US Tax Reform from a Swiss US investors perspective

Wednesday, March 14, 9:30 am -1:30 pm, PwC Bern

PwC is pleased to host a seminar with the Embassy of the United States and K&L Gates followed by a luncheon, on the U.S. Tax Cuts and Jobs Act signed by President Trump in December 2017. Tax professionals from PwC Switzerland and K&L Gates of South Carolina will highlight the implications of the U.S. federal tax code changes for current and future Swiss and Liechtenstein investors and U.S. companies operating in Switzerland.

When: 

Wednesday, March 14, 9:30 am -1:30 pm, PwC Bern,  Bahnhofplatz 10, 3001 Bern.

What:

  • “US Tax Reform in a Nutshell & How US Tax Reform impacts doing business and investments between the US and Switzerland”
  • “It’s a competition: Understanding the State and Local Incentive Process”
  • “Impact on European inbound US investment – One State’s Perspective”

The detailed agenda of the event will be provided upon registration.

Attire: 

Business

Registration:

Kindly respond by March 5 to Mr. Sandor Galambos, galamboss@state.gov or 031 357 7237 or Nathalie Fretz, nathalie.fretz@ch.pwc.com

Contact Us

Martina Walt
PwC | Partner – International Tax Services
Office: +41 58 792 68 84 | Mobile: +41 79 286 60 52
Email: martina.walt@ch.pwc.com
PricewaterhouseCoopers Ltd
Birchstrasse 160, 8050 Zurich
http://www.pwc.ch

US Tax Reform – The Final Tax Legislation as approved for enactment

In brief

Congress on December 20 gave final approval to the House and Senate conference committee agreement on tax reform legislation (HR 1) also called “Tax Cuts and Jobs Act” that would lower business and individual tax rates, modernize US international tax rules, and provide the most significant overhaul of the US tax code in more than 30 years.

The only remaining uncertainty is whether President Trump will sign the legislation into law before the end of this year, or if the signing might be delayed until January 2018.

The final conference committee agreement for HR 1 (the ‘Conference Agreement’ or the ‘Agreement’) will lower permanently the US federal corporate income tax rate from 35 percent to 21 percent. The Conference Agreement will further temporarily reduce the current 39.6-percent top individual income tax rate to 37 percent and revise other individual income tax rates and brackets. Both the new corporate tax rate and revised individual tax rates shall be effective for tax years beginning after December 31, 2017. The Agreement will repeal the corporate alternative minimum tax (AMT), while retaining a modified individual AMT with higher exemption amounts and phase-out thresholds.

In short, the Conference Agreement provides for the most significant overhaul of US international tax rules in more than 50 years by moving the United States from a ‘worldwide’ system to a 100-percent dividend exemption ‘territorial’ system. As part of this change, the Agreement includes two minimum taxes aimed at safeguarding the US tax base from erosion, along with other international tax provisions.

The Agreement further includes a broad range of tax reform proposals affecting businesses and individuals, including a new 20-percent deduction for certain pass-through business income. In addition, the Agreement repeals or modifies many current-law tax provisions to offset part of the cost of the proposed tax reforms. The Joint Committee on Taxation (JCT) staff have estimated that the net revenue effect of HR 1 will be to increase the on-budget federal deficit by $1.456 trillion over 10 years.

Highlights of the US tax reform bill

The final US tax bill appears to attract investments, jobs and business in the US and increases the attractiveness of the US by introducing a 21% federal income tax rate, participation relief on foreign subsidiary dividend income (though not on capital gains) or an incentive for US production for sale to “foreign” customers (Foreign Derived Intangible Income – FDII). On the other hand, the above benefit come with a toll charge tax on foreign untaxed profits of US controlled foreign companies (CFCs) and many new rules that enlarge the US tax base such as interest deduction limitation, a new Base Erosion Anti Abuse Tax (BEAT), expanded controlled foreign company (CFC) definitions and new foreign profit inclusion (Sub F) rules such as the global intangible low-taxed income (GILTI) and the anti-hybrid rules.

One can for sure say that cross border group transactions with the US become more complex. So do US compliance and reporting obligations, which especially for non-US groups increase significantly. The Trump campaign planned to create an easy and simple US tax code under which the US tax return should have the format of a “postcard”. Though the new rules will significantly increase the complexity. The final US tax legislation also has international discussion potential as WTO and EU already address incompatibility concerns for the new BEAT and FDII rule. The US tax reform as passed should be reviewed carefully in international context or unilateral reactions and measures as well.

The new rules are complex and impact of the US tax reform is to be reviewed on a case by case basis by every company. For a detailed summary of HR1 rules, see PwC Tax Insight

What to do now?

While the new tax legislation wording may not be precise in all details or results in unintended consequences, treasury and IRS now have to present underlying regulations and practice notices as guidance for application and interpretation. Such details are only expected to become available over the next weeks and months.

The immediate implication of the US tax reform is however its impact on 2017 financial reporting and tax accounting. For both, US GAAP and IFRS the enactment date is the signing date by President Trump. Accordingly, in case of signing in 2017, respective tax accounting entries and in case of signing in 2018, disclosure requirements need to be considered for the financial statements 2017.

Relevance of the US tax reform for Swiss companies and economy

The US tax reform will increase global tax competitiveness for US business. Switzerland and the US have very strong trading relations. With USD 224 billion of cumulative direct investments, Switzerland is the 7th largest investor into the US. Many Swiss companies have a significant US footprint either by US manufacturing or with sales and distribution functions or services rendered and are impacted by the new legislation as the US is an important export market. On the other hand, Switzerland is also a key trading partner of the US as it is the 7th largest export market for services, the 17th largest for goods and is an important location for European headquarters of US multinational groups. Switzerland as well as Swiss companies will thus for sure be impacted by the US tax reform.

The most important considerations from a Swiss perspective:

  • Review global supply & value chain as well as pricing approaches considering the new foreign profit inclusion and anti-base erosion rules
  • Review US funding and investment & acquisition plans considering the interest limitation rules and expensing rules
  • Increase of international tax competitiveness for US business and Switzerland
  • Review international and Swiss tax developments in the light of US tax reform

The rules in more detail

HR 1 is proposed generally to be effective for tax years beginning after 2017. Certain provisions have separate effective dates, while others are effective after the date of enactment and some are effective for tax years beginning after 2016. The bill also proposes some temporary measures and provides transition rules for certain proposals. The below summarizes the most important general provisions. Many exemptions and special rules however exist for specific facts or certain industries in the more than 500 pages of tax legislation that are to be considered in detail on a case by case basis.

Corporate rate reduction
The current 35% top federal corporate rate is reduced permanently to 21% for tax years beginning after 2017. The current corporate alternative minimum tax is repealed. State taxes are to be added and thus the combined US tax rate will be in average around some 26%. This rate will still be slightly higher than the 23.75% average rate for all other OECD nations in 2017.

Tax location competition for Switzerland will increase not only with the US but especially also the EU to attract US business. Passing Swiss tax reform is an important measure to maintain Switzerland’s competitiveness and business location attractiveness.

Interest expense limitation
Interest expenses both for related and unrelated party debt is limited to the sum of business interest income plus 30% of the “adjusted taxable income”. Adjusted taxable income is defined similar to EBITDA for taxable years beginning after December 31, 2017 and before January 1, 2022, and is defined similar to EBIT for taxable years beginning after December 31, 2021. Disallowed interest is allowed to be carried forward indefinitely.

US companies are typically highly debt leveraged under today’s rules favoring debt over equity. Accordingly companies should reconsider the US operation’s funding structure in detail.

Cost recovery / full expending of certain property
100% full expensing for investments in new and used property made after Sept. 27, 2017 and before January 1, 2023 is introduce. A five-year phase down of full expensing will begin in 2023.

This rule intends to attract investments into the US. Swiss groups that plan investments into the US should (re-)consider the funding and expensing of US investments as well as timing of planned investments under this rule.

NOL’s / Tax loss carry forward
NOLs are limited to 80% of income for losses arising in taxable years beginning after December 31, 2017. Indefinite carryforward but no carryback for losses arising in taxable years ending after December 31, 2017 will be applicable. For insurance companies special rules will apply.

Companies with tax loss carry forwards in the US will need to assess the impact on deferred tax positions for financial reporting purposes. In future, companies with NOLs will have to pay US cash tax in years with taxable profit as only 80% of income per year can be set off with NOLs.

R&D Credit / Domestic Production Credit
The R&D credit as per the current rules remain in place to maintain the jobs and attractiveness of the US for research and development activities. This measure combined with the new “foreign derived intangible income” rule shall increase the attractiveness to keep intangible property in the US. On the other hand, domestic production credits for taxable years beginning after December 31, 2017 are repealed.

Participation Relief and Toll Charge Tax
A territorial tax system providing a 100% dividends received deduction (DRD – participation relief) for certain qualified foreign-source dividends (10% shareholding and 1 year holding period required) received by US corporations from foreign subsidiaries is introduced effective for distributions made after 2017.

The territorial system is introduced only for foreign dividends while for any other activities, the current CFC (controlled foreign company) and Sub F (inclusion of CFC foreign profit for US taxation) is maintained.

Under DRD, no more tax credits are available for dividend income. From a Swiss perspective, dividends from a Swiss subsidiary to a US parent are subject to Swiss withholding tax resulting generally in a 5% residual Swiss withholding tax under the Swiss – US double tax treaty. Any foreign withholding tax will become a final tax cost as no more tax credit available in the US.

As a consequence of the change to a territorial tax system, previously untaxed foreign earnings of US CFCs (foreign subsidiaries of US companies) are subject to repatriation toll charge tax at 15.5% for cash & cash-equivalents and 8% on non-cash assets. Such toll charge tax will be payable over 8 years.

Any US company owning shares in foreign subsidiaries will be subject to the toll charge tax resulting in an immediate impact on its tax accounting and financial reporting.

Expanded CFC definition and new Sub F Rules
In general, the current CFC (controlled foreign companies) and Subpart F rules (inclusion of foreign CFC’s profit into the US tax base) are generally maintained. Under the current CFC attribution rules, foreign subsidiaries of non-US parented groups that are not held by US entities are not treated as CFCs. Under the new expanded CFC definition, if a non-US parented group has at least one US subsidiary or an interest in a US partnership, any other non-US subsidiary would generally be treated as CFC. Although there would be no income pick up or attribution of profit to US tax base as long as the US entity does not have a direct or indirect interest in such foreign entities. However, there may be a reporting requirement (reporting 5471) for all of the foreign entities under the non-US parent. Such expanded CFC definition is effective the last taxable year before January 1, 2018 (effectively already for 2017).

Under these rules, a Swiss parent group that owns one US subsidiary would have a tax reporting duty in the US for all its subsidiaries.

The new tax code also adopts a deduction for ‘foreign derived intangible income’ (FDII) and the global intangible low-taxed income’ (GILTI) provisions, as well as the ‘base erosion and anti-abuse tax’ (BEAT).

BEAT

The BEAT targets US base erosion payments from US companies to any group entities abroad resulting in higher US taxes. The intention of such rules is to create an incentive to provide such activities in the US rather than “outsourcing” to non-US group companies and avoid base erosion payments. The US base erosion with payments of interest, royalties or other transfer prices such as management fees, services etc. should be limited. A big relief for many Swiss companies is the fact that the BEAT does not include payments for costs of goods sold (except for former US groups that inverted abroad). A Swiss company selling goods to US customers directly or via a US distribution company should not be adversely impacted.

The BEAT is a new add-on minimum tax that is imposed in addition to the corporate tax liability. Subject to BEAT are generally corporations with average annual gross receipts of at least $500 million and that make certain base-eroding payments to related foreign persons for the taxable year exceeding 3% (2% for certain banks and securities dealers) of all their deductible expenses.

The BEAT is a comparable calculation and the additional tax is imposed if
(i) 10% of taxable income (5% in 2018 and 12.5% for tax years after 12/31/2025, 6% for certain banks and securities dealers) generally determined without regard to amounts paid or accrued to a foreign related party (other than COGS and certain services), including amounts includible in the basis of a depreciable or amortizable asset;
exceeds
(ii) regular tax liability (consideration of available credits apply based on specific rules).

The BEAT of $1 is levied on top of the regular US tax charge of $21.

The BEAT will result in higher taxes in the US and impacts Swiss groups rendering services, licensing intangible assets or financing activities to US group companies. Swiss groups as well as US multinational groups need to review the cross border value chain and transaction flows to assess the extra US tax to become due under the BEAT.

From an international point of view, the BEAT is not undisputed and both the WTO and the EU have addressed to the US government concern whether such tax is permitted under international trade and double tax treaty rules. Further expert assessment is expected. In case deemed to be a concern, potential international counter measures might result.

Foreign derived intangible income’ FDII) and global intangible low-taxed income’ (GILTI)
The FDII should create an incentive to keep the IP in the US for domestic production in the US and sale of goods and services abroad by allowing a 37.5% deduction on foreign-derived intangible income from a US trade or business. The deduction is reduced to 21.875% for taxable years beginning after 12/31/2025.

Income eligible for such deduction would be taxed at a 13.1% effective tax rate (21% federal tax less 37.5% deduction) effective for tax years beginning after 2017.

Such rule is comparable to a patent / IP box and shall intensify to keep and relocate IP to the US. The US legislation is silent on modified nexus approach as defined as OECD and EU standard and thus, such rule also triggers discussion on an international level for compatibility with new OECD BEPS international standards. While it appears to be a benefit to transfer IP into the US, Swiss groups should consider such a step carefully also in the light of sustainability of US tax legislation as well as future US exit taxes and the overall value chain and operational set up. For location Switzerland, this means that US companies have less of an incentive to transfer IP abroad. To assess the most competitive IP and business location, any of the existing and new rules as well as international developments should be considered holistically to assess overall pros and cons. Especially the combination with any other base erosion and US tax base enlargement rule and the comparison of tax impacts on a holistic basis may differ significantly from case to case.

The GILTI introduces a new Subpart F category in which US shareholders of CFCs become subject to current US tax on “global intangible low-taxed income”. GILIT is defined as income in foreign CFCs that generate a 10% margin or more on certain products. If so, such profit of CFCs exceeding the 10% margin is to be included in the US tax base under consideration of a 50% deduction and an 80% foreign tax credit.

The GILTI rule will only impact structures where a US company owns foreign subsidiaries. As long as the US subsidiary however does not own any shares or partnership interests in foreign entities, such rules would not apply. Thus a Swiss group that holds a US distribution or manufacturing subsidiary, which itself is not invested in foreign entities should not be impacted by GILTI. Considering the 80% foreign tax credit that is available in the GILTI calculation, GILIT tax is as an approximation only expected to result in an additional tax burden if the foreign tax rate of the CFC is below 13.125%.

Anti-Hybrid Rules
New anti-hybrid rules inspired by the OECD BEPS rules are introduced. Accordingly, a US company will not be allowed a tax deduction in the US for interest or royalty payments if the income is not taxed or results in a double deduction in the recipient’s jurisdiction. This rule applies to hybrid entities or hybrid instruments and also applies to the newly introduced US participation relief. Since the rule largely follows OECD BEPS wording, further explanations, on how the rule will be applied in detail, are expected to be included in upcoming IRS and Treasury regulations and practice notices.

Accordingly, any payment of US companies have to be reviewed whether paid to a hybrid entity or whether the instrument as such is qualified as hybrid.

State Taxes
The US tax reform covers federal income tax. How and at what point in time the States adopt the new US tax code matters is unclear at this stage. Companies should carefully monitor State tax interactions under the new rules as well.

Individual Tax Matters
The US tax reform legislation includes many rules for individual tax payers and aims to reduce the tax burden for low and middle calls families. However, the rules are highly complex and impact depends literally on very specific individual facts which define allowed deductions, incentives and applicable tax rates. Whether you are a winner or not so lucky individual tax payer under the new rules has to be assessed personally.

The following shows a few of the important provisions that will impact individual taxpayers living and working abroad.

The following rules do not change and continue to apply:

  • US citizens and residents taxed on worldwide income
  •  409A rules (Nonqualified Deferred Compensation Plans)
  • Taxation of nonqualified stock options at exercise
  • Net investment income tax
  • 401(k), qualified plan pre-tax contribution limits
  • Foreign earned income exclusions for taxpayer living and working abroad
  •  Foreign tax credit rules
  • Gift tax
  • Qualified dividend and Capital gain rates and holding periods
  • Charitable contribution deduction

The following rules will change:

  • Standard deduction increase to $24K for married taxpayers
  •  Limit on property tax deduction, combined with state and local tax deductions to $10K
  • Mortgage interest deduction, limited to $750K including the repeal of deduction on home equity indebtedness
  • Relocation costs paid directly to the vendor by an Employer may become taxable to the employee
  • Increase in lifetime estate and gift tax exemption to $11M per donor
  • Sale of US Partnership interest by a foreigner is considered US effectively connected income
  •  Taxation of income from tax-transparent entities (i.e. LP, LLP, LLC) at the entity level rather than the individual owner, except for certain personal services businesses
  •  Increase of the current AMT exemption
  • A ‘toll tax,’ which would subject certain individuals and trusts to a one-time reduced tax on the undistributed foreign earnings and profits (E&P) in US-owned foreign corporations.

Depending on your personal tax situation, there are certain actions you may take before the end of the year to benefit from the existing provisions that are subject to change or that are expected to be completely repealed from the tax code.

Questions & How can PwC help you?

PwC would be pleased to assist you with:

    • Any questions on how the US tax reform may impact yours and your company’s US tax position;
    •  Assist with modelling US tax reform impact. PwC has developed specific financial modelling tools;
    •  Support you for any tax accounting questions for your financial report;
    • Support assessment of global value chain and US related business transactions;
    • Follow our publications and blogs via:

a. https://news.pwc.ch/category/managing-taxes/
b. https://www.pwc.com/us/en/washington-national-tax/us-tax-reform.html
c. https://twitter.com/PwC_Tax

  • PwC will present a series of webcast in January 2018 explaining several of the new rules in more detail
  • Our US experts are available for individual meetings and discussions upon request.

Contact Us

Corporate and business tax

Martina Walt
PwC | Partner – International Tax Services
Office: +41 58 792 68 84 | Mobile: +41 79 286 60 52
Email: martina.walt@ch.pwc.com
PricewaterhouseCoopers Ltd
Birchstrasse 160, 8050 Zurich
http://www.pwc.ch

Stefan Schmid
PwC | Partner, International Tax Services
Office: +41 58 792 44 82 | Main: +41 58 792 44 00
Email: stefan.schmid@ch.pwc.com
PricewaterhouseCoopers AG
Birchstrasse 160 | Postfach | CH-8050 Zürich
http://www.pwc.ch

Monica Cohen-Dumani
PwC | Partner, International tax services, Central Cluster ITS Leader
Office: +41 58 792 97 18 | Mobile: +41 79 652 14  77
Email: monica.cohen.dumani@ch.pwc.com
PricewaterhouseCoopers SA
Avenue Giuseppe-Motta 50 | Case postale | CH-1211 Genève 2, Switzerland
http://www.pwc.ch

Pascal Buehler
PwC | Partner on Secondment – Swiss Tax Desk
Office: +1 646 471 14 01 | Mobile: +1 917 459 8031
Email: buehler.pascal@us.pwc.com
PricewaterhouseCoopers LLP
300 Madison Avenue, New York, NY 10017
http://www.pwc.com/us

Individual tax

Richard Barjon, CPA
PwC | Director
Office: +41 58 792 13 53 | Mobile: +41 79 419 55 16
Email: richard.barjon@ch.pwc.com
PricewaterhouseCoopers AG
Birchstrasse 160 | Postfach | CH-8050 Zürich
http://www.pwc.ch

US Tax Reform: House and Senate negotiators reached agreement in principle

House and Senate negotiators (​’conferees​’​) have reached an agreement in principle on a compromise US tax reform bill that would reduce the US corporate tax rate to 21​% beginning in 2018 and fully repeal the corporate alternative minimum tax (AMT). On interest expense deduction limitations, it seems that a worldwide leverage test might have been eliminated in the conference agreement and that foreign repatriation rates for the toll charge may be increased. The House-Senate conference agreement is preliminary and therefore subject to change.

Details are still emerging and bill text is not yet available. ​The conference report is expected to be filed late tonight Friday, December 15.

The House and Senate next week are expected to hold up-or-down votes on the conference report, which is not amendable. The Senate is expected to begin up to 10 hours of floor debate on on Monday, December 18. A Senate vote could occur on Tuesday, December 19 followed by a House vote on Wednesday, December 20, which would clear the measure to go to the White House​.

To register for the WebEx Session: Click Here

Look out for PwC’s newsletters and coming webcasts to be announced soon.

Contact Us

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

 

US Tax Reform – How does it impact Swiss / US Inbound groups?

The US Senate voted 51-49 on early Saturday, December 2 in favor of the amended tax reform bill. Several amendments and last minute adjustments were made to the original version of the draft bill with a large focus on individual tax or pass through entities. Differences between the House- and Senate-passed versions must now be reconciled. The House on Monday, December 4 is scheduled to vote on a motion to request a formal conference committee with the Senate to negotiate a compromise bill (‘conference agreement’) that would be subject to an up-or-down vote in both chambers before it could be sent to the White House. Even though the Senate discussion was not without bumps, the Senate vote indicates the strong forces and intention to pass US tax reform. It remains most interesting on where the compromise between House and Senate will end.

Both the House bill and the SFC bill respectively the expected reconciled final bill, if enacted, would represent the largest overhaul of the US tax code (the Code) since the Tax Reform Act of 1986.

How are Swiss groups impacted by the proposed legislation?

Foreign groups investing into the US (“US Inbounds”) will be impacted by both the House and Senate bill. It is clear that there is a real effort to meet stated goals of leveling the playing field for US companies. At the same time, some of the proposed rules will, compared to the OECD and BEPS developments, introduce even stricter rules than the ones proposed by BEPS. While the federal corporate rate cut is welcome to Inbounds, there are proposals that could impact cross border transactions negatively. At the same time, the US tax base is enlarged with deduction limitations and new CFC (controlled foreign corporation) and Sub F (rules that require inclusion of certain types of foreign income into US tax base) rules. The Senate and House’s proposals on the excise tax (House) / BEAT (Base erosion and anti-abuse rules – Senate) are of particular concern despite the changes made to the House bill and could impact supply chain and business arrangements with customers. The interest limitation will impact Inbounds in particular the proposed worldwide debt limitations in both bills. Lastly, the revised CFC attribution rules may cause a significant compliance burden in a global group even though a US company may not have any direct or indirect ownership in a related company. Depending on enactment either still this year or early next year, Swiss groups have to be aware that they may have to consider tax accounting and financial reporting measures already for FY 2017.

With Switzerland and Swiss groups being one of the top trading partner with and investor into the US, US tax reform is an important element for Swiss based groups. Nevertheless, the US tax reform and its impact on global value chain and US investments is to be reviewed also considering all other tax and non-tax developments including OECD BEPS, European tax legislation as well as pending Swiss tax reform.

The below is an initial overview on how some of the proposed House and Senate corporate tax rules may impact Swiss companies:

New corporate federal tax rates

Corporate income would generally be taxed at 20% federal rate (US state income taxes of 3% – 8% to be added) and thus, the US becomes more attractive from an international corporate rate perspective. Pending Swiss tax reform would result in an effective tax rate of some 12% – 17% depending on Canton and the US thus closes the gap down from the current 35% US tax rate. At the same time, tax base enlargement rules will come into force resulting in the overall effective tax rate to largely vary on US fact pattern including US domestic versus international footprint of US operation, interest leverage and capital intensity as well as industry. Due to different date of effectiveness, there can be gaps between the rules to enlarge the US tax base and the corporate rate reduction. State taxes would still be applied on top of the 20% federal corporate rate and potential state tax developments are to be monitored separately. Even though the federal corporate rate as such brings the US into a more medium range of OECD average, effective total tax rate may still be higher due to enlarged tax base, CFC as well as Sub F rules and state taxes.

Interest expense deduction limitation / full cost recovery / expensing

Most US group companies have a high level of debt funding. US tax reform would limit interest deduction for both related and unrelated party interest payments requiring companies to review their US based treasury functions and US debt level. The proposed interest limitation rules with the combination of two tests will impose even stricter rules than under the OECD BEPS recommendations and EU Anti-Tax Avoidance Directive. The new rules would significantly impact capital intensive businesses and US operations. Especially the consideration of the financing structure of the entire worldwide group may have a significant impact on the level of US interest deduction. Introduction of anti-hybrid rules would also need to be considered for certain financing structures currently used. At the same time, immediate P&L expensing for investments in certain assets may become immediately and fully tax deductible and may thus replace debt funded acquisition of investments. Swiss groups should thus review their current US funding structure and planned investments into US operations or US acquisitions carefully.

Net operating losses

Limitation of NOLs to 90% of income is planned to be introduced with indefinite carryforward but no carry back. Beside effective use of NOLs in the US, such rule would also require tax accounting considerations and re-assessment of deferred tax asset positions which, depending on enactment, may require a FY 2017 deferred tax position adjustment or a disclosure requirement.

R&D / “IP box”

Current R&D credits will remain applicable and allowance of capitalization and amortization of certain R&D expenditures would be introduced to enhance US R&D activities while some other deductions such as domestic manufacturing deduction would be eliminated. The Senate bill also considers a special rule to encourage transfer of intangible assets to US corporations. A 37.5% deduction (reduction to 21.87% for 2026) would be allowed under the Senate bill for foreign-derived intangible income produced in the US resulting in a 12.5% federal tax rate on such IP income. From an international view, it seems that the consideration of modified nexus approach as defined as the new standard for IP / patent box regimes by OECD BEPS has not been addressed thus far.

Toll charge / participation relief (territorial system) / CFC / Subpart F

Due to the change to a territorial system with a 100% participation regime on foreign dividend income, US shareholders with an interest in a foreign corporation have to include the undistributed, non-previously-taxed foreign earnings. This rule would apply to Swiss groups to the extend they have a US company owning shares in foreign subsidiaries. Such deferred foreign earnings would be taxed immediately at a rate between approximately 7% – 15% depending on the proposal independent whether effectively repatriated or not (deemed mandatory repatriation toll charge). State income tax on such positions are to be considered separately. Further, impact on current tax credit position would need to be reviewed and no more tax credits are applicable in future under the territorial regime. One should however note that the new US tax code as proposed is not a true pure territorial system as most other countries have but would rather overlay the territorial dividend income participation relief to a partial worldwide system with CFC (controlled foreign corporation) and Sub F (rules that require inclusion of certain types of foreign income into US tax base) inclusions. The participation relief on dividends will allow immediate cash flow of foreign earnings back to the US for re-investment, spending or acquisitions in the US. At the same time it is to be noted that participation relief would not apply on capital gains.

With the introduction of a 100% participation relief on dividend income, the Swiss – US double tax treaty withholding tax rate of 5% for dividends will become a final tax charge as no more US tax credits will be possible. Thus owning a Swiss subsidiary through a US company becomes less attractive.

The current CFC and Sub F rules would generally be maintained with some amendments. The new legislation would modify the attribution rules for determining whether a US person is considered a “US shareholder” in connection with determining whether it qualifies as a CFC. The proposed legislation would repeal exceptions so that the foreign subsidiaries (but not the foreign parent) for foreign parented groups with at least one controlled US subsidiary or an interest in at least one US partnership would generally be treated as CFC, even if the foreign subsidiaries are not held, directly or indirectly, under the US entity. Although there may not be an income pick up (provided US entity has no direct or indirect interest) there would be a new reporting requirement for the foreign subsidiaries. Thus, non-US groups have to review CFC qualification and application of Sub F rules as the base for such qualification is extended and new rules introduced for any US subsidiaries. At the same time, new Subpart F categories (foreign high returns or global intangible low-taxed income) would be introduced resulting in a 10% – 12.5% minimum taxation.

Excise tax versus Base erosion and Anti-Abuse Tax (BEAT)

The House bill would introduce a new 20% excise tax for certain deductible payments paid or incurred by a US to a foreign corporation that is a member of the same international financial reporting group. Instead of adopting an excise tax similar to the House bill, the Senate bill would target base erosion by imposing an additional 10% corporate liability (“BEAT”) on taxpayers that make certain base eroding payments to related foreign persons.

From an outside in view, the above two rules can be put into simple words:

  • Under the House excise tax approach, the 20% corporate tax rate is levied on gross payments made by a US company (including cost of goods sold, royalties, etc.) to a foreign related person. This is a fairly substantial number in most cases. However, the company has a right to elect out of this gross payment methodology and elect into a deemed US branch methodology with deemed effectively connected income (“ECI”). This largely means the foreign company is taxed in the US on a net income basis with some foreign tax credits on the profit that arises from the US sales outside the US.
  • The Senate BEAT approach is simpler in nature by setting a minimum tax approach on “bad” payments to foreign related companies. Bad payments do not including purchase of goods but include interest, royalties or services, etc. to foreign related parties. The base erosion anti-abuse tax is imposed if 10% of the modified taxable income (generally, taxable income without regard to deductible foreign related party payments) of the US corporation exceeds the US corporation’s regular tax liability for the year.

Groups should review the global value chain not only under US tax reform rules but also other international developments including OECD BEPS, EU or Swiss tax law changes.

Hybrid entities / transactions

Other provisions deal with hybrid transactions and hybrid entities and would deny a US deduction for interest and royalties paid or accrued by a US corporation to a related foreign party pursuant to a hybrid entity or hybrid transaction (e.g. non-inclusion or double deductions). This provision may be less relevant for Swiss groups but would require review of certain branch exemptions.

Financial reporting

The above changes and rate reduction would impact the deferred tax position under US GAAP and IFRS. If the bill is enacted (President Trump signing the bill) already in FY 2017 such provision is to be accounted for in FY 2017 accounts. In case the bill is signed in 2018, disclosure requirement may have to be considered in FY 2017 reporting already. Thus, modelling the impact on the US tax reform proposals for tax accounting purposes is to be considered. See our PwC blog entry on this topic.

Individual tax

The current draft bills include many changes to individual tax and pass through entities. This may impact US based expatriates on their individual taxation and indirectly Swiss groups under expatriate tax equalization arrangements. Stay tuned for our separate newsletter on individual tax matters.

Conclusion?

With the above provisions immediately heading into reconciliation procedure between the House and Senate today, close monitoring of which compromise will be concluded in the final bill is key. What should a Swiss company do today?

  • Ensure to know your company’s facts pattern and how US tax reform impacts your company’s holding structure (CFC and Sub F rules), transaction flow, supply and overall value chain (interest deduction excise tax / BEAT implications), cash repatriation or investment plans.
  • Do you know whether your company is subject to deemed mandatory repatriation / toll charge tax on US subsidiaries and where the group has untaxed foreign earnings? Acceleration of expenses and realization and use of foreign tax credits should be reviewed. PwC US has developed analytic tools and models to calculate the impact of toll charge as well as other impacts of US tax reform.
  • Analyze whether US toll charge is due and if so, whether your groups plans to pay “deemed” tax only or whether an effective dividend shall be resolved up to the US. In case of the latter, are all double tax treaty clearances in place to execute such dividend without adverse withholding tax implications?
  • Are you prepared to consider US tax reform in your 2017 financial statements if enacted this year (deferred tax positions, toll charge provision) or do you know applicable disclosure requirements if enacted early next year?
  • Communicate with senior management, board of directors or audit committee and engage in US tax reform discussion.
  • Stay tuned for the outcome of the reconciliation process and be prepared that US tax reform may be enacted rather sooner than later.

Background and additional reading material

For a detailed explanation of the international provisions of the House bill and SFC bill, please see House passes tax reform bill with international tax provisions

The proposed revisions to US tax code would significantly impact inbound companies, please see PwC Insight for US inbound companies for more details.

For an overview of a high level comparison of the House and Senate bill version see our PwC Blog. As compared to the original Senate proposal, many last minute adjustments have been included into the final draft.

See also our PwC Blog on how US tax reform impacts financial reporting may even for FY 2017.

Questions?

Martina Walt

PwC | Partner – International Tax Services
Office: +41 58 792 6884 | Mobile: +41 79 286 6052
Email: martina.walt@ch.pwc.com
PricewaterhouseCoopers Ltd
Birchstrasse 160, 8050 Zurich
http://www.pwc.ch

Pascal Buehler

PwC | Partner on Secondment – Swiss Tax Desk
Office: +1 646 471 1401 | Mobile: +1 917 459 8031
Email: buehler.pascal@us.pwc.com
PricewaterhouseCoopers LLP
300 Madison Avenue, New York, NY 10017
http://www.pwc.com/us

US Tax Reform – Comparison between the House (HR 1) and Senate Finance Committee proposals

Congress is out this week for Thanksgiving but congressional staff continue to work on tax reform legislation. Negotiation also are underway over sticking points between the House and Senate versions of the bill. Congress will reconvene during the week of November 27, when the Finance Committee tax reform bill is expected to be considered on the Senate floor. The tax reform proposal approved by the Finance Committee differ in key aspects from the House-approved bill. Once the House and Senate have approved tax reform bills, both chambers must reconcile differences between the two bills and then vote to pass a final bill which would then be signed into law by President Trump.

The enclosed summary outlines the comparison of the key elements of the House “Tax Cuts and Jobs Act’ (HR 1) and the Senate Finance Committee version. The proposals differ in key elements but the differences do not seem to be irreconcilable following latest talks in Washington DC.

House of Representatives

The House on November 16 voted 227 to 205 to pass the Tax Cuts and Jobs Act’ (HR 1), with 13 Republicans voting against the legislation. The bill proposes to lower business and individual tax rates, modernize US international rules, and simplify the tax law, with significant impact on numerous sectors of the economy. For more details on the House action and next steps in the tax reform process see our November 16 Tax Insight.

Senate Finance Committee

The Senate Finance Committee late on November 16 approved by a vote of 14 to 12 a Senate version of tax reform legislative. For more on the Finance Committee approved bill, see your November 17 Tax Insight.

The Comparison

General business tax reform proposals

International business tax reform proposals

Individual tax reform proposals

What’s next?

With House passage complete and Senate floor discussion coming up, the US tax reform makes strong headway. Despite the fact that Congress is on Thanksgiving recess, crucial negotiations and legislative write up are ongoing in the light of upcoming reconciliation process to find middle ground and compromise. Some provisions may still get smoothen out in the reconciliation and negotiation process. This conference is expected to be easier than the healthcare bill as the bills are dramatically similar. 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 by end of November or early in December 2017 which would then be signed into law by President Trump still in December 2017 or early 2018. The question becomes the calendar with the upcoming Alabama Senator election and the holidays.

What you should do? Follow the debate on the final US tax proposal closely, know your facts and be prepared for change at some point. Stay tuned for the next blogs on US Tax Reform to follow shortly with more specific details for the impact on Swiss groups / US inbounds or what you need to consider for financial reporting. Also, stay tuned for our EMEA Webcast: “How US Tax Reform impacts European Multinationals” next Monday (27 November) from 4:00 pm until 5:00 pm (CET time).

Contact Us

Martina Walt
TLS Partner
+41 58 792 68 84
martina.walt@ch.pwc.com

Pascal Bühler
TLS Partner
+1 646 471 1401
buehler.pascal@us.pwc.com

US Tax Reform: House passes tax reform bill

The US House of Representatives on November 16 voted 227 to 205 to pass the ‘Tax Cuts and Jobs Act’ (HR 1). The bill proposes to lower business and individual tax rates, modernize US international tax rules, and simplify the tax law, with significant impacts on numerous sectors of the economy. Meanwhile, the Senate Finance Committee is continuing to consider a version of tax reform based on legislation proposed by Finance Chairman Orrin Hatch (R-UT). The tax reform proposals being considered by the Finance Committee differ in key aspects from the House-approved bill. The Senate Finance Committee on November 16 approved tax reform legislation (the Tax Cuts and Jobs Act), by a 14:12 vote, after adopting a manager’s amendment offered by Senate Finance Committee Chairman Orrin Hatch (R-UT).

The legislation now moves to the Senate floor, where the full Senate is expected to debate and consider amendments to the Finance Committee-approved tax reform bill during the week of November 27, following Congress’ Thanksgiving holiday recess week. Once the Senate has approved its tax reform bill, the two chambers must reconcile differences between the two bills and then vote to pass a final bill in identical form before tax reform legislation can be signed into law by President Trump. HR 1 would lower the US corporate tax rate from 35 percent to 20 percent for tax years beginning after 2017. In addition, there are several complex base broadening measures built into the reform package.

President Trump and Republican Congressional leaders hope to enact the legislation before the end of 2017.

The takeaway and impact on Swiss corporations

Stakeholders should remain engaged in the legislative process as Congress works to enact tax reform intended to boost US competitiveness and productivity through lower business tax rates, a modernized international tax system, and incentives to invest in the United States.

If the US tax reform, is passed, it will have an impact on Swiss multinationals and how they will structure their business going forward.

To learn more, explore the full article and video here.

Martina Walt, our Swiss US tax country champion has also published an article about US Tax Reform Developments for US Inbounds with the latest developments.

 

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US Tax Reform Developments for US Inbounds

Discussions continue

The US tax reform discussions continue to develop and shape. The Senate Finance Committee Chairman Orrin Hatch on November 9, 2017 released a Senate version of the ‘Tax Cuts and Jobs Act.’ The Senate tax reform proposals would lower business and individual tax rates, modernize US international tax rules, and simplify the tax law, but differ in key aspects from the House Ways and Means Committee approved tax reform bill. The Senate Finance Committee will begin its process of adjustments on Monday, November 13.

There are several key areas which are in particular relevant for non-US based multinational companies with respect to the Finance Committee’s proposed tax reform legislation:

Corporate Tax Rate

A 20% percent corporate tax rate beginning after 2018 which is a year longer than the House bill that has the 20% rate effective for years beginning after 2017.

Interest deduction limitations

Similar to the House bill, the deduction for interest expense would be limited, but with some key differences. The Senate bill generally would limit the deduction for business interest to the sum of business interest income plus 30 % of the ‘adjusted taxable income’ of the taxpayer for the taxable year. The limitation would not apply to any taxpayer that meets a $15 million gross receipts test. Similar to the House bill, the Senate bill includes an additional interest limitation which would deny a deduction for certain interest expense of US companies that are members of worldwide affiliated groups with ‘excess’ domestic indebtedness. Companies subject to both interest limitation provisions are denied the greater of the two interest limitations.

  • The second interest limitation compares US leverage to worldwide leverage and disallows a current deduction to the extent the US leverage exceeds 110 percent of the debt the US group would have had if the US leverage was based on the worldwide debt to equity ratio.
  • The amount of any interest not allowed for a deduction for any taxable year may be carried forward indefinitely, unlike the House bill where there is a 5 year limit.
  • Both changes would be effective for tax years beginning after 2017.

Base erosion and anti-abuse tax

The Senate base erosion and anti-abuse tax has the same policy objectives of the House excise tax but addresses the issue differently. Companies subject to this provision would pay the excess of tax computed at a 10-percent rate on an expanded definition of taxable income over their regular tax liability reduced by certain credits. The tax would apply to companies (excluding REITS, regulated investment companies or S Corporations) with “base erosion tax benefits” of more than four percent of total deductions and has average annual gross receipts of at least $500 million over the three preceding years. The tax is imposed on the difference between 10 percent of taxable income, grossed up by deductible payments to foreign related persons and taxable income, reduced by certain excess credits. The gross up is reduced proportionately to the extent the deductible payments taken into account have been subject to gross basis tax under the US withholding regime, as reduced under an applicable treaty.

  • Effective for payments made after December 31, 2017; note, the excise tax in the House version is proposed to be effective for tax years beginning after December 31, 2018.

To read more about the Senate bill on tax reform, see PwC’s Tax Insight, Finance Committee Chairman Hatch releases Senate tax reform bill.

The House Ways and Means Committee on November 9, 2017 approved by a party-line vote of 24 to 16 the ‘Tax Cuts and Jobs Act of 2017’ bill. Some modifications from the original draft bill released on November 7th that are especially relevant for non-US companies include:

Base erosion rules

Chairman Brady’s November 6 and November 9 amendments modify the bill’s international base erosion rules in several respects. In the reported bill as amended, the provision taxing affiliated payments was amended to provide for a foreign tax credit, to exclude acquisitions of property priced on a public exchange, to compute a foreign affiliate’s profit based on foreign profit margins instead of global profit margins, and to coordinate with existing withholding rules. Under this provision, the foreign tax credit is 80 percent of foreign taxes. (A provision in the November 6 amendment that permitted a routine return to be earned on deemed expenses was subsequently removed by the November 9 amendment, with an increase in the foreign tax credit from 50 percent to 80 percent.)

Repatriation toll tax

The House bill’s mandatory repatriation toll charge was amended to increase the proposed effective tax rates for deemed repatriated earnings to 14 percent on earnings held in liquid assets and seven percent on earnings held in illiquid assets, up from 12 percent and five percent respectively in the bill as introduced.

 

To read more about the modified House bill on tax reform, see PwC’s Tax Insight, House Ways and Means Committee approves amended tax reform legislation.

To learn more on the international provisions of the House bill, see PwC’s International Insight, Brady’s tax reform bill includes significant international provisions.

While the exact bill is still shaped, further discussions are expected in the week of November 13 with the Senate Finance Committee discussions. Stay tuned for more Tax Insights.

Tax Forum 2017 in Zurich

Do you want to receive valuable information and practical tips on negotiating the latest developements in taxes? We look forward to seeing you at the Tax Forum 2017 in Zurich.

Find more information here.