u.s. tax reform – potential impact on u.s. inbound investment · u.s. tax base. — corporate...

U.S. Tax ReformPotential impact on U.S. inbound investment

Peter Madden, Carol Kulish, Patrick Jackman, Justin Davis & John Modzelewski

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 todayPatrick 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]

John ModzelewskiUS – M&A Tax (Tax Reform Modelling)Tel: +1 212 872 6572Email: [email protected]


Program Agenda (1/2)Potential U.S. corporate income tax reform— The state of play— Process— Overview of House GOP Blueprint1

U.S. inbound company - specific considerations— Loss of deduction for imports— Full expensing— Interest expense— Mandatory repatriation— State taxes

2

Institutional investment - specific considerations— US real estate— US infrastructure— Foreign exchange and debt pricing impacts— Asset management fee structures

3


Program Agenda (2/2)Modeling4

Action steps6

6

Australian insights5

Potential US corporate income tax reform


Tax reform – The state of playFor the first time since 2006, the Republican Party (GOP) controls the House, Senate, and White House simultaneously.

In the last decade, the urgency for tax reform, long a GOP priority, has increased for a number of reasons:— The United States now has the highest statutory corporate rate in the Organisation for Economic

Co-operation and Development (OECD).— Gross domestic product (GDP) growth continues to lag behind historical averages.— The U.S. manufacturing sector continues to decline.— The development of the base erosion and profit shifting (BEPS) recommendations puts effective

rate pressures on U.S. multinationals.— The European Commission’s State Aid cases cast doubt on the predictability of the global

tax system.— Significant migration of business income into partnerships and other pass-through has eroded the

U.S. tax base.— Corporate inversions further erode the tax base and raise questions of fairness.

Speaker of the House Paul Ryan was a driving force behind the development of the House GOP ‘Blueprint on Tax Reform’ released in June 2016.

On February 9, President Trump indicated that he would make an announcement regarding tax in the next few weeks.


House 2017

Speaker: Paul Ryan (R-WI)Chairman, Ways and Means: Kevin Brady (R-TX)

Democrats 194 (+6)Republicans 241


Senate 2017

Majority Leader: Mitch McConnell (R-KY)Chairman, Senate Finance: Orrin Hatch (R-UT)

Democrats 48 (+2)Republicans 52


Possible process for action on tax reformThe House The Senate Conference Signature

— Ways and Means releases tax reform draft

— Ways and Means Chairman releases Chairman’s mark and/or modified mark

— Ways and Means “marks up” tax reform bill, including amendments

— Full House of Representatives passes bill approved by Ways and Means (further amendments unlikely)

— House bill sent to Senate

— Senate Finance releases mark (could be similar to or different from House bill)

— Senate Finance Chairman releases modified mark

— Senate Finance “marks up” its own tax reform bill, including amendments

— Full Senate considers bill approved by Senate Finance (further amendments possible)

— If bill achieves 60 votes, then to conference with the House

— Alternatively, “Budget Reconciliation” vehicle to achieve Senate approval

— Senate considers policy changes to conform with Budget Reconciliation rules

— House and Senate call for conference to reconcile differences between the two versions

— House and Senate Republicans and Democrats appoint conferees to negotiate Conference Report

— If conferees resolve their differences, the negotiated Conference Report sent back to House and Senate for approval

— No amendments to Conference Report permitted

— Senate may achieve 60 votes or 51 (via Budget Reconciliation) for passage

— If approved, the bill is sent to President

— Conference report sent to President for signature, veto, or no action

— If enacted, Treasury and Internal Revenue Service begin process of implementing the new law


Tax reform – The House GOP Blueprint

The House GOP Blueprint (a high level document released June 24, 2016) is the likely starting point for tax reform.

The Blueprint proposes a number of dramatic changes to the tax code, largely pushing the tax system closer to a consumption-based tax.

Many of the Blueprint policy choices are intended to encourage GDP growth.

The Blueprint is designed, in theory, to be revenue neutral – that necessarily involves revenue trade-offs that create the possibility of winners and losers.

Failure to achieve revenue neutrality could undercut support for reform on both sides of the aisle.

Achieving passage in the Senate will be a complex task – for both procedural and political reasons.


The House Blueprint (2/4)

Moving from an income tax towards a

consumption tax

Lower rate – 20%

Move to cash-flow system

Wages are deductible (not a traditional consumption tax feature)

Intended to be revenue neutral

Transition rules

Consumption features— Immediate expensing of

investment costs (e.g., tangible and intangible assets, but not land)

— No deduction for net interest expense

— Net operating losses (“NOLs”)- Not carried back- Carried forward indefinitely- Indexed for inflation- Can offset only 90% of ATI

in a given year



Services and royalties –possibly treated like a sale of goods so need to determine payor jurisdiction

Border adjustable — Significant revenue raiser— Tax jurisdiction focuses on

location of consumption— Tax base seemingly comprised

only of business transactions with other U.S. taxpayers- In the base – business

expenses (including cost of goods sold (‘COGS’)) paid to and business income from other U.S. taxpayers

- Out of the base – business expenses (including COGS) paid to and business income from non-U.S. taxpayers

- Generally favors exports over imports, including within the value chain

Foreign subsidiary earnings not taxed— Eliminates Indirect FTC— Transition tax on ‘old

earnings’ - 8.75% on cash/3.5%

on non-cash property- 8 years to pay tax

(appears to apply to cash and non-cash liabilities)

Territorial tax system



No requirement that states follow federal tax treatment

State tax considerations

US inboundcompany - specific considerations


Considerations for U.S. inbound companies (1/2)

— Potential adverse impact on companies with significant foreign inputs selling to U.S. persons- E.g. U.S. companies with significant foreign inputs and foreign companies that sell input to U.S.

net importers— How to minimise adverse treatment of Imports

- Assess existing supply chains, operating models and pricing strategies- Alter location of principal functions- Potential shift of supply chain activities to the U.S. and expansion of export activities

— Incentive to bring IP and principal functions to U.S.— Consider pre-reform inbounding into the U.S. of capital equipment to potentially enable recovery of

cost of capital— Consider pre-reform potential inbounding into the U.S. of IP to potentially enable ability to claim

amortisation deductions- Foreign exit taxes may be incurred so need to consider foreign tax credit planning

Full expensing

Potential loss of deduction for imports

Interest expense


Considerations for U.S. inbound companies (2/2)

— Repatriation provision references Camp’s repatriation proposal as a starting point- Camp’s repatriation proposal would have subjected any U.S. shareholder that owned 10% of a

foreign corporation to a deemed repatriation of the corporation’s undistributed and untaxed post-1986 foreign earnings for the last tax year of the foreign corporation which began before the year in which the participation exemption system would have applied.— Notably, includes both CFCs and 10-50 companies

— Minimisation of deemed repatriation tax- E&P studies- Foreign E&P management

Mandatory repatriation

State taxes

— Due to many of the state’s broad reliance on federal tax policy to determine the state tax base, consideration should be given to consequential state tax reforms- Depending on the final outcome of the federal tax reform, states may reduce their reliance on

Federal Code and / or income tax

Institutional investment - specific considerations


Considerations for Institutional Investment (1/2)

— Upfront investment expense deduction and denial of interest deductions problematic for REITs- Real estate is a highly leveraged sector- REIT regime effectively requires distribution of earnings on a current year basis

— Current lobbying efforts focused on carve out or special regime for REITs and RICs— FIRPTA repeal….unlikely— State and local taxes will remain a significant cost

— A key focus area for the Trump Administration- $1 trillion in new infrastructure spend (election promise)- Tax credits for private capital investment (election promise), but maybe not….- Tax-exempt bond muni bond market safe (Trump to US conference of Mayors)- Assets owned/controlled by the States, but initiatives/incentives to come from the Feds

US infrastructure

US real estate


Considerations for Institutional Investment (2/2)

— Introduction of border adjustment regime expected to trigger a USD appreciation- Impact on non-USD valuations- Impact on current USD hedging policies and programmes

— Consider impact of tax reform on pricing and demand for tax-exempt bonds and other bond market implications

Foreign exchange and debt pricing impacts

Asset management fee structures

— Evaluate current fee structure and consider treatment of carried interest

US infrastructure (cont’d)

— Another highly leveraged sector, but unable to benefit from REIT regime— Benefit of shareholder debt adversely impacted, but withholding tax benefits may still remain— Many DCF models adversely impacted by GOP Blueprint proposals

- Cash flow impact on tax assumptions and computations- Tax reform impact on commercial assumptions

Modeling


Tax reform – Factors affecting outcomesFactors suggesting higher tax burdenFactors suggesting lower tax burden

High number of domestic suppliers, foreign customers

Asset-intensive business

Low-leverage business model

Domestically domiciled IP

Tax burden currently determined largely by the statutory tax rate

High number of foreign suppliers, domestic customers

Multinational with significant cross-border financing

High-leverage business model

Value chain relies on imports from foreign affiliates

Currently manage tax burden via heavy use of deductions, credits, preference items, and other incentives and special rules


Baseline modeling: Tax reform overallDynamic model offers capability to analyse potential scenarios for each individual proposed tax law change

More sophisticated model analysing tax and non-tax business (e.g., supply chain) benefits and costs associated with border adjustments in development


Modeling: Tax reform overall (1/3)Detailed input screens for relevant company data to model effects of proposed tax reform


Modeling: Tax reform overall (2/3)Inputs tab will populate hypothetical Form 1120 with relevant company data

Sample - Impact of Tax Reformbased on House Blueprint, June 2016Company Scenario YES

Form 1120 U.S. Corporation Income Tax Return 2018

Line Item

2018-GAAP2018- House

Blueprint

1a 1a 420$ 420$ 378$ (42)$ 412$ 378$ b 1b - - - - - - c 1c 420 420 378 (42) 412 378 2 2 210 210 126 (84) 193 126 3 3 210 210 252 42 218 252 4 4 4 4 - (4) 4 - 5 5 6 6 6 - 6 6 6 6 - - - - - - 7 7 - - - - - - 8 8 2 2 - (2) 2 - 9 9 - - - - - -

10 10 2 5 3 (2) 2 3 11 11 224 227 261 34 232 261 12 12 10$ 10$ 9$ (1)$ 10$ 9$ 13 13 30 30 28 (2) 30 28 14 14 - - - - - - 15 15 - - - - - - 16 16 - - - - - - 17 17 - - - - - - 18 18 5 5 5 - 5 5 19 19 - - - - - - 20 20 5 4 11 7 5 11 21 21 - - - - - - 22 22 10 10 10 - 10 10 23 23 - - - - - - 24 24 - - - - - - 25 25 - 4 - (4) - - 26 26 91 97 110 13 91 110 27 27 152 160 173 13 152 173 28 28 72 67 88 21 81 88

Employee benefits programs . . . . . . . . . . . . . . . . . . . . . . Domestic production activities deduction . . . . . . . . . . . . . . . . . .

Percentage Increase/(Drop) in Total Cash Tax . .

Other deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deductions . . . . . . . . . . . . . . . . . . . . . . . . . . Taxable income before net operating loss deduction and special deductions. Subtract line

Sales Returns and allowances . . . . . . . . . . . . . . . . . . . . . .

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross rents . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach

Other income (see instructions—attach statement) . . . . . . . . . . . . . . Total income. Add lines 3 through 10 . . . . . . . . . . . . . . . . . . .

2018- Current Regime

2018- House

Blueprint

Cost of goods sold (attach Form 1125-A) . . . . . . . . . . . . . . . . . . Gross profit. Subtract line 2 from line 1c . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Description

Capital gain net income (attach Schedule D (Form 1120)) . . . . . . . . . . . . Net gain or (loss) from Form 4797, Part II, line 17 (attach Form 4797) . . . . . . .

Difference

Balance. Subtract line 1b from line 1a . . . . . . . . . . . . . . . . . . .

Gross receipts or sales . . . . . . . . . . . . . . . . . . . . . . . .

2018-GAAP

-12%

Gross royalties . . . . . . . . . . . . . . . . . . . . . . . . . . .

Include One Time Repatriation Tax on Foreign Earnings --->

FX Adjusted

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension, profit-sharing, etc., plans . . . . . . . . . . . . . . . . . . . .

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Depletion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Compensation of officers (see instructions—attach Form 1125-E) . . . . . . . . . Salaries and wages (less employment credits) . . . . . . . . . . . . . . . . Repairs/maintenance . . . . . . . . . . . . . . . . . . . . . . . . . Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . .


Modeling: Tax reform overall (3/3)Summary tax impact of change

Australian insights


Considerations for Australian Groups

— A reduced U.S. tax rate, and a U.S. tax exemption for exports, should encourage Australian group’s expanding their U.S. presence, including by way of:- New business expansion into the U.S. and business/company acquisitions; - Transfer of existing assets and functions to the U.S., including:

• the transfer of IP to the U.S.; and• transferring principal and other supply chain functions to the U.S., for both U.S. and non-U.S. sales;

and- Making a U.S. entity a regional holding company.

— Australian groups should be able to borrow up to their Australian thin capitalisation limit to fund the capitalisation of a U.S. company or acquisition of a U.S. company/controlled group. Interest should be tax deductible against Australian assessable income.

— Dividends received by an Australian company from a U.S. subsidiary should be free from Australian tax.— Under Australia’s controlled foreign company (CFC) regime, most income earned by a U.S. resident

company does not result in attributable income. A U.S. company may be an effective:- Group holding company receiving dividends and capital gains from sales of subsidiaries;- Group financier earning interest and guarantee fees; - IP owner earning royalties; - Centralised shared-services provider earning service fees from group members; and- Manufacturer of goods for global sales.

U.S. as Regional Principal and Regional Holding Company

Action steps


Action stepsTax reform in 2017–2018 remains uncertain

Still, with the election of Donald Trump and a GOP-held Congress, the likelihood is significantly greater

Proposed U.S. tax reform should encourage Australian groups to expand their presence in the U.S.

1. Analyse flow of goods, services, royalties, and apply a “border adjustable” approach2. For Corporates - develop high-level economic model of effect on the company’s tax

position and business resultsFor Investments – update DCF models, consider impact on valuations and pricing

3. Consider advocacy priorities and reasonable legislative options, including transitional issues. Do not sit on the side lines

4. Review existing strategies, policies and forecasts from both a tax and economic perspective

5. Develop post-reform options and transition strategies

Consider the following list of actions:

Thank you


Notice

The 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.

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u.s. tax reform – potential impact on u.s. inbound investment · u.s. tax base. — corporate...

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