US Tax Reform – Impact on US GAAP / IFRS Financial Reporting for FY 2017

Following the House passage of HR 1, the Tax Cuts and Jobs Act, the Senate Finance Committee has approved its version of the tax reform legislation on November 16. The tax reform legislation keeps pace despite the derailed budget meeting. Last night the next hurdle was taken and the bill will now be debated on Senate floor starting today, November 29 with expected Senate conclusion this Friday.

Following the Senate floor debate, the reconciliation process of the two bills will start with the expectation to have it completed shortly. Surprises in the Senate floor and reconciliation are expected and it will not be a straight forward debate but the intention for completion is significant.

With House passage complete and Senate floor discussion coming up, the US tax reform makes strong headway. If the process continues without delay, a feasible timeline may be for House and Senate to resolve differences and vote to pass a final bill which would then be signed into law by President Trump still in December 2017 or early 2018.

Why US tax reform might impact FY 2017 Financial Reporting for Swiss Groups?

Swiss groups that apply  international accounting and reporting standards with operations in the US (US (sub)-holding companies or local US operating companies or activities), will need to consider the ongoing US tax reform development in their 2017 financial statements either due to (substantive) enactment or potentially for disclosure.

What if the US Tax Reform is (substantively) enacted in 2017?

Accounting for income tax requires the effects of changes in tax laws or rates to be recognized in the period in which the law is (substantively) enacted regardless of the effective date.

For US federal tax purposes, the enactment date is most often the date the President signs the bill into law. While the release of the bill does not constitute enactment, companies should stay abreast of current legislative developments and evaluate the potential implications on financial reporting to ensure they are prepared to account for any changes in the period of enactment.

The current bill proposes significant changes that, if (substantively) enacted, will have pervasive financial reporting implications. For example, lowering the corporate tax rate and mandatory taxation of deferred foreign income will impact measurement of deferred taxes and taxes payable in the period of enactment.

Other changes, such as elimination or limitation of certain deductions and changes to international taxation, will impact both current and deferred taxes on a prospective basis. Changes in (substantively) enacted tax law may also require the reassessment of realizability of deferred tax assets. In the period of (substantive) enactment, critical analysis of the resulting changes in US tax law will be needed to determine the appropriate financial statement effects.

Disclosure requirements if US Tax Reform is not (substantively) enacted in 2017?

In periods prior to (substantive) enactment, consideration should be given to potential requirements for disclosure within management’s discussion and analysis (MD&A) where the potential impacts on the financial statements may be significant.

The emphasis should be on the potential effect of the proposed legislation on the variability of earnings, financial condition, and liquidity. As future tax law or rate changes cannot be anticipated and should not be recognized until enacted, it generally is expected that disclosures in the period prior to enactment should be limited to the MD&A.

Nevertheless, if enactment occurs after the balance sheet date but before issuance of financial statements it may be necessary to include more transparent disclosures regarding the change in tax law and an estimate of its impact on the financial statements, or include a statement that such an estimate cannot be made.

Are you prepared?

For many companies, depending on the footprint and structure, the assessment of tax accounting impacts including disclosure will be complex and may require significant effort.

What companies should do if not done so yet is to take stock of existing positions, understand the company’s facts, risks and strategies, closely follow the US tax reform and other global tax developments, manage communication and ensure discussion with management, audit committee and board are up to date.

How can PwC help?

PwC has developed various tools and has a fully dedicated tax policy group that can assist you with:

  • Model the potential impact including potential corporate tax rate changes or of mandatory repatriation, as well as E&P and tax pool studies, using our proprietary tools – the Toll Charge Analytic Tool and the E&P Tool.
  • Model the potential impact of a territorial tax system using our high-level analytic tool, Tax Restructuring Impact Modelling (TRIM).
  • Assist treasury departments with evaluating capital structures and options for deploying repatriated cash (e.g., shift from debt to equity, reduction in need to borrow for acquisitions, investments, and R&D expansion).
  • Visit our website to stay up to date on US Tax Reform developments on a daily basis – on demand daily video subscription available with tax policy analysis and insider briefings.

Contact Us

Martina Walt
Partner – International Tax Services
+41 58 792 68 84
martina.walt@ch.pwc.com

Reto Inauen
International Tax Senior Manager
+41 58 792 42 16
reto.inauen@ch.pwc.com

Published by

Reto Inauen

Reto Inauen

Reto Inauen is an international Tax Senior Manager at PwC Switzerland focusing in Tax Accounting and Reporting.
Reto has been with PwC Switzerland for more than 11 years. He advises Swiss and foreign Headquartered companies on their tax accounting and reporting matters. He is also regularly working as part of our audit teams.
Reto is a graduated business lawyer and is a certified Swiss Tax Expert.