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S.A.F.

SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

US tax reform, what could it mean for Italian businesses?

Michael W. Burak

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S.A.F.

SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

Donald Trump elected 45 th President of the

United States

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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

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S.A.F.

SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

US legislative process and tax reform

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How a tax bill becomes a law (regular process)

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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

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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

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S.A.F.

SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

US tax reform: current options

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Current tax reform proposals

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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)

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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)

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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).

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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.

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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

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S.A.F.

SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

Questions ?

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