tax position.

The key features of ITRA include:

— Powerful modeling capabilities with the ability to handle modeling for tax provision, tax compliance, and tax planning use cases all in the same model

— Scalability that can accommodate both “back-of-the-envelope” and in-depth calculations

— Extensive scenario planning ability that can help align tax planning with business goals and objectives

— High-impact outputs to help visualize and compare planning opportunities, perform cost-benefit analyses, and effectively communicate with stakeholders

— Regular updates reflecting the latest tax technical guidance by the U.S. Department of Treasury and the Internal Revenue Service.

3KPMG’s international tax reform analyzer

Post–tax reform rules are highly interdependent.You cannot rely on intuition. The significant interaction among various post–tax reform rules requires detailed modeling at both the controlled foreign corporation (CFC) and U.S. shareholder levels to help determine the potential global tax impact of tax reform and tax planning.

U.S. shareholder level

Modeling

Cash management

CFC level

Taxable income/

NOLs

FTClimitation/ utilization

BEAT

FDII and GILTI

Subpart F income

Section 163(j)

— Foreign tax credits

— Losses/deficits

Section163(j)

E&P adjustments

Subpart F

GIL TI

Income sourcing/Section

861

© 2019 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. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 863524

ITRA can handle multiple use cases.ITRA can be used to model calculations for quarterly tax provisions and for the year-end compliance process. It can also accommodate the modeling of any number of planning scenarios for up to 20 years using percentage growth rates or actual projections.

ITRA is scalable.Depending on the objectives, ITRA can be used for high-level directional analyses to, for example, check a company’s high-level global intangible low-taxed income (GILTI) calculation. Or, ITRA can be used to model detailed base case and scenario planning, taking into account the potential impact of the new international tax provisions and their interaction with legacy rules, using refined financial data by legal entity, including the allocation and apportionment of expenses to groupings of income at both the foreign entity and U.S. shareholder levels.

ITRA can model multiple scenarios.ITRA can be used to model multiple scenarios within the same base model, including scenarios involving acquisitions, dispositions, supply chain planning (e.g., the movement of intellectual property from offshore to the United States or from a reverse hybrid to a nonreverse hybrid), changes to the mix of GILTI inclusions versus subpart F inclusions, foreign tax credit (FTC) limitation planning, and legal entity and debt restructuring planning, among others.

ITRA produces high-impact outputs.ITRA outputs include (1) visuals generated by Power BI that highlight key drivers of the base case global tax profile and the potential impact of proactive planning scenarios and can be used in discussions with tax, finance, and C-suite stakeholders and (2) Excel reports—organized by key tax reform provision and structured to take a user through ITRA inputs, tax rule calculation flows, and resulting numerical outputs. In addition, ITRA is able to interface directly with Corptax and Thomson Reuters ONESOURCE Income Tax and GoSystem Tax RS tax compliance software. More information about this interface is provided on page 11.

ITRA links to other KPMG technology.ITRA is a cross-functional tool that can connect with other KPMG tax tools, including KPMG’s PTEP/Repat model and KPMG’s state and local tax reform model (SALT model). More information about these models is provided starting on page 9. As a result, a broader picture of the potential impact of tax reform can be achieved.



Overview of U.S. taxable income calculationThis schematic provides a high-level overview of ITRA’s calculation flows—from key inputs to CFC-level calculations to U.S. shareholder-level calculations—taking into account the various interplays of the rules.

Inputs

Other Domestic Credits & Inputs

U.S. Taxable Income(Pre-subpart F, GILTI, 163(j), 956 Inclusion)

BEAT

FDII

GILTI

Section 250 Deduction

163(j) Limitation

Subpart F

Foreign Source Income Determination by Foreign Basket

Tentative Section 250 Deduction

Section 956 Loans that Result in Inclusions

FTC Limitation Calculation by Basket

U.S./Foreign Source Income Determination for FTC Purposes

Basketing of Foreign Source Gross Income

CFC 163(j) (Excess Taxable Income)

Foreign Expenses Section 861 Allocation at Legal Entity Level

U.S. Expenses – Section 861 Allocation

FDII Qualifying Transactions

BEAT Payments

U.S. Legal Entities(including Foreign Branch Ownership)

Foreign Legal Entities andRelevantOwnership

Foreign E&P by Legal Entity

Designation of GILTI USSH

U.S. Tax Attributes (FTCs, NOLs, OFLs, ODLs, SLLs, etc.)

Calculations

U.S. Taxable Income Calculation (Post-subpart F, GILTI, 163(j), 956 Inclusion)

5KPMG’s international tax reform analyzer© 2019 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. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 863524

ITRA’s scopeITRA’s functionality encompasses calculations at both the CFC and the U.S. shareholder levels, including the ability to help analyze how the impact of various tax focus areas may affect your global ETR—in both dollar and rate terms—and concisely summarizes the total potential impact of the 2017 Tax Act (base case) and potential planning scenarios.

Specifically, ITRA can help analyze the potential impact of a corporation’s base case and global tax profile across such areas as:

— Foreign tax planning and rate differential

— GILTI inclusion

— GILTI IRC section 250 deduction

— Subpart F inclusion

— FTC utilization

— Foreign-derived intangible income (FDII) IRC section 250 deduction

— IRC section 163(j) limitation

— Base erosion anti-abuse tax (BEAT)

— Other permanent items.

In addition, ITRA can help analyze the potential impact of various scenarios, including, among others:

— GILTI/proactive subpart F

— FTC planning

— High-tax exception analysis

— FDII planning

— BEAT planning

— 163(j) planning

— Acquisition scenarios

— Disposition scenarios

— IP restructuring scenarios

— Entity/loan restructuring scenarios

— Local country tax planning.




Base case and scenario 1 cash tax expense comparisonThis sample chart—another output from ITRA—compares the base case and scenario 1 cash tax results of planning by key focus area such as, among others, FDII, GILTI, subpart F, and 163(j).

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Scenario 1

Potential cash tax savings of approximately

$16.2 million

Decreased interest disallowance

Utilization of high foreign taxesIncreased FDII

Visualization samplesEstimated global ETR reconciliationThis sample ETR bridge chart—an output from ITRA—starts on the far left with global earnings subject to the new 21 percent corporate rate and then highlights the potential impact of selected items (e.g., the foreign tax rate differential and the potential impact of GILTI, FDII, BEAT, 163(j), and other cash tax or rate reconciling items) to come to the resulting global ETR on the far right of the chart.


Example of Excel outputThe following is an example of an Excel report output from ITRA. In this case, the report walks through a section 163(j) calculation from key inputs to tax rule calculation flows and ends with calculated amounts.




KPMG’s PTEP/Repat modelThe PTEP/Repat model is an Excel-based complement to ITRA. The model is designed to address the complex rules associated with distributions and tracking previously taxed earnings and profits (PTEP). The model applies the new distribution ordering rules on 16 potential annual layers of PTEP for four categories of income, calculating the applicable withholding tax, section 986(c) foreign exchange gain/loss, section 960(b) FTCs, basis adjustments, section 965 exclusion ratios, and section 245(e) adjustments.

The PTEP/Repat model is designed to assist in the following areas:

— Planning: Allows for the modeling of various potential distributions and their associated potential costs to help identify tax-efficient ways to repatriate cash

— Provision: Depending on APB 23 assertions, enables analysis of PTEP movement and associated potential tax implications

— Compliance: Serves as a detailed and transparent check against any high-level compliance or “black box” calculation

— Treasury hedging against foreign exchange risk: As the potential section 986(c) gain/loss is now much more material for many companies, allows for quick and regular determination of this value and for potential hedging against it

— M&A and spin-offs: Calculates section 1248 and section 964(e) and basis adjustments for due diligence

— Tax compliance: Creates a Schedule J output report by entity to help teams complete compliance tasks and understand current-year additions/subtractions to the relevant baskets of PTEP; see following example.


Overview of PTEP analysisThis schematic provides a high-level overview of the PTEP/Repat model’s calculation flows—from key inputs and ITRA integration to potential tax impact from a distribution—taking into account the various rules.

ITRA Attribute Tracking Distribution Analysis

Subpart F (by year)

GILTI (by year)

245A Eligible Foreign E&P

Foreign Legal Entities and Relevant Ownership

959(c)(1) PTI (by annual layer in FC)

Distribution Ordering Rules

959(c)(2) PTI (by annual layer in FC)

959(c)(3) E&P (by annual layer in FC)

Mandatory Repat Tool

Blended 965(g) %

Blended 965(c) %

965(b) PTI

965(a) PTI

Inputs Calculations

Distribution Info (amounts, entities, WHT rates, etc.)

960(b) FTC by 904 Basket

986(c) Gain/Loss by 904 Basket

USD Basis of PTI Distribution

Local Withholding/ Income Tax on Distribution

Reclass for 956 Loans

Determine Treatment of 245A(e) Hybrids

Pooling or Direct Tracing

USD Basis in PTI

960(b) FTCs

Distribution up Chain

Distribution to U.S.

— 959(c) ordering rules

— Treatment of multiple distributions from entity in year

— Allocation of distribution to different subbaskets of 959(c)(2) and 959(c)(1) PTI (e.g., GILTI PTI versus 965(a) PTI)

— Within an annual layer, PTI received from a lower-tier entity distributed before PTI generated at the entity

— Determining distributions of PTI where entity has multiple U.S. shareholders



States and local jurisdictions have responded to federal tax reform with legislation and various versions of their own tax reform. An add-on to ITRA, the SALT model helps to measure the potential state and local income tax impact of tax reform by estimating and evaluating various significant provisions of tax reform, including:

— Section 965

— GILTI and the related section 250 deduction

— FDII

— Section 163(j) group and separate calculations

— Bonus depreciation or 100 percent expensing.

KPMG’s SALT model

ITRA’s tax compliance connectorITRA’s tax compliance connector (ITRA TCC) interfaces directly with third-party corporate income tax compliance tools, such as Corptax and Thomson Reuters ONESOURCE Income Tax and GoSystem Tax RS tax compliance software. For the upcoming compliance season, without this automated connection, multinational companies may have to conduct supporting international tax calculations and complete forms using “typewriter emulation,” which are needed under the 2017 Tax Act, outside their compliance software.

ITRA TCC enables KPMG’s Tax engagement teams and web-enabled desktop clients to populate automatically and complete e-filing the following forms:

— Form 8990 (Consolidated, by U.S. shareholder, by CFC)

— Form 8991

— Form 8992 (Consolidated, by U.S. shareholder)

— Form 8993 (Consolidated, by U.S. shareholder in development)

— Form 5471 (Schedules E, E-1, I, I-1)

— Form 1118 (Schedules C, D).

ITRA differentiators — ITRA is Excel-based, transparent, and not a “black box.”

— Clients can obtain personal desktop access to their Excel version of ITRA. (This capability is not available to KPMG’s SEC Audit clients.)

— ITRA has been used on hundreds of large clients.

— ITRA is a holistic and flexible Excel model that can be used for tax consulting, provision, and compliance.

— Regulations, other tax law changes, and enhanced functionality are added continually and on a timely basis.

— PTEP and other key attributes can be tracked via KPMG’s PTEP/Repat module.

— ITRA links to KPMG’s SALT module.

— Detailed, step-by-step ITRA output reports by key tax rule (e.g., FDII, GILTI, section 163(j), BEAT, and section 861 expense allocation and apportionment) are included.

— ITRA TCC includes output reports that mirror certain IRS tax forms.

— ITRA outputs can “automatically” link to third-party corporate income tax compliance software for efficient form population and e-filing.

KPMG’s international tax reform analyzer 11© 2019 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. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 863524

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

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Contact us

Jim CarrPartner, International TaxSanta Clara, [email protected]

Rob ClaryPrincipal, International Tax Chicago, [email protected]

Jason ConneryPrincipal, International Tax Washington, [email protected]

Tom HayesPrincipal, International TaxSeattle, [email protected]

Wally HendersonPartner, International Tax Atlanta, [email protected]

Tom JossPartner, International Tax McLean, [email protected]

Jason KingPartner, International Tax Philadelphia, [email protected]

Jahn KvalsethPartner, International TaxMinneapolis, [email protected]

Brad McPhailPrincipal, International TaxDallas, [email protected]

Bruce StelznerPartner, International TaxSan Diego, [email protected]

Jay TataPartner, International TaxBoston, [email protected]

Chetan VagholkarPartner, International TaxHouston, [email protected]

Kortney WallacePrincipal, International TaxDetroit, [email protected]

Tim WongPartner, Tax IgnitionSanta Clara, [email protected]

To learn more about KPMG’s ITRA, contact your local KPMG adviser or one of the following professionals:

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.


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