Impact of U.S. and Global Tax Reform on Effective Treasury ......• US International Tax Reform • Tax Impact on Common Treasury Transactions ... • Global Tax Reform • OECD's

Impact of U.S. and Global Tax Reform on Effective Treasury Management

Minnesota Association for Financial Professionals – St. Paul, MN

April 24, 2018

© Grant Thornton LLP. All rights reserved. 2

Today's Presenters

Todd Horsager

Compass Strategic Investments

Minneapolis

+1 952 808 6915

[email protected]

Kyle Brandon

Senior Manager

International Tax

Grant Thornton LLP

Minneapolis

+1 612 677 5269

[email protected]

Doug Watson

Director

International Tax

Grant Thornton LLP

Minneapolis

+1 612 677 5260

[email protected]

Bob Swarup

Principal

Camdor Global

London

+44 (0) 7801 552755

[email protected]


1Develop an understanding of how US and Global Tax

Reform may impact treasury management

2

Learning objectives

Understand how changes in tax law impact global cash

flows and global foreign exchange risk management


Agenda

• Overview of US/Global Tax and Economic Environment

• US Domestic Tax Reform

• US International Tax Reform

• Tax Impact on Common Treasury Transactions

• Cash and Notional Pools

• Foreign Exchange Hedging

• Mergers and Acquisitions

• Supply Chain

• Questions


Overview of US/Global Tax and Economic Environment


Tax Impact on Treasury Management• Potential Negative/Positive Cash Flow Impact of Taxes:

• Corporate income tax (i.e. rates can range from 10-40%)

• Withholding taxes on intercompany transactions, such as interest, royalties, and dividends (i.e.

rates can range from 0%-30%)

• Indirect taxes (i.e. rates can range from 0%-27%: ex. sales use tax, value-added tax)

• Transfer Pricing for intercompany transactions determines which legal entity has profit and

related cash

• Tax Audits may require additional tax payments

• Liquidity Needs:

• Depending on the country, ability to declare and pay dividend and or do share buy-back will

impact movement of cash

• Royalty and debt provide opportunity to move cash more freely depending on the country

• Tax planning can devise an approach to facilitate movement of cash in a tax efficient manner


US and Global Tax Environment• Global Tax Reform

• OECD's BEPS – Country by Country reporting, Information sharing

• EU Directives implementing BEPS action plan

• Brexit

• Global Transparency – Local country authorities want to see the whole picture

• UK Criminal Finance Act – Demonstrate good tax payer process

How will Brexit impact a tax efficient supply chain?

• US Tax Reform Passed in late 2017

• Dramatic impact on tax rate, interest limitations, inbound and outbound transaction rules, expensing,

state tax impact, etc.

• New outlook on global tax planning

• Global Tax landscape will continue to evolve as countries update and adjustment tax rules.

How is this being monitored by your organization?


Economic Environment• Structural Issues

• Debt levels at all time highs and significantly higher than mid 2007

• Central banks have gone to extreme lengths to manager the fallout of the last crisis, but in

doing so, have crushed yields and distorted the pricing mechanism in markets

• Financial assets seem extremely expensive

• Social cohesion is low and falling, with growing societal challenges

• Future funding needs and demographic challenges (pensions, healthcare, long term care)

• Liquidity and volatility

• Bond liquidity has reduces by circa 70% since the 2008 financial crisis

• The assets that are eligible for collateral for clearing are shrinking, and loved by both central

banks and institutions

• Structure of volatility has changed in recent years – very low with sudden spikes

• More idiosyncratic and more driven by policymakers sentiment

• Exacerbated by macro trends, e.g. competitive devaluation, political fragility, liquidity

• Harder to predict and harder to manage


Treasury Challenges

The search for

yield

Balance sheet

and funding

strains

Collateral

management

International

flows and

hedging

Counterparty

risks

Tail risks

TaxationUnstable

correlationsPolicy

uncertainty

Use of cash

proceeds

What do you

do?

Source: Camdor Global


The problem of real rates

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

Base rate, inflation and real rates since Jan 2012

Inflation expectations Fed rate Real rate


How can a treasurer managing investments mitigate the cost of negative real rates and

be consistent with an investment policy to preserve capital, liquidity and yield?


The innovation gap

The Innovation Gap



Where does innovation lie?

Tax planning and structuring

Investmentstrategy

Risk management and funding

Culture



Treasury Management Considerations

• Tax and Treasury need to work proactively together to monitor the changing global tax

landscape

• Consider impact of tax reform on Treasury department

• Frictional cost of moving cash

• Location of cash for FX purposes

• Overall liquidity of the organization

• Tax loan documentation requirements under Section 385 regulations


A holistic approach


Risk• Tail risks• Short term & long term risks• Counterparty risks

Tax and liability management• Efficient structures to minimise leakage and maximise coordination•Linking investment strategy to funding needs

Return• Long term expected returns• Short and medium term horizons

Macro trends, maturity bucketing, new asset classes, etc.

New structures, monetising the balance sheet, pension payments etc.

Cashflow optimisation, risk appetite & goals, etc.


US Domestic Tax Reform


• Flat 21% rate (previously 34-35%):

• Effective for tax years beginning after Dec. 31, 2017

• Fiscal year taxpayers use blended rate based on ratio of days in calendar years 2017

and 2018 pursuant to Section 15:

• Important: If FY filer, then deductions, other non-rate provisions are governed by

effective date of provision as enacted in new law. Must check!

• Significant impact for tax accounting purposes

• Deferred tax assets are not as valuable

• Deferred tax liabilities will not be as costly

• Individuals of pass though entities may qualify for an effective 29.6% rate

Federal US Tax Rate Reduction


• Bonus depreciation doubled for five years:

• 100% for property placed in service after Sep. 27, 2017 and Jan. 1, 2023, and then:

• 80% in 2023

• 60% in 2024

• 40% in 2025

• 20% in 2026

• Used property qualifies (if new to taxpayer)

• Exceptions for public utilities, real estate businesses, and floor-plan financing

• Section 179 expensing increased to $1 million for tax years beginning after 2017 and before

2023; phase-out increased to $2.5 million

New Expensing Provisions


• Cost recovery

• Maintains present law MACRS recovery periods of 39 years and 27.5 years

for nonresidential and residential real property.

• JCT report indicates there is a 15-year recovery for qualified improvement

property, but actual legislative text does not say this.

• Depreciation of luxury automobiles: Section 280F limitations increased

New Cost Recovery Provisions


• Net interest limited to 30% of adjusted taxable income:

• Adjusted taxable income:

• 2018 – 2021: Roughly equivalent to EBITDA

• 2022+: Roughly equivalent to EBIT

• Unlimited carryforward of disallowed net interest expense

• Exceptions: Utilities, electing real estate, and businesses with <$25 million in

receipts

• Investment interest expense and income are not impacted

• Also consider sec. 385 debt to equity regulations

New Interest Deduction Limitation


Treasury Management Considerations

• The new interest expense limitation will require multinational companies to reassess:

• Overall capital structure – debt vs. equity

• Location of debt – U.S. vs. other countries

• Given the reduction in the corporate tax rate and the interest expense limitation it may be

preferable to reduce debt in the U.S. and increase debt in other countries

• Need to consider thin cap limitations

• Need to consider other tax reform provisions

• Revised cash flow projections should be closely coordinated between treasury and tax.

They should consider the shift from EBITDA and EBIT in the interest expense limitation

as well as other phase out provisions of tax reform.

How does this impact your FX profile and hedging requirements?


US International Tax Reform


Worldwide vs Quasi-Territorial System

• US Worldwide Tax System:

• US multinationals subject to US taxation on global income.

• Ability to defer taxation on certain income earned outside of the US until repatriation of cash

• Resulted in many multinationals deferring foreign income indefinitely

• New US Quasi-Territorial Tax System:

• One-Time transition tax on all previously deferred income under previous system (Discussed in

more detail later)

• Going forward, income earned outside of the US not subject to US taxation, with certain

exceptions (Participation Exemption / Dividends Received Deduction "DRD")

• Global minimum tax and anti abuse tax limits the ability for certain foreign income to qualify for

exclusion from US taxation

• New rules are technical and mechanical


Treatment of Foreign Dividends

• New Sec. 245A – Establishment of participation exemption system for taxation of foreign income

• Participation regime is a partial territorial system that allows a deduction for the foreign source portion

of dividends received by certain domestic corporations

• Generally income includible under Subpart F, Section 956, or GILTI Income (discussed later) is not

income which is treated as a dividend. Therefore, do not qualify for the DRD

• Income earned through foreign branch's do not result in a DRD

• Certain holding period requirements apply to qualify for DRD

• Effective for distributions made after Dec. 31, 2017

Insight : This participation exemptions system is not the classic territorial system found in

many other countries throughout the world.


Treatment of Deferred Foreign Income (One-time tax)• Amended Sec. 965 – Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of

Taxation

• Generally requires that for the last taxable year beginning before January 1, 2018, of any deferred foreign income

corporation, any U.S. shareholder must include in income its pro rata share of the accumulated post-1986 deferred

foreign income as an increase to subpart F income as otherwise determined under Section 952

• Installment election – can elect to pay tax over 8 years (8% in years 1-5, 15% in year 6, 20% in year 7 and 25% in

year 8)

• Effective date – Generally effective for the last taxable year of a foreign corporation that begins before Jan. 1, 2018


Global Intangible Low-Taxed Income

• New Sec. 951A – Global Intangible Low-Taxed Income Included In Gross Income Of United States

Shareholders

• Imposes a minimum tax on certain foreign income described as "global intangible low-taxed income"

• Discourages income shifting incentives by subjecting income to current U.S. tax

• U.S. Shareholders of one or more CFCs are subject to current U.S. tax on its "global intangible low-

taxed income" (GILTI)

• Domestic corporations can obtain a deduction equal to 50% of the GILTI inclusion (subject to TI

limits)

• Effective date – Taxable years of foreign corporations beginning after Dec. 31, 2017, and for taxable

years of U.S. shareholders in which or with which such taxable years of foreign corporations end

Eliminates the ability to defer taxation on certain foreign income


GILTI = Global Minimum Tax?

2.5% 6% 10.5%

Fo

reig

n

ET

R

U.S

.

ET

R

~10.3% ~6.1% 0%

0%

13.125%

The calculation (by operation) would result in a full credit against U.S. tax if the foreign effective rate is

above ~13.125%. The table below illustrates the approx. U.S. effective tax rate based on the

respective foreign effective tax rate.

Insight: The foreign effective rate is calculated using U.S. tax principles to determine the

"taxable income" but uses foreign principles to determine tax amount. Caution should be

used as odd results could occur!


Deduction for Foreign-Derived Intangible Income• New incentive for domestic corporations that earn "foreign derived-intangible income" (FDII)

• Property that is sold to any person who is not a US person and that the taxpayer establishes is for a foreign use,

or services provided by the taxpayer that the taxpayer establishes are provided to any person, or with respect to

property, not located within the US.

• The term sold, sells, and sale include any lease, exchange or other disposition.

• Generally provides a deduction of 37.5% of the sum of its FDII plus 50% of its GILTI

• Subject to a taxable income limitation, determined without regard to the deduction

• Results in a 13.125% effective tax rate on excess returns on certain foreign derived income

• Deduction for FDII is reduced from 21.875% for taxable years beginning after Dec. 31, 2025

• Effective date − Taxable years beginning after Dec. 31, 2017

Results in a 13.125% vs 21% effective tax rate on certain income!

Is the new FDII rule change an attempt to level the tax playing field with Ireland?


Deduction for Foreign-Derived Intangible Income• A domestic corporation’s FDII is its “deemed intangible income” multiplied by the percentage of

its “deduction eligible income” that is foreign-derived

• Deduction for FDII and GILTI is available only to C corporations that are not RICs or REITs

• Complex set of definitional rules

• Deduction eligible income is the gross income of the corporation determined without regard to

certain exceptions (provided on next slide) over deductions

How will this impact your company's cash tax and strategy to optimize FDII benefit?


Base Erosion Anti-Abuse Tax

• New Sec. 59A – Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts

• Certain companies that make excessive "base erosion payments" (BEPs) will be subject to a

minimum tax

• Examples of BEPs include: management fees, interest, royalty, services (excludes purchases of

products)

• BEPs are generally amounts paid or accrued to a foreign-related party which results in a deduction

(including depreciation and amortization with some exceptions)

• Effective Date - Amounts paid or accrued in taxable years beginning after Dec. 31, 2017

• Only applies if US company has $500M or greater in US group revenue and BEPs payments are

greater than 3% of total deductions


Treasury Management Considerations• Cash repatriation PTI balances (how you bring the cash back and the various tax results)

• DRD earnings

• Section 965 one time repatriation earnings

• GILTI earnings

• Subpart F earnings

• Remember potential for foreign withholding tax on remitted earnings: credit vs no credit

• When will cash be repatriated, how will it be used, how will it impact cash flow and what is impact on FX:

• Repay US Debt

• Fund dividends/stock repurchases

• Expand employment/ fund capex

• Make acquisitions

To optimize cash flow, Tax and Treasury need to work together


Tax Impact on Common Treasury Transactions


Cash Pooling• Cash and notional pooling is common practice for many multinationals

• Loans made from foreign entities will still result in a section 956 deemed income inclusion (i.e.

Investments in U.S. property may create deemed dividends from foreign entities)

• There were drafts proposals to repeal section 956 but the final bill did not do so.

• Thus, while cash pooling should continue to be an effective cash management tool, loans

to the US will still be treated as deemed dividends. The details of how this will work post-

tax reform are unclear.

Will you consider including the U.S. group in cash concentration locations with your offshore

pooling?

• However, section 956 still applies to offshore pools and the type of investments are still

important.

• Certain types of investments such as U.S. Treasury or Agency securities may be

acceptable options to consider for offshore pools. The objective is to avoid deemed

dividends from foreign entities and reduce the net equity hedge amounts.


Cash Pooling

Germany

P

Switzerland

P

Netherlands

P

France

P

CPL

P = Pool Member

CPL = Cash Pool Leader

*Agreement drafted as a revolver to fluctuate daily depending on cash needs.

Bank

Intercompany

debt/receivable

Intercompany

debt/receivable

Interest

paid/received

US Parent

Germany

P

Switzerland

P

Netherlands

PFrance

P

CPL

BankCross Guarantees

Notional Cash Pooling

Interest

paid/received

Cross Guarantees

Intercompany Loan Agreements*

US Parent

Physical Cash Pooling


Foreign Exchange Hedging• Net Equity hedge

• Consider splitting operating cash maintained in local currency and maintain excess

investable cash in U.S. dollars.

• The objective is to reduce the net equity hedge amount required for local currency.

• Natural Hedge

• Consider borrowing in local currency to repatriate funds to U.S. to fund U.S. activities.

• May reduce hedge amounts required for net equity hedges with occasional adjustments.

• This may also dovetail with tax planning to optimize interest expense deductibility by

jurisdiction due to more stringent U.S. interest expense limitations.

• In other words, move debt and related interest expense to jurisdictions that will not be

limited to reduce the cost of capital on a global basis.

• Borrowing in the U.S. may not be an optimal location for debt since the C-Corporation tax

rate benefit is 21% versus 35%. Also, the net after tax cost of capital may be better in

another foreign location.


Mergers and Acquisitions

• The lower corporate tax rate should generally be advantageous for US acquirers of US targets.

• The mandatory repatriation provision are expected to release trapped cash that will provide

liquidity to fund acquisitions

• Several of the tax reform provisions are designed to make inversions less advantageous

• How you structure and finance acquisitions (asset vs stock)

• The cost of capital due to location of the acquisition debt in the U.S. versus outside the U.S. may

be significantly different today.

• The cost of capital considerations and shift in mindset are due to lower U.S. corporate tax rates,

new U.S. interest expense limitations and low or possibly negative interest rates outside the

U.S.


Supply Chain

Will you consider onshoring your principal or master distributor functions or IP back to the U.S. to

claim or optimize FDII tax benefits?

US

Mexico UK

3rd Party

Supplier

3rd Party

Customer

3rd Party

Customer

Intercompany Sale

3rd Party Sale 3rd Party Sale


Treasury Management Considerations• Companies should consider review of treasury policies and practices

• Global cash visibility and targets

• Technology to improve cash forecasting

• Netting of intercompany balances

• All debt covenants should be reviewed to determine the potential impact of the tax changes

• The repatriation of cash which is used to repay domestic debt will have a favorable impact

• What are some of the strategic treasury, finance and tax next steps to consider?

• Address to the current cash tax costs such as the offshore earnings deemed toll charge?

• Cash repatriation back to the U.S. and use of funds.

• Consider paying off high rate debt, share buybacks, capital investments with 100%

expensing in first year, new U.S. manufacturing locations, etc.

• Acceleration of pension payments.

• Pension funding to freeze or sell the pension plan in the U.S. or outside the U.S.


Treasury, Finance & Tax Strategic Alignment

• Next steps to consider

• Review global cash planning plus strategic debt location in US vs. offshore,

• Analyze the intercompany lending, payables and netting strategies

• Analyze hedging policies and strategies

• Review Tax, Treasury and Finance alignment, tools and resources.


Questions?

Disclaimer

• This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered

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Documents

Impact of U.S. and Global Tax Reform on Effective Treasury ......• US International Tax Reform • Tax Impact on Common Treasury Transactions ... • Global Tax Reform • OECD's