S.A.F.
SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO
US tax reform, what could it mean for Italian businesses?
Michael W. Burak
S.A.F.
SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO
Donald Trump elected 45 th President of the
United States
Possible macro implications from Trump policies
If campaign rhetoric translates fully to economic policy, it will be a profound break with policy not just of the last eight years, but the last six decades. This is still more
“what could happen” than “what will happen”.
• Regulatory reform is a central tenet of Trump economic policy
• Dodd Frank, ACA, energy, climate….replace, repeal, amend, overhaul…harder than it looks
• Bully pulpit “name-and-shame” tweets aside, these reforms are generally pro-business
• More infrastructure and defense spending, lower taxes …Mr. Keynes, meet Mr. Reagan
• Will provide stimulus, but also will pressure the deficit, raise inflation due to timing in cycle
• Will reverse the policy regime between fiscal and monetary stimulus, so little sustained boost
• If it proceeds, economic nationalism will reduce US global engagement and trade
• Campaign promises will not deliver the outcomes promised, could create serious risks
• Could see a dramatic reshuffling of global economic world order. End of US hegemony?
• A signature issue for Trump, but not a win for the US economy
• Lower demand, higher costs, higher prices, smaller workforce
• Visa restrictions would disadvantage the US in the global war for technical talent
1
2
3
4
FISCAL STIMULUS
TRADE
IMMIGRATION
DEREGULATION
S.A.F.
SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO
US legislative process and tax reform
How a tax bill becomes a law (regular process)
S.A.F.- SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO 6
There is more than one path for tax reform
Regular legislative process Benefits • Legislation can be enacted permanently
• No artificial restrictions on which measures can be included
Limitations • 60 votes needed at every step in the Senate (i.e., to begin debate, vote on amendments, vote on passage, to
conference, etc).
Budget reconciliation process Benefits
• Requires only simple majority vote at every step in the Senate (no filibuster allowed)
• Expedited consideration (time limits for amendments and overall debate)
Key
Limitations
• Legislation that increases the deficit outside of the budget window (typically 10 years) is subject to automatic sunset or other measures to avoid long term deficit effect
• 60-vote Senate super-majority required to waive deficit rule
• Senate rules also require reconciliation to be used only to
enact measures that have a fiscal effect on the federal
budget
Tax Foundation “static” and “dynamic”
revenue estimates
Critical to tax reform passage!
Source: Tax Foundation (July 2016); CBO baseline (August 2016). Assumes certain transition rules.
* In second 10 years, static revenue loss is reduced by 50% relative to GDP, due to larger
Tax CBO baseline
(2016-2025) “Static”
Change* “Dynamic”
change
Individual Income Taxes $20,265 -$981 $566
Payroll Taxes $13,025 $0 $683
Corporate Income Taxes $3,634 -$1,197 -$1,324
Excise Taxes $1,059 $0 $57
Estate and Gift Taxes $263 -$240 -$240
Other Revenue $1,696 $0 $68
TOTAL $39,942 -$2,418 -$191
S.A.F.
SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO
US tax reform: current options
Current tax reform proposals
S.A.F.- SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO 10
Comparison of recent tax reform proposals Business provisions
Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform
‘blueprint’ Trump tax principles (4/26/2017)
Corporate rate 25% rate (phased in over 5
years) 20% rate 15%
International–
General income tax regime
‘Territorial’ system, with 95%
foreign dividend exemption
‘Territorial’ system, with 100% dividend exemption system
Territorial system
Repatriation “toll
tax” Previously untaxed foreign
earnings: 8.75% tax on cash and cash-equivalents and 3.5% tax rate for non-cash assets paid over 8 years
Same One time deemed
repatriation tax
International – Consumption tax regime (border tax adjustment)
(No exact provision; subpart F provision below has some related features for imports from foreign subsidiaries)
‘Destination-based cash- flow’ approach, with border adjustments that exempt exports and tax imports
(Not stated)
International – Anti-base erosion regime (subpart F)
- Subpart F generally maintained
- New tax on ‘intangible’
income: 15% for foreign market sales, 25% for US market sales
Subpart F reduced to foreign personal holding company income provisions (see border adjusted tax above)
(Not stated)
Comparison of recent tax reform proposals (cont’d) Business provisions
Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform
‘blueprint’ Trump tax principles (4/26/2017)
Cost recovery Repeal MACRS and implement ADS type system, with inflation adjustment
Full expensing for
depreciable and amortizable investments
(Not stated)
Interest expense Limit for thin capitalization Deductible only against net interest income
Special rules TBD for financial services
(Not stated, except with a broad mention that plan to eliminate tax breaks for special interests)
R&D Make alternative simplified credit permanent
Require 5-year amortization
Business credit to
encourage research and development
Maintains R&D credit
Domestic production deduction
Phase out and repeal Repeal Repeal
NOLs Limited to 90% of taxable income; Repeals special NOL carryback provisions (other than provisions relating to casualty and disaster losses)
Carried forward indefinitely limited to 90% of taxable income and increased by interest factor to adjust for inflation; Carryback is not allowed
(Not stated)
S.A.F.- SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO 12
Tax Reform – Key provisions impacting US Inbounds
House GOP tax reform ‘blueprint’ provisions Impact on US inbounds C - corporation tax
rate Reduced rate to 20% rate Consider accelerating deductions now during higher tax rate years and deferring income to later years with lower tax rates.
Interest deduction Loss of net interest deduction with special rules to
be determined for financial services With interest being one of the largest issues for US inbounds, consideration needs to be given whether the statutory rate reduction will compensate for the loss of the interest deduction.
Border adjusted tax
(BAT)
‘Destination-based cash-flow’ approach,
with border adjustments that exempt exports and taxes imports
With a large number of US inbounds being net
importers, the BAT will likely increase significantly their US tax liability.
Repatriation “toll
tax” Previously untaxed foreign earnings have a toll tax of 8.75% imposed on cash and cash- equivalents and 3.5% tax rate for non-cash assets paid over 8 years
US inbound companies with “sandwich structures” (F.
Parent-US Sub-F. Sub.), will be subject to the repatriation toll tax.
Cost recovery Full expensing for investments, excluding land Full expensing of tangible personal property and intangibles may have significant impact, especially around a foreign-headquartered MNC’s overall IP strategy, requiring evaluation of whether to on-shore IP and principal functions to the US (e.g., R&D
activities).
House Blueprint: Border tax adjustment - design
• Referred to as a “destination- based tax system” because the taxability is based on the destination of goods and
services as opposed to source or residence
• 167 countries, including all other OECD countries, have destination-based value added tax systems
• Limited details provided in Blueprint on how border tax adjustment would be
implemented (“border adjustments exempting
exports and taxing imports”)
Major business
provisions 10-year revenue
cost (billions) Reduce corporate rate to 20% and
repeal corporate AMT -$1,845
Expense investment; disallow net
interest deduction on new loans -$ 448
Territorial system -$ 88
Deemed repatriation $ 138
Border adjustments $1,180
Repeal identified corporate tax
expenditures $ 172
Source: Tax Policy Center, September 16, 2016.
S.A.F.- SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO 14
Immediate steps executives should understand and assess potential impact
• Physical flows and financial flows including financial transactions
• Trade data and agreements and other indirect tax levers used
• Physical asset footprint (manufacturing, distribution, and other)
• Capital plans, forecasts, and costs
• Legal entity structures Mapping the
current situation
• Modeling
• Corporate rate reduction, cross-border tax, expensing capital investments
• Trade – NAFTA, TPP, and others
• Brexit
• Environmental Overlay the potential new
policies and risks