US tax reform: 4 December 2017 update

The US tax reform process continues to move incredibly quickly.

On Saturday, 2 December, the US Senate voted 51 to 49 to pass an amended version of their tax reform bill. To secure sufficient votes, some late amendments were adopted, but many of the key provisions that will have an impact on Irish businesses remain largely the same as originally proposed.

As a next step, although the approved House and Senate bill are similar in overall structure, the bills do have differences which must be resolved and a single tax reform bill must be voted on. We expect a House and Senate conference committee to begin work this week on resolving the differences between the two versions.

Read our PwC US publication on the approved Senate tax reform bill which includes a side by side comparison of the House and Senate bills.

US tax reform: 4 December 2017 update — Capitol Hill at dusk.

Key proposals for Irish business

As this publication does not focus on the impact to both Irish inbound and outbound investment, we have provided details below on certain key proposals of interest to Irish businesses:

1. Reduction in US corporation tax rate

While no amendments were made to the originally proposed flat corporate tax rate of 20%, applicable for most companies, it is important to note that the effective date for this proposal is for tax years beginning after 31 December 2018, while the approved House bill is effective for tax years beginning after 31 December 2017.

2. Territorial Tax Regime

Both the Senate and House bills are aligned on providing for a one time mandatory deemed repatriation toll charge on certain untaxed foreign earnings with a transition to a participation exemption whereby foreign dividends can be repatriated to US companies without having to pay additional US tax.  An amendment made in the Senate bill now uses rates of 7.49% for non-cash assets and 14.49% for cash and cash equivalents. These rates are slightly greater than those in the House bill (7% for non-cash assets and 14% for cash and cash equivalents).

3. Base Erosion and Anti-Abuse Tax ("BEAT")

The proposal included within the approved Senate bill targets certain amounts paid or accrued to a foreign related party. While the approved House bill also looks to tax these type of payments, the method for computing this tax between the two bills is largely different and must be reconciled when aligning on a modified tax bill. Specifically, the BEAT calculation requires a US corporation to compute a modified taxable income by adding back certain related party payments which are deductible to the US corporation.  The modified taxable income is tax effected at 10% and compared to the regular tax liability (determined after reduction by credits other than the R&D tax credit).  Any excess amount would be considered additional tax under the BEAT. There are certain thresholds which must be met in order for these provisions to be applicable to a US corporation.  Refer to the link above for additional detail around these proposals. If either of these proposals are contained within a final piece of tax legislation, it may result in additional cash tax for existing supply chain arrangements and could impact future business decisions as it relates to both Irish inbound and outbound transactions with US companies.

4. Global Intangible Low Income Tax ("GILTI")

The proposal included within the approved Senate bill looks to put a minimum tax on certain income from a subsidiary of a US corporation.  At a high level, the computation requires a US tax payer to compute its net deemed tangible return (computed at 10% of the tax basis in tangible assets) and compute its net tested CFC income.  The excess net tested CFC income over the net deemed tangible return is considered the GILTI amount.  The GILTI is then allocated to the CFCs and a foreign tax credit is computed based on an 80% limitation.  In addition, subject to certain criteria being met, 50% of the total GILTI amount can be deducted by the US corporation.  Note that this amount decreases to 37.5% post 2025. In connection, there is also a proposed US tax deduction of 37.5% as it relates to certain US sales made to foreign customers (which effectively provides for an effective rate on such income of 12.5% however, the deduction decreases from 37.5% to 21.875%, post 2025). The intention of this tax is similar to one in the House proposal which attempts to put a minimum tax on certain income where there is not significant tangible assets; however, the mechanics to compute such tax varies between the House and Senate proposals. The incentive which allows for a deduction related to US production to foreign customers is not contained within the approved House bill. Refer to the link above for additional detail around these proposals. If either of these proposals are contained within a final piece of tax legislation, it may result in additional cash tax for existing supply chain arrangements and could impact future business decisions as it relates to both Irish inbound and outbound transactions with US companies.

5. Interest Deductibility

Both the approved House and Senate bill contain two tests, computed differently under each proposal, which impose restrictions on the deductibility of interest. The House and Senate will need to align on these proposals as they work towards a single tax bill. These proposals may have an impact on current and future financing decisions with Irish businesses. For additional details, refer to the link above.

Next Steps

As US tax reform continues to progress quickly, we are seeing companies focus efforts on various areas including a review of their existing structure, future business plans, the impact tax reform could have on their 2017 financial statements, and various financing considerations including accessing cash to fund the mandatory toll charge. We will continue to keep you updated with any developments.

Contact us

Joe Tynan

Partner, PwC Ireland (Republic of)

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