Embed Size (px)
Citation preview
US Tax ReformKey provisions and theirimpacts on financial servicescompanies
EMEIA Financial Services January 2018
1
OverviewThe US Tax Cuts and Jobs Act was passed at the end of 2017and represents the most significant US tax reform in 30 years.Most provisions take effect from 1 January 2018 and will needto be carefully considered from 2017.
This reform will have impacts beyond tax and not just on US-headquartered financial groups. Foreign financial groups witha US presence will need to review the impact on:
► Financial reporting and tax function readiness
► Funding/treasury and intra-group services
► Capital management
► Workforce strategies
In the short term, the key challenge is to address the year-end financial reporting consequences of the reforms.
After this initial period, clients will need to consider howthey respond to the broader impacts. The issues include thefinancing of US operations, US dollar funding, corporateholding structures, treasury management and location ofoperations.
Front offices will need to consider impacts of these taxreforms on US debt and equity markets, and other bankingand trading businesses.
This document summarizes the short- and long-term impactsof the reforms.
Highlights of the billThe highlights of the bill include:
► Reduction of corporate income tax to 21%
► Introduction of Base Erosion Anti-Abuse Tax (BEAT)which could give rise to additional tax costs on crossborder related party payments
► Sweeping international reform:
► Territorial tax system
► Expanding the current taxation of non-USsubsidiaries
► Incentivizing US exports
US Tax Reform: key provisions and their impacts on financial services (FS) companies
US Tax Reform: key provisions and their impacts on financial services (FS) companies 2
OperationsNow that US tax reform is enacted — shifting the US to a more com-petitive environment — companies should evaluate:► Current and prospective location of operations
► Impact of the US anti-base erosion provisions on areas, such asfunding, intra-group services set-up and deferred compensationstructures
► Updates to systems in order to comply with the Government andregulatory reporting
Financial statementsCompanies will need to understand the immediate impact of legislation on financial statements in the period enacted and consider:
► Capital impact due to lower tax rate driving reduction in deferred tax assets
► Income statement impact of tax rate reduction and transition tax
► Timing to report impact of the reform
► Changes to systems, processes and internal controls over financial reporting
► Disclosures of impacts and tax rate guidance, including BEAT aspects
► Additional audit procedures required
PeopleTax reform legislation alters the landscape of executive compensation and employer-provided benefits while considering:
► Executive compensation structures
► Design of benefits programs
► Workforce strategy, sourcing, retention and location
► Immigration risk and compliance
Regulatory capitalImpact of lower rates and provisions needs to be evaluated:
► Favorable impact on regulatory capital forecast as a result of lower tax rate
► Unfavorable changes to the utilization of net operation losses (NOL) may impact tax planning strategies with impact on timing deferred tax assets (DTA) and therefore regulatory capital
Liquidity and investment ► Related party borrowing and intercompany trading can result in deductibility restrictions and BEAT
► Review of (regulatory) funding and capital deployment with respect to domestic and offshore businesses to improve global interest deductibility
► Active offshore earnings above a minimum tax rate will generally be exempt from incremental US tax upon repatriation
► Includes repos/reverse-repos and other funding structures
Financial statements
Value
chain
Change management
People Liquidity and i
nves
tmen
t
Drive multifunctional involvement
Prepare for change
Assess cost
Potential business implications of US tax reform In the light of the changes in US tax reform, companies should evaluate the following:
3 US Tax Reform: key provisions and their impacts on financial services (FS) companies
Impact on FS groups with operations in the US
Provision Short-term impact Longer-term impact
1. Rate reduction ► From 1 January 2018, the
corporate tax rate was reduced from 35% to 21%
Re-measurement of US DTA/deferred tax liabilities (DTL) — impact for year-end reporting
Lower tax rate on US earnings
Supply chain impacts
► Combined with other measures, it might encourage movement of activity to the US.
► Clients will need to consider funding arrangements, transfer pricing (TP) set-ups, service company structures, etc.
2. Anti-base erosion measures —BEAT► Alternative minimum tax that
may disallow a US deduction onforeign related-party payments
► Five percent for year one, 10% thereafter and increasing to 12.5% from 2025 (additional 1% for banks and broker dealers)
► The BEAT is compared withthe ordinary tax liability of thetaxpayer and the higher of thetwo is due
► The BEAT is of major concernto FS clients and could lead toa significant increase in US taxliability. This provision is oneof the main issues inbound FSclients are facing
Measurement of BEAT impact for year end — impact on US DTA
► Uncertainty on recognition and measurement for IFRS reporters
► Stakeholder appreciation that the BEAT applies to current transactions
Cost of capital
► US inbounds with non-US intra-group funding may find themselves uncompetitive compared with wholly US-funded businesses.
Location of operations
► Supply of services from outside the US could incur additional BEAT costs.
Planning opportunities
► Capital, treasury, service structures, TP and supply chain/operations review to influence BEAT
► Business and service structure, e.g., branch or subsidiary structures
Reinsurance
► Additional tax substantially affects related-party cross-border reinsurance, particularly from a US ceding to a foreign reinsurer; potentially restructuring and capital impacts
3. Interest expense restrictions► Interest deductions limited to
30% of earnings before interest, tax, depreciation and amortiza-tion (EBITDA), furtherrestricted to EBIT beginningin 2022
► Applies to related and unrelatedparty debt
FS companies with positive spread unlikely to be affected
Debt markets to review products to take account of new rules
► To the extent interest is restricted, consider capitalizing related-party debt and methods to boost EBITDA/EBIT
US Tax Reform: key provisions and their impacts on financial services (FS) companies 4
Impact on FS groups with operations in the US
Provision Short-term impact Longer-term impact
4. Loss restriction ► For losses arising in tax years
beginning after 2017, the loss deduction would be limited to 80% of taxable income.
Re-measurement of DTA’s
► Carryback elimination affects regulatory capital calculations. Hypothetical losses cannot be carried back, thus creating a NOL DTA disallowed from capital. Loss limitation will limit tax planning strategies which may have to be reviewed — i.e., loss refresher transactions may have to be reassessed.
► Potential impact on recognizable DTA and DTA recognition methods
5. Transition tax ► A one-time transition tax is
levied on a US corporation’s foreign accumulated untaxed earnings at a 15.5% rate for cash/cash equivalents and an 8% rate for the balance.
Tax accounting
► Computation may present extreme complexity as there is a need to determine post-1986 earning pools and historic tax payments to substantiate any foreign tax credit attributable to post-1986 earnings.
Payment
► Potentially significant cash flow needed to pay tax
► Transition tax may be paid over eight years subject to certain triggering events. The bulk of the transition tax, 60%, is payable in years six to eight.
6. Participation exemption ► Dividends received from
10%-owned non-US subsidiaries would be exempt from US tax, though capital gains would still generally be subject to US tax.
Tax accounting
► Impact on deferred tax assets and liabilities
Cash repatriation eased
► Ability to efficiently move funds back to US owners facilitated due to lack of arising tax liability
7. Global intangible low taxed income (GILTI)
► Effectively imposes a global minimum tax on US parented or owned group companies outside the US
► Expands the current US taxation of non-US subsidiary income
DTA measurement and effective tax rate (ETR) impact
► Expected to disproportionately impact FS clients due to low level of tangible assets
► Partially erode benefits of lower headline tax rate and territorial tax system
Review out from under planning
► Reconsider US ownership of non-US subsidiaries to influence long-term implications of GILTI
8. Foreign derived intangibleincome (FDII)► Provide incentives for the
export of services from the US by providing a beneficial tax rate
DTA measurement and ETR impact
► Lower US tax rate (13.125%) onexported services
► Excludes FS income which will limitbenefits to FS clients
Supply chain impacts
► Combined with other measures, may encourage movement of activity to the US
5
Provision Short-term impact Longer-term impact
9. People ► Executive compensation
► Fringe benefits
► Very short period to assess the impact of changes to employment related taxation which became effective on 1 January 2018
Employment
► Deductible limits on US executive compensation and limited deductions for fringe benefits may increase the true costs of US employees as well as impact the cost of expatriate packages into the US.
► When combined with other provisions, the location of US-based employees need to be considered.
Impact on FS groups with operations in the US
US Tax Reform: key provisions and their impacts on financial services (FS) companies
US Tax Reform: key provisions and their impacts on financial services (FS) companies 6
ContactsFor more information and an approach tailored to your needs, please contact our team.
Tax Banking and Capital Markets
Ralf Eckert Partner, Ernst & Young AG
T: +41 58 286 3559 E: [email protected]
Richard Milnes Partner, Ernst & Young LLP
T: +44 20 7951 7750 E: [email protected]
Andy Martyn Partner, EMEIA Transfer Pricing lead, Ernst & Young LLP
T: +44 20 7951 9539 E: [email protected]
Tax Insurance Tax Wealth and Asset Management
Thomas Brotzer Partner, Ernst & Young AG
T: +41 58 286 3412 E: [email protected]
Linda Henry Partner, Ernst & Young LLP
T: +44 20 7951 8618 E: [email protected]
US Tax Specialists
Tobey Schumacher Associate Partner, Ernst & Young LLP
T: +44 20 795 18342 E: [email protected]
Dan Farrell Partner, Ernst & Young LLP
T: +44 20 7760 9324 E: [email protected]
How EY can help
► EY has more than 50 US tax and accounting professionals dedicated to financial services in London who focus on the EMEIA market. Our US tax team is able to rapidly help in understanding of the US tax reform legislation, consider the short- and long-term impacts it raises, and your reaction to it.
► Our tax teams can immediately provide:
► BEAT planning, technical analysis of the tax reform provisions and modeling of tax impact
► Resources/secondment opportunities to address year-end accounting aspects and fill client resourcing gap
► Tax tools to estimate: repatriation tax, interest limitation, BEAT
EY | Assurance | Tax | Transactions | Advisory
About EYEY is a global leader in assurance, tax, transaction and advisory services.The insights and quality services we deliver help build trust and confidencein the capital markets and in economies the world over. We developoutstanding leaders who team to deliver on our promises to all ofour stakeholders. In so doing, we play a critical role in building a betterworking world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, ofthe member firms of Ernst & Young Global Limited, each of which is aseparate legal entity. Ernst & Young Global Limited, a UK company limitedby guarantee, does not provide services to clients. For more informationabout our organization, please visit ey.com.
© 2018 EYGM Limited.All Rights Reserved.
EYG no. 00446-184Gbl
EY-000052346.indd (UK) 01/18.Artwork by Creative Services Group London.
ED None
In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
ey.com
