Key questions companies should ask ?

In the wake of the November elections that gave Republicans control of the White House and both houses of Congress, the chances of enacting comprehensive tax reform are greater than they have been since the Tax Reform Act of 1986.

The fact that there have been only four such instances of broad-based US tax reform over the past century only serves to underscore its significance.

Impact of US tax reform on Canadian companies

The feeling among policymakers is that the high current federal corporate income tax rate, combined with the current international tax system, encourages profit-shifting to low-tax jurisdictions, thus eroding the US tax base and moving jobs and capital out of the US.

The proposed tax reform Blueprint reduces tax rates, imposes the mandatory repatriation of undistributed foreign earnings and broadly supports investments in US-based goods and services to discourage US companies from using foreign inputs and making foreign investments (i.e., incentivizing a “made in the USA” business model).

More far-reaching than “just tax reform”The Blueprint is both a call to action and a broad outline of “US pro-growth” and protectionist policy changes. As such, companies doing business with and in the US need to be well informed about the impact on cross-border trade.

• What impact will US tax reform have on our current investments or operations in the US?

• What will be the optimal strategy for capitalizing US-based businesses?

• How will US tax reform change the behaviour of our key customers, suppliers or competitors?

• What are the implications of the proposal to allow companies the ability to immediately expense certain capital expenditures? What about the proposal to eliminate the current deduction for net interest expense?

• What tax planning opportunities may exist with a lower corporate tax rate?

• How do the reforms impact our workforce?

Key questions companies should ask ?

Business models must adaptPerhaps the most innovative feature of the Blueprint is the Border Adjustment. This creates a destination-based system under which export sales would be exempt from tax, and imported material would not be deductible. There may also be tariffs on imported goods, and companies may need to review the supply chain and production aspects of their operations. US multinationals with overseas earnings will need to determine whether and how to repatriate cash to avoid potential penalties.

• What are the effects of the proposed Border Adjustment provisions and duty and tariff reforms on the supply chain (for both exporters and importers), as well as companies dealing with commodities not available in the US?

• How do the various reform proposals affect cost-reduction programs that are key to growing/protecting the bottom line?

• How will US tax changes impact our M&A strategy, and how will we manage our risks in current transactional activity?

• How should our risk assessment change? What are the possible risks and opportunities?

• How will this change operational decisions? Will it give US-based multinationals a competitive advantage?

• How do the proposals impact our cash management opportunities, and how can we plan and strategize for cash flow in the organization?

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2199077 ED 00This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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Although many issues remain to be determined, tax reform is a top priority for the new administration and is envisioned to be implemented in 2017. Regardless of the uncertainty of free trade agreements, these sweeping changes will fundamentally change how Canadian companies do business with the US.

Organizations will need to closely monitor the debate and plan for the potential effects of the leading tax reform proposals, as understanding the concepts behind the Blueprint and other approaches to tax reform will allow them to position themselves for success as the final product takes shape.

Contact usTo learn more about the impact of US tax reform on your business, please contact one of the following EY professionals.

Ryan Coupland Partner, US Corporate Tax Ryan.Coupland@ca.ey.com | +1 403 206 5405

John Penner Partner, Supply Chain Advisory John.Penner@ca.ey.com | +1 403 206 5666

Ann Brockett Partner, Assurance Ann.M.Brockett@ca.ey.com | +1 403 206 5016

Karleen Batty Partner, Transaction Advisory Services Karleen.Batty@ca.ey.com | +1 403 206 5215