Download - Tax Reform 12.1.2017 - Joe Cruz EY
Page 2 Tax legislative and policy update
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Page 3 Tax legislative and policy update
Legislative status update
Health care
► Administration to stop making cost-sharing reduction (CSR) payments
► Alexander-Murray legislation would ensure CSR payments through 2019; provide
states greater flexibility to meet ACA requirements; restore funding for ACA outreach,
enrollment assistance
► Individual mandate “repeal” added to tax reform; other reform could be part of year-end
discussions on government funding
Budget
► October 26: House approved Senate-passed budget resolution 216-212
► Approval by both chambers authorized reconciliation process, allowing tax bill to pass
Senate with the votes of as few as 50 senators (with the Vice President breaking tie)
► Reconciliation instructions provide for $1.5 trillion tax cut; other tax cuts must be offset
► Government funding expires December 8: negotiations will be bipartisan, failure could
mean government shutdown
Tax reform
► House passed its Tax Cuts and Jobs Act November 16
► Senate Finance Committee released summary text of its version of the Tax Cuts and
Jobs Act November 9, and passed a modified Chairman’s Mark November 16
► Full Senate floor action expected in late November, early December
Page 4 Tax legislative and policy update
Business tax highlights of House and Senate tax reform plans*
• 20% corporate rate, beginning 2018; AMT repealed
• 25% tax rate generally applied to passive business activity
income plus “capital percentage” (generally 30%) of active
income
• Limits interest deduction to 30% of earnings before interest, tax,
depreciation and amortization (EBITDA) with additional limit
based on global group income
• Immediate expensing – five years
• Expands definition of covered employee (§162m)
• Establishes territorial exemption system for dividends received
by US corporations from 10%-owned foreign corporations
• One-time transition tax – 14% / 7%
• New broad-based anti-deferral provision taxes “foreign high-
return amount” on a current basis at 10% effective tax rate (some
foreign tax credits (FTCs) available)
• 20% excise tax on certain deductible payments to related foreign
persons
House
• 20% corporate rate, beginning 2019; AMT repealed
• 17.4% deduction for domestic qualified business income from a
partnership, S corporation, or a sole proprietorship
• Limits interest deduction to 30% of earnings before interest and tax
(EBIT) with additional limit based on global debt to equity
• Immediate expensing – five years
• Expands definition of covered employee (§162m)
• Establishes territorial exemption system for dividends received by
US corporations from 10%-owned foreign corporations
• One-time transition tax – 10% / 5%
• New broad-based anti-deferral provision taxes “global intangible
low-taxed income” on a current basis at 10% effective tax rate
(some FTCs available)
• New deduction available for “foreign-derived intangible income”
• Anti-base erosion measures include minimum tax of 10%, applied
on income determined after adding back deductible payments
made to related foreign persons
Senate Finance Committee
Note: These provisions are detailed and highly complex. This chart, and the ones that follow, are intended to provide a high-level overview, and no inference is made that these provisions equate to one another. * “Plans” refer to the language as released and all amendments passed as of the date of these materials.
Page 5 Tax legislative and policy update
Corporate and business provisions
Provision House Senate Finance
Corporate income tax
rate
20% rate, beginning 2018; personal services
corporations taxed at 25%; AMT repealed
20% rate, beginning in 2019; 35% rate for
certain personal services corporations
repealed; AMT repealed
Expensing
Immediate write-off of qualified property placed
in service after September 27, 2017, and
before January 1, 2023. Repeals “original use”
requirement. Excludes from the definition of
qualified property certain public utility property
and property of real property trade or business
Immediate write-off of qualified property placed
in service after September 27, 2017, and
before January 1, 2023, by increasing bonus
depreciation percentage to 100%. Excludes
from the definition of qualified property certain
public utility property (real property excluded by
requirement that recovery period be 20 years
or less), but includes qualified film, television
and live theatrical productions.
Interest expense
Limits deduction of net interest expense to
30% of the business’s adjusted taxable
income not taking into account interest,
depreciation, amortization, depletion, or net
operating losses (NOLs), (disallowed
amounts may be carried forward five tax
years). Exclusion for taxpayers that meet a
$25 million gross receipts test and certain
regulated public utilities and real property
trades or businesses (not eligible for full
expensing).
Limits deduction of net interest expense to
30% of the business’s adjusted taxable
income not taking into account interest, pass-
through deduction, or NOLs (disallowed
amounts may be carried forward indefinitely).
Exclusion for taxpayers that meet a $25
million gross receipts test, certain regulated
public utilities and certain electric
cooperatives. Farming businesses could elect
to not be subject to the limitation, but would
have to use alternative depreciation rules.
Page 6 Tax legislative and policy update
Corporate and business provisions (cont’d)
Provision House Senate Finance
Rate for pass-through
entities
25% tax rate generally applied to passive
business activity income plus the “capital
percentage” of active business activity
income (generally 30%; 0% for certain
personal services businesses; special rules
for capital intensive business); 9% tax rate
on first $75k for small businesses (benefit
begins to phase out after $150k; 9% rate
phased in over five tax years).
17.4% deduction for domestic qualified
business income from a partnership, S
corporation, or sole proprietorship.
Deduction generally does not apply to
specified service businesses but available
to service providers with income under
certain monetary thresholds. For taxpayers
with qualified business income from a
partnership or S corporation, deduction
limited to 50% of W-2 wages (limit phased
in for individuals with taxable income over
$500k (married, filing jointly)
Net operating losses
(NOLs)
Deduction limited to 90% of the taxpayer’s
taxable income (determined without regard to
the NOL deduction). NOLs may be carried
forward indefinitely. Carrybacks repealed
(limited small business/farm
exception).Generally effective for losses
arising in tax years beginning after 2017.
Deduction limited to 80% of the taxpayer’s
taxable income (determined without regard to
the NOL deduction). NOLs may be carried
forward indefinitely. Repeals the two-year
carryback and the special carryback
provisions, but provides a two-year carryback
for certain farming losses. Preserves current
law for NOLs of property and casualty
insurance companies. Applies to tax years
beginning after 2022
Page 7 Tax legislative and policy update
Corporate and business provisions (cont’d)
Provision House Senate Finance
Research and
development credit
Retained but research and experimental
expenditures must be capitalized and
amortized over a 5-year period (15 years in
the case of expenditures attributable to
research conducted outside the United
States) (applies to those paid or incurred
during tax years beginning after 2023)
Retained but research and experimental
(R&E) expenditures must be capitalized and
amortized over a 5-year period (15 years in
the case of expenditures attributable to
research conducted outside the United
States) (applies to those paid or incurred
during tax years beginning after 2025).
Reporting requirement for R&E
expenditures in tax years beginning after
2025
Section 199 deduction Repealed Repealed
Work Opportunity Tax
Credit (WOTC); New
Markets Tax Credit
(NMTC); Low-income
housing tax credit
(LIHTC)
WOTC repealed. No new NMTC allocated
after 2017. LIHTC retained.
Retained; modifications made to LIHTC,
including renaming it “Affordable Housing
Tax Credit”
Like-kind exchanges Limited to exchanges of real propertyLimited to exchanges of real property that is
not held primarily for sale
“Orphan drug credit” RepealedLimited. Rate set at 27.5%, certain limits for
previously approved drugs removed
Page 8 Tax legislative and policy update
Senate Finance plan – other key provisions affecting businesses and corporations
• Requires taxpayers to recognize income no later than the tax year in which the
income is taken into account on an applicable financial statement, with certain
exceptions
• Increases the maximum amount a taxpayer may expense under Section 179 to
$1,000,000 for property placed in service after 2017; increases the phase-out
threshold amount to $2,500,000 (more generous provision is in House W&M
Committee bill)
• Disallows deduction for entertainment, amusement, or recreation that is directly
related to or associated with the active conduct of a trade or business; may still
generally deduct 50% of food and beverage expenses associated with operating a
trade or business (also in House W&M Committee bill). Disallows an employer’s
deduction for expenses associated with meals provided for the convenience of the
employer on the employer’s business premises or through an employer-operated
facility
• Modifies certain rules governing partnerships, life insurance companies, and tax-
exempt organizations (see analogues in House W&M Committee bill)
Page 9 Tax legislative and policy update
Senate Finance plan – other key provisions affecting businesses and corporations (cont’d)
► Finance Committee Chairman Hatch remains interested in corporate
integration
► Senate tax reform bill would create a new Section 242 and would allow
eligible corporations a “dividend paid deduction” with a 0% rate
► Permits corporations to deduct 0% of dividends in computing taxable
income subject to tax under Section 11
► Adds a new requirement for corporate taxpayers that pay dividends to
shareholders
► Policy rationale for corporate integration
► Address debt/equity imbalance
► Unlock “trapped” offshore earnings
► Attack earnings stripping
► Close gap with pass-throughs
Page 10 Tax legislative and policy update
Senate Finance plan – international provisions
• Territorial System: ≥10% US corporate shareholders may deduct 100% of the foreign-
source portion of dividends from foreign corporations (excluding certain “hybrid”
dividends)
• One-time transition tax: Accumulated deferred foreign earnings subject to a transition
tax at two rates (payable over eight years):
• 10% for earnings held in cash and cash-equivalents; 5% for the balance
• Relevant foreign earnings are:
• Those accumulated in years beginning after 1986, during periods in which the
foreign corporation had a ≥10% US shareholder
• Measured as of Nov 9, 2017, or other measurement date (“as appropriate”)
• Mandatory inclusion year: Foreign corporation’s last year beginning before 2018
• No new limitation on use of foreign tax credit carryforwards or other attributes to
reduce the tax; foreign taxes on earnings deemed repatriated partially available;
may elect to preserve NOLs and opt out of utilizing them to offset the mandatory
inclusion
• Claw-back provision if a US shareholder inverts within 10 years; entire mandatory
inclusion taxed at 35% without allowance for foreign tax credits
Page 11 Tax legislative and policy update
Senate Finance plan – international provisions (cont’d)
• Current anti-deferral regime: Most categories of “includible” income retained, with some
important structural modifications (e.g., expanded definitions both of US shareholder and of
controlled foreign corporation (CFC))
• New broad-based subpart F category: global intangible low-taxed income (GILTI)
• GILTI (aggregated for the CFCs of a US shareholder) is the excess (if any) of (i) certain net items of income of the
CFCs, over (ii) a deemed return on related tangible property
• Credit to corporate US shareholders: 80% of attributable foreign income taxes
• US shareholder entitled to a deduction equal to 50% of recognized GILTI (reduced to 37.5% after 2025), resulting in
a 10% effective tax rate on GILTI (12.5% after 2025)
• New export incentive in the form of a deduction for US corporations for “foreign-
derived intangible income” (FDII)
• FDII is the “foreign-derived” portion of the excess (if any) of (i) certain net items of income, over (ii) a deemed return
on related tangible property
• Foreign-derived: Generally, product sales and services by the taxpayer to non-US persons outside of the
United States
• Applicable to certain GILTI inclusions and income earned directly (but excluding foreign branch income)
• Deduction equals 37.5% (for an ETR of 12.5%) of the lesser of (i) the sum of FDII and GILTI inclusion, and (ii)
taxable income (as otherwise calculated); (reduced to 21.875% after 2025, for an ETR of 15.625%)
Page 12 Tax legislative and policy update
Senate Finance plan – international provisions (cont’d)
• New intangible “inbounding” provision: Tax-free repatriation of intangible property
• New limitations on interest expense deduction
• All taxpayers (including pass-throughs): Disallowance of deduction for net business interest
expense exceeding 30% of adjusted taxable income for the year, which is generally analogous
to EBIT (i.e., pre-tax, pre-interest earnings after the deduction for depreciation, depletion and
amortization (DD&A))
• US corporate members of worldwide affiliated groups: Disallowance of deduction for a portion
of net interest expense, calculated with reference to “excess indebtedness” (generally, the
excess of US debt over 110% of proportionate worldwide group debt)
• Transfers of intangible property (IP): Expands the definition of IP (e.g., to include
goodwill) and authorizes the Commissioner to use certain methods to value IP (e.g.,
realistic alternative principle).
• New hybrid mismatch rule: Deductions disallowed for certain related party interest and
royalties paid or accrued (i) pursuant to a “hybrid transaction” or (ii) by/to a “hybrid entity”
• Repeal of special rules for DISCs and IC-DISCS
• New separate Section 904 “baskets” for both foreign branch income and GILTI
Page 13 Tax legislative and policy update
Senate Finance plan – international provisions (cont’d)
• New base erosion minimum tax
• Tax imposed on an “applicable taxpayer” equal to the excess of 10% of modified taxable
income over the regular tax liability for the year (increased to 12.5% after 2025).
• Modified adjusted taxable income is taxable income determined without regard to
any “base erosion tax benefit” from any “base erosion payment” for the year
• Base erosion payment is generally any amount paid or accrued to a related foreign
person with respect to which a deduction is allowable, but does not include
amounts included in cost of goods sold
• Base erosion tax benefit means any deduction allowed with respect to a base
erosion payment
• Applicable taxpayer is a corporation (other than a RIC, REIT, or S Corp):
• Which has average annual gross receipts of at least $500 million for the three-year
period ending with the preceding year; and
• Which has a “base erosion percentage” of 4% or higher for the year
• Base erosion percentage is the aggregate amount of base erosion tax benefits divided
by aggregate amount of allowable deductions
Page 14 Tax legislative and policy update
House Ways and Means plan – international provisions
• Territorial system: 100% deductions for foreign source dividends received from foreign
subsidiaries by a 10% or greater US corporate shareholder
• One-time transition tax: Accumulated foreign earnings subject to a transition tax at two
rates (payable over eight years):
• 14% for earnings held in cash and cash-equivalents; and 7% for the balance
• Mandatory inclusion equals the greater of foreign earnings accumulated in tax
years beginning after December 31, 1986, determined as of:
• November 2, 2017, or
• December 31, 2017
• Mandatory inclusion for last year of a specified foreign corporation beginning
before January 1, 2018
• Foreign tax credit carryforwards fully available, foreign tax credits triggered by
deemed repatriation partially available
• No overall foreign loss (OFL)/foreign oil and gas loss (FOGL) recapture
Page 15 Tax legislative and policy update
House Ways and Means plan – international provisions (cont’d)
• Current anti-deferral rules retained (other than foreign base company oil related income)
• Structural modification to subpart F rules made to expand definition of CFC
• New broad-based anti-deferral provision: A US shareholder must include in income
50% of any “foreign high-return amount” determined with respect to its CFCs
• The foreign high-return amount equals the excess, if any, of:
• The US shareholder’s CFCs’ “net tested income”, over
• A return (7% plus short-term AFR) on the CFCs’ qualified business asset
investment (“QBAI”) reduced by interest expense
• QBAI is the aggregate of the U.S. shareholder’s pro rata shares of its CFCs’ bases
in certain tangible property
• Tested income is all income other than specifically excluded amounts
• The US shareholder is entitled to a credit for 80% of the foreign taxes paid on that
income
Page 16 Tax legislative and policy update
House Ways and Means plan – international provisions (cont’d)
• New excise tax: Nondeductible excise tax is imposed at a rate of 20% on specified
amounts paid by domestic corporations after December 31, 2018, to foreign corporations
that are members of the same international financial reporting group (“IFRG”)
• Specified amount includes an amount that is deductible, or includible as cost of goods
sold, inventory, or the basis of depreciable or amortizable asset
• Excludes interest, amounts paid or incurred to acquire certain commodities, any amount taxed
under Section 881(a) (effectively connected income, or “ECI”), and certain service fees
• An IFRG is a group of entities that files consolidated financial statements and that
contains at least one US member and one foreign member
• Foreign corporation can make an irrevocable election to instead treat specified amounts
as ECI and be subject to net-basis taxation
• A deemed expense amount is allowed to offset the deemed ECI
• Limited foreign tax credits can be used to offset the tax
• US branch profits tax may also apply if ECI election is made
• Limited to IFRGs with average annual aggregate outbound payments in excess of $100
million over 3-year period
Page 17 Tax legislative and policy update
House Ways and Means plan – international provisions (cont’d)
• Limitations on interest expense deduction
• New 163(j) generally limits deduction for net business interest expense to 30
percent of adjusted taxable income for the year, which is generally analogous to
EBITDA
• New 163(n) limits deduction for net interest expense of a US corporation that is
member of an IFRG (see above) to 110% of the corporation’s share of the group’s
net interest expense, based on the ration of the US corporation’s EBITDA and the
group’s EBITDA (as determined under GAAP / IFRS)
• A US corporation subject to both provisions must apply the one that disallows the greater
amount of interest deduction
• Interest disallowed under either provision may be carried forward up to five years, usable
on first-in, first-out basis
• Limited to groups with average annual gross receipts in excess of $100 million over 3-
year period
• Applies to taxable years beginning after December 31, 2017
Page 18 Tax legislative and policy update
Final US tax reform legislation – what’s anticipated
Lower ratesFinal legislation is expected to reduce both the corporate and individual
income tax rates. A new rate for flow-through entities may be included.
Broader tax
base
To pay for the proposed lower rates, US tax reform proposals include a wide
array of base-broadening provisions (e.g., limitations on deductions). The
base-broadening proposals will likely extend to both business and individual
taxation (and may come with a series of complex transition rules).
A move to a territorial system of taxation is expected, and will likely include
some type of “toll charge” on previously untaxed accumulated foreign
earnings with the rate determined by whether the earnings are in cash or
non-cash assets.
New
international
tax system
Timing
While the timing is subject to change, Republicans are targeting:
► White House: Republican framework released September 27
► House: Legislative language – November 2; passed November 16
► Senate: Legislative description – November 9; legislative language
November 21; passage November/December
► Reconcile bills/signing: December (though may push into early 2018)
Next steps in tax reform
Page 19
Senate Finance Committee’s tax reform plan
Preparing for change
Preparing for US tax reform involves understanding the leading proposals and their potential effects,
implementing strategies that account for these changes and educating policymakers on their real-world impact.
Model tax reform
proposals:
See how proposals
could affect your federal
and state liabilities and
business operations
Undertake
scenario
planning:
Use model output to run
scenario planning
Plan:
Prepare for change and
consider implementing
planning strategies
Influence:
Engage lawmakers on
provisions that could
significantly affect your
tax liability and business
operations
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Policy Perspectives | Ernst & Young LLP’s rapid response to the Senate Finance Committee’s tax reform plan
Senate Finance Committee’s tax reform plan