U.S. Tax Reform - KPMG | US · US tax reform impact. ... Net interest expense limitation ... the...

U.S. Tax Reform

Webinar for Australian MNC & Institutional Investors

Carol Kulish, Justin Davis, Patrick Jackman and Peter Madden

December 2017

2© 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.

With us today

Patrick JackmanUS - Washington National TaxTel: +1 203 406 8109Email: [email protected]

Justin DavisUS - Seconded Australian PartnerTel: +1 212 872 3847Email: [email protected]

Carol KulishUS - Washington National TaxTel: +1 202 533 5829Email: [email protected]

Peter MaddenAustralian Tax PracticeTel: +61 2 9335 7500 Email: [email protected]


Program AgendaU.S. Tax Reform – Current state of play— Journey to date, where are we now, next steps1

Key tax reform measures for Australian MNCs and institutional investors— Introduction – cornerstone provisions — Corporate tax rate— Interest expense limitations

— Example of 163(j) earnings stripping and worldwide debt cap limitations— Base erosion measures

— Example of House Excise and Senate BEAT measures — Full expensing— Corporate AMT and modifications to NOL usage— Participation exemption for foreign dividends— Global Intangible Low Tax Income (GILTI)— Example of US as a RHQ jurisdiction — Anti-hybrid rules

— Example

2

Q&A and closing remarks3

U.S. Tax Reform –

Current State of Play


A possible path to tax reform

Ways and Means Chairman releases mark 11/03/17

Markup by Ways and Means Committee 11/06/17

Ways and Means approves bill 11/09/17House

votes and passes 11/16/17

Senate Finance Chairman releases mark 11/10/17

Markup by Senate Finance Committee 11/14/17

Senate votes and passes by simple majority through “budget reconciliation” 12/02/17

Resolve differences and send back to House and Senate for vote on identical legislation

Final bill sent to President Trump for signature

Treasury and Internal Revenue Service begin process of implementing the new law

HouseBill introduced11/02/17

Senate White House

Joint Conference© 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 721411

Senate Finance Committee approves bill 11/16/17

Senate Budget Committee votes to send bill to Senate floor 11/28/17

Markup 11/09/17

https://home.kpmg.com/us/en/home/insights/2017/11/tnf-ways-and-means-chairmans-mark-released-in-advance-of-markup-november-6.html


https://home.kpmg.com/us/en/home/insights/2017/11/tnf-ways-and-means-chairmans-modified-mark-to-hr-1.html


https://home.kpmg.com/us/en/home/insights/2017/11/tnf-ways-means-chairman-amendments.html


https://home.kpmg.com/us/en/home/insights/2017/11/tnf-ways-means-reports-tax-reform-bill.html?z

https://home.kpmg.com/us/en/home/insights/2017/11/tnf-ways-means-reports-tax-reform-bill.html?z

https://home.kpmg.com/us/en/home/insights/2017/11/tnf-senate-finance-tax-reform-markup-set-for-monday-afternoon-november-13.html

https://home.kpmg.com/us/en/home/insights/2017/11/tnf-senate-finance-tax-reform-markup-set-for-monday-afternoon-november-13.html

https://home.kpmg.com/us/en/home/insights/2017/11/tnf-senate-finance-chairman-modified-mark-released.html

https://home.kpmg.com/us/en/home/insights/2017/11/tnf-senate-finance-chairman-modified-mark-released.html








House1 Senate1

1. Based on scores provided by the Joint Committee on Taxation. U.S. Dollar amounts are in billions.

2. Approximate.

Provisions

The Tax Cuts and Jobs Act: The numbers tell the story

$1,456 Reduce corporate rate to 20% $1,329

$597 Pass-throughs $339

$25 Temporary, limited expensing $27

$205 Territoriality $204

--- Onshore IP incentives $99

$293 Repatriation $298

$95 Base eroding payments/transfers $141

$68 Super Subpart F $135

$206 Interest expense reforms $317

$156 NOL reform $158

$95 Repeal section 199 $85

$1,073 Business and int’l tax reform deficit (including pass-through)2

$864

Key Measures for

Australian MNCs and

Institutional Investors


Cornerstone provisions for U.S. inbounds

Globalgame-changing

tax reforms

Lower Corporate Rate – 20%

Immediate Expensing ButStrengthened Interest Expense Limitation Rules

Net operating loss limitations and enhancements

Participation Exemption& Mandatory RepatriationTax

Tax on overseas excess returns/low taxed IP income

ImportsExcise Tax/Base Erosion Payment Tax


Key tax reform measures

Corporate tax rate lowered to

20% beginning in 2018(deferred to 2019 in Senate version)Approx. $100B revenue loss per point

Corporate tax rate reduction with no phase-in period

Potential impact for State and Local taxes?


Key tax reform measuresNet interest expense limitation – 163(j) earnings stripping

House Senate— Net U.S. business interest expense limited to

30% of ‘Adjusted Taxable Income’ (‘ATI’)- ATI is generally taxable income without

regard to NOLs, interest income, amortization/depreciation, and non-business gains or losses (similar to EBITDA)

- Applies to ALL debt (related and third-party obligations)

- No grandfathering

— Applies to corporate and non-corporate entities (e.g., partnerships); real estate industry largely exempt

— 5 year carryforward of disallowed interest (carryforwards are 381/382 limitation item)

— Effective taxable years beginning after 31/12/17

— Generally the same as the House version – net U.S. business interest expense limited to 30% of ATI- Unlike House version, ATI is

determined without adding back amortization / depreciation (i.e., EBIT)

— Amount disallowed may be carried forward indefinitely

— U.S. consolidated group treated as single entity for computations


Example – 30% interest expense limitationOverview

Facts and assumptions— US domestic corporation (US Co) has EBITDA of $50 and EBIT of $35.— US Co has unsecured foreign related party borrowings $200 at 6%, giving rise to $12 related party net interest expense.— US Co has secured third party borrowings of $400 at 4%, giving rise to $16 of third party net interest expense.

Current rules— S.163(j) currently applies to limit foreign related party borrowings and/or borrowings guaranteed by a related party to 50% of

EBITDA — This would give rise to a limitation of 50% x EBITDA of $50 = $25— Related party interest expense is only $12— The full $28 interest expense would be deductible— No net interest limitationSenate Bill:— §163(j) amended to limit all business net interest expense to 30% of EBIT — This would limit net interest expense deductions to 30% x EBIT of $35 = $10.5— Interest deductions allowed = $10.5— Interest deductions denied = $17.5House Bill:— §163(j) amended to limit all business net interest expense to 30% of EBITDA— This would limit net interest expense deductions to 30% x EBITDA of $50 = $15— Interest deductions allowed = $15— Interest deductions denied = $13

US tax reform impact

Earnings impact?



House Senate

— Additional limitation where U.S. interest expense is disproportionate relative to the multinational financial reporting group’s total financial statement reported interest expense (i.e., based on GAAP interest allocation)

— Limitation computations, in general, based on 110% of U.S. corporation’s share of global group’s financial statement EBITDA

— Applies to large global groups – gross receipts > $100M annually

— Apply both 30% and 110% limitation; allow only lower amount

— Disallowed expense carried forward 5 years; no excess limitation carryforwards

— Effective tax years beginning after 31/12/17

— Generally similar to the House provision, but is determined by reference to U.S. versus global group debt/equity ratios (rather than EBITDA ratio) by reference to tax values (rather than book)- Phase-in of 110% limitation over 4

years, starting with 130% limitation effective for tax years beginning after 31/12/17 and before 01/01/19

— Amount disallowed may be carried forward indefinitely

— U.S. consolidated group treated as single entity

— Applies to all global groups regardless of size

— Global group determined using modified U.S. tax ‘affiliated group’ definition rather than House-based financial reporting consolidation

Net interest expense limitation – Worldwide debt cap (WWDC)


Example – WWDC interest expense limitationOverview

Facts and assumptions— Australian MNC holds a 50% investment in US corporate and consolidates for accounting purposes.— Australian Investor holds a 50% investment in a US corporate or REIT and accounts for the investment at FMV (no

consolidation).

Senate Bill:— Applies to members of a ‘worldwide affiliate group’

(WWAG) with a 50% ownership threshold- Australian MNC and Australian Investor should both be

treated as a member of the WWAG.- Based on current drafting an interposed partnership

between the US corporate and other entities would break the WAG, however this position is open to be regulated by the IRS.

— Impact on 110% proportionate global debt-equity ratio- Australian MNC – US corporate debt limitation driven by

the Australian MNC global leverage ratio. - Australian Investor – As above, depending on investor

profile (e.g. institutional investors with lower global debt/equity ratio) certain investor types will be impacted to a greater extent.

- Note that in the ‘debt/equity ratio’ needs to be calculated based on US tax rules.

US tax reform impactHouse Bill:— Members of an International Financial Reporting Group

(IFRG)?- Australian MNC – Yes- Australian investors – No

— Impact on 110% proportionate EBITDA ratio- Australian MNC – The positive/negative impact from

including the Australian MNC will simply be driven by the strength of the financials.

- Australian Investor – Not included as part of the IFRG. US corporate interest deductions not impacted by Australian Investor financials.


Key tax reform measuresHouse Excise vs. Senate BEAT (1/2)

House Senate— New 20% excise tax on certain deductible

payments (‘specified payments’) made to relatedforeign 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 subjectto U.S. gross-basis WHT

— Excise tax not applicable if recipient makes ECI election to subject net income to tax at 20% corporate tax rates- Complex deemed expense deductions

based on product lines

— Broadly, a minimum 10% tax (17.5% tax in 2018 based on corporate rate remaining at 35% for one year) tax imposed on U.S. companies having certain deductible ‘base erosion payments’ made to related foreign companies- For tax years beginning after

31/12/2025, 12.5% rate of tax

— Minimum tax liability equals excess of 10% of the U.S. company’s ‘modified taxable income’ (”MTI”) over its regular U.S. tax liability reduced by certain allowable credits (but not R&D credit)- Slightly harsher minimum tax liability

formula to apply after 2025

— Broadly, MTI is taxable income plus certain ‘base erosion payments’ and NOLs allocable to such payments


Key tax reform measuresHouse Excise vs. Senate BEAT (2/2)

House Senate

— Certain FTCs available against ECI tax liability (in general, 80% of foreign taxes paid on the income)

— Only applies to large multinational groups with significant U.S. intragroup payments- in aggregate, U.S. companies (and U.S.

branches) must make annual average$100M+ ‘specified payments’ to certainforeign affiliates over 3-year period

- relatedness based on 50% common ownership

— Delayed effective date -- tax years beginningafter 31/12/18

— Similar to House, ‘base erosion payments’ include (i) deductible payments and (ii) depreciable/amortizable amounts (and exclude U.S. ECI and non treaty-rate reduced portion subject to U.S. gross-basis WHT)

— Unlike House provision, deductible base erosion payments generally exclude COGS payments (except to expatriated companies), but include allowable interest expense

— Only applies to large taxpayer groups, but relatedness based on significantly lower common ownership threshold (only 25%)- Groups with average global gross receipts >

$500M over 3-years and- base erosion % (base erosion deductions /

total allowable deductions) > 4%

— Earlier effective date -- tax years beginning after 31/12/17


Example – Base erosion measures

Aus MNC

US LRDForeign Contract

ManufacturerPayment for

finished/partly finished products

Overview

US LRD - Facts and assumptions— Products manufactured offshore by Foreign Contract

Manufacturer (FCN), a related entity, and sold to US LRD, also a related entity, (whether finished or partly finished) who sells to US end customers.

House Bill – 20% Excise Tax— Payments made by the US LRD to acquire product (i.e. COGS)

from FCM related party subject to 20% Excise Tax;

OR

— FCM can elect to treat payments from US LRD as effectively connected income (ECI) attributable to a US permanent establishment (PE).

— In this scenario FCM can claim a deduction for costs based on accounting and a credit for foreign taxes.

Senate Bill – 10% BEAT— Does not apply to COGS payments

US tax reform impact

Aus MNC

US Manufacturer

Foreign IP HolderRoyalty payment

US Manufacturer with royalty - Facts and assumptions— Products manufactured in the US for sale to US customers with

significant royalty payments from US Manufacturer to Foreign IP Holder, a related entity.

House Bill – 20% Excise Tax— The FDAP carve out only applies to non-treaty reduced payments. — US Manufacturer royalty payments subject to 20% Excise Tax

where Foreign IP Holder is resident in treaty country with reduced royalty withholding tax rates.

Senate Bill – 10% BEAT— Similar to the House Bill, royalty payments will also be treated as a

‘base erosion payment’ in determining the 10% BEAT to the extent that Foreign IP Holder is resident in a treaty country with reduced royalty withholding tax rates.


Key tax reform measuresFull expensing

House Senate— Immediate expensing allowed for capital

investments in certain new and used depreciable assets acquired and placed in service after 27 September 2017 and before 1 January 2023- Does not apply to goodwill or other

amortizable intangible assets- Does not apply to property used in a

real estate business

— Not applicable to property acquired from certain related parties or in tax-free exchanges

— Generally similar to House version but 100% immediate expensing limited to certain original use property placed in service after 27 September 2017, and before 1 January 2023

— Gradual phase down of expensing % for certain property acquired after 31 December 2022 and before 01 January 2027



Net operating losses (NOLs)

House Senate— Annual use of NOL carryforwards

limited to 90% of the loss corporation’s taxable income

— Carryforwards allowed indefinitely— No carrybacks (except certain casualty

and disaster losses)— Carryforward increased by an interest

rate adjustment factor to preserve value

— Effective for NOLs arising in tax years beginning after 2017 (BUT 90% limitation applies to pre-existing NOLs)

— Generally, same as House version except no indexation of NOL carryforward amounts and the new 90% limitation does not apply to NOLs from years prior to 2018 - For tax years beginning after 31/12/22,

NOL carryforwards limited to 80% of taxable income

Repeal of corporate AMT

House Senate— Elimination of the corporate Alternative

Minimum Tax (AMT) — Unlike the House version, the Senate

Bill preserves the corporate AMT regime


Key tax reform measuresParticipation exemption for certain foreign dividends but not share gains (in excess of earnings)

House Senate

— Replacement of FTC (or related deductions) with a 100% ‘foreign- source portion’ dividend exemption regime- distributions made after 31/12/17- from 10% or greater

foreign subsidiaries- 6 month holding period req.

— Repeal of current taxation of CFC investments in U.S. property (i.e., Section 956)

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

— Foreign source dividend received deduction regime mostly similar to House version, but:- doesn’t apply to ‘hybrid dividends’ (i.e., if

payor receives local country deduction for dividend payment)

- stricter holding period requirement (1 year w/in 2 year window)

- applies also to portion of stock gain treated as dividend income under existing rules


Key tax reform measuresHouse Global Minimum Tax vs Senate Global Intangible Low Taxed Income (GILTI)

House Senate

— 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, global basis effective tax years beginning after 31/12/17

— Current U.S. taxation limited to pro-rata share of 50% of ‘foreign high returns amount’ across entire group of foreign subsidiaries

— In essence, 10% tax on foreign subsidiaries’ non-subpart F / non ECI income in excess of deemed routine return amount on tangible depreciable property (7% + short term AFR)

— Allowable FTCs:- Capped at 80% of foreign taxes paid- New separate basket, and- No carryforwards or backwards

— Similar to the House ‘global minimum tax’, the Senate’s version taxes U.S. corporate shareholders on their portion of a CFC’s global intangible low taxed income (‘GILTI’) - Current inclusion under subpart F- 17.5% ETR in 2018 (based on corporate

rate remaining at 35% for one year), then 10% ETR threshold ratcheting up to 12.5% ETR threshold for tax years beginning after 31/12/25

- Effective for tax years of CFCs beginning after 31/12/17

— Very broadly, GILTI is the excess of the U.S. shareholder’s share of each CFC’s non-subpart F / non ECI income over a 10% return on tangible depreciable property

— Allowable FTCs:- Capped at 80% of foreign taxes paid- New separate basket, and- No carryforwards or backwards


- 20% corporate tax

- Participation exemption on foreign dividends

- No corporate AMT?

Example – US as a RHQ jurisdiction

US

- BEAT / Excise Tax- WWDC / 163(j)

- GILTI / FHRA / Subpart F

- Gains on shares

Australia

Americas



Senate Only— Similar to BEPS Action 2, disallows U.S. tax deductions for interest or royalties paid or accrued to a

related party in connection with hybrid transactions and/or involving hybrid entities to extent that:- There is no corresponding income inclusion for recipient under applicable foreign tax law; or- Related party recipient entitled to deduction with respect to payment received

— Exception applies to extent payment is subject to U.S. tax as subpart F income

— Treasury granted broad authority to promulgate regulations: (i) conduit rules, (ii) rules for determining tax residence of foreign entity, (iii) application to foreign branches and certain structured transactions and (iv) application when recipient income taxed under a ‘preferential tax regime’ or eligible for a participation exemption

— Effective for tax years beginning after 31/12/17

Hybrid mismatch rule


Pre-Tax Reform:Deduction on share repo dividend

Post tax-form:No deduction

No Australian CFC

implications

Example – Anti-hybrid rules

Australia

US Canada

Share Repo Exemption on dividends

Q&A and Closing

Remarks

Thank you


NoticeThe 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 organisation. KPMG accepts no responsibility or liability in respect of this document to any person or organisation 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.

© 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.

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

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