Don’t be caught out by DAC6

The EU is introducing radical measures to tackle tax abuse and ensure fairer taxation by increasing the level of transparency another notch in order to detect potentially aggressive tax arrangements.

The amendment to Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC6 for short) will have far-reaching consequences for tax advisors, service providers and taxpayers – including organisations and individuals in Switzerland.

DAC6 imposes mandatory disclosure requirements for arrangements with an EU cross-border element where the arrangements fall within certain “hallmarks” mentioned in the directive and in certain instances where the main or expected benefit of the arrangement is a tax advantage. There will be a mandatory automatic exchange of information on such reportable cross-border schemes via the Common Communication Network (CCN) which will be set-up by the EU.

Although the directive is not effective until 1 July 2020, taxpayers and intermediaries need to monitor their cross-border arrangements already as of May 2018. Therefore the time to act is now.

DAC6 in a nutshell

Who? Intermediaries such as tax advisors, accountants, banks and lawyers, who design, market, organise, make available for implementation or manage the implementation of potentially aggressive tax-planning schemes with an EU cross-border element for their clients as well as those who provide assistance and advice

What? Mandatory reporting by tax intermediaries (or taxpayers) and the automatic exchange of information by the tax authorities of EU member states via the Common Communication Network (CCN) for a wide range of cross-border arrangements in relation to individuals and entities.

Why? The main purpose of DAC6 is to strengthen tax transparency and fight against aggressive tax planning. It broadly reflects the elements of action 12 of the BEPS project on the mandatory disclosure of potentially aggressive tax-planning arrangements.

How? The potentially aggressive tax planning arrangements with a cross-border element need to be reported by the intermediaries to the tax authorities in the country in which they are resident. The EU member states then will share the information with all other member states via the Common Communication Network (CCN) on a quarterly basis.
If the taxpayer develops the arrangement in-house, or is advised by a non-EU adviser, or if legal professional privilege applies, the taxpayer must notify the tax authorities directly.

Penalties will be imposed on intermediaries that do not comply with the transparency measures. EU member states to implement effective, proportionate and dissuasive penalties.

Find out more about DAC6 and if you are affected online and get in contact with our experts.

Contacts

Monica Cohen-Dumani
Partner
+41 58 792 97 18
monica.cohen.dumani@ch.pwc.com

Bruno Hollenstein
Partner
+41 58 792 43 72
bruno.hollenstein@ch.pwc.com

EMEA PE Webcast Series – Episode Four – VAT consequences of a corporate tax permanent establishment

Tuesday, 17 April 2018, 3.00 – 3.45 pm CET

After a short break, we are pleased to inform you that we will resume the PE Webcast Series, with Episode 4 – VAT consequences of a corporate tax permanent establishment.

In this webcast specialists from our international tax and VAT practice will compare the objectives and concepts of a corporate tax permanent establishment with a VAT fixed establishment (FE).

We will walk through practical examples to demonstrate the interaction of these rules, outlining the VAT consequences of creating a corporate tax PE, as well as the corporate tax position if you have a VAT FE.  As part of the discussion we will highlight trends in the application of PE and FE rules by tax authorities, leading in some cases to a blurring of the concepts.

You will have the chance to raise questions directly to our specialists.

Speakers for episode four will include:

  • Monica Cohen-Dumani – Partner, International Tax Services, EMEA ITS Leader – PwC Switzerland
  • Ine Lejeune – Partner Tax Policy, Dispute Resolution & Litigation – Law Square
  • Herman van Kesteren – Partner Indirect Taxes – PwC Netherlands

Registration Link

Complete the required registration fields and select “Submit”.
Once you have registered, you will receive the WebEx access details. The WebEx will be recorded and you will receive a link to the recording via e-mail after the event using the same details. There will be time for questions and answers with your speakers during the WebEx. Questions can also be sent in advance of the
WebEx session to the following email address: grasiele.neves@ch.pwc.com

We do hope that you will join us online!

Best regards,
Monica Cohen-Dumani

Contact

Monica Cohen-Dumani
Partner, EMEA ITS Central Cluster Leader
+41 58 792 97 18
monica.cohen.dumani@ch.pwc.com

Grasiele Teixeira Neves
International tax services
+41 58 792 98 25
grasiele.neves@ch.pwc.com

Update: Repatriation Tax (Notice 2018-26)

On April 2, 2018, the Department of the Treasury and the IRS released their third notice on the Toll Tax also known as the Repatriation Tax (Notice 2018-26)

Some of the key guidance provided in this latest notice which affect US individuals living abroad are:

  • Extension of time to pay the first installment of the Toll Tax for US individuals living abroad until June 15, 2018, the same date as the automatically-extended personal tax return deadline for these individuals.
  • Clarification on the allowable deductions for US individuals subject to the Toll Tax, who wish to make an election to be taxed similar to a US domestic corporation (i.e. §962 election)
  • US partners holding less than 5% in a partnership structure with investments in US domestic corporations may not be subject to the Toll Tax
  • If a foreign corporation filed an election to be treated as a tax-transparent entity (i.e. check-the-box election) after November 2, 2017, the Toll Tax may still be attributed to its US individual shareholders for the 2017 tax year.

From a practical perspective, US individuals (US national, US green card holder, US tax resident) residing abroad who are investors in a structure holding directly and indirectly, 10% ownership in a US domestic corporation should carefully review their toll tax exposure before June 15, 2018.

For more information, a complete copy of the notice can be found in the following link: https://www.irs.gov/pub/irs-drop/n-18-26.pdf

Contact Us

Richard Barjon, CPA
PwC | US Tax Director
+41 58 792 13 53
richard.barjon@ch.pwc.com

European Commission proposes new rules on the taxation of the digital economy

On 21 March 2018, the European Commission proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU.

Background

While digital businesses have evolved rapidly in the recent past, the current tax rules do not fully fit the modern, increasingly digital economy, resulting often in a misalignment between the place where the profits are taxed and the place where value is created. In order to address the tax challenges from the digital economy the EU Commission presented its so-called “Digital Tax Package”, which mainly consists of two draft Directives and one Recommendation to the EU Member States. This package supports the Commission’s key priority of completing the Digital Single Market, which also takes into account the global dimension: the OECD has committed to bring forward a report on the next steps internationally by 2020.

Legislative proposals in a nutshell

Draft Directive on the corporate taxation of a significant digital presence:

  • To reform corporate tax rules so that profits are allocated and taxed where businesses have significant interaction with users through digital channels (assumption of a taxable digital presence or a virtual permanent establishment);
  • This is the EU Commission’s preferred long-term solution.

With respect to non-EU countries, not captured by this Directive, the EU Commission issued a Recommendation to the Member States for adaption of such rule via the double tax treaty (see also below).

Draft Directive on Digital Services Tax (DST):

  • To introduce a DST of 3% on certain revenues from digital activities;
  • The introduction of a DST is considered as an interim solution until the above long term solution is in place.

As a next step, both legislative proposals will be submitted to the European Council for adoption and to the European Parliament for consultation. If adopted by unanimous vote, the expected effective date would be 1 January 2020.

Legislative proposals in detail

Draft Directive on the corporate taxation of a significant digital presence (long-term, comprehensive solution)

A digital platform shall constitute a significant taxable digital presence in an EU Member State if it fulfils one or more of the following criteria:

  • Total annual revenues from digital services to users in that Member State in a taxable year exceed a threshold of EUR 7 million, and/or
  • Users of digital services in that Member State in a taxable year exceed 100’000, and/or
  • Business contracts for digital services in that Member State in a taxable year exceed 3’000.

The new rules would also change how profits are allocated to Member States in a way which better reflects how companies can create value online: for example, depending on where the user is based at the time of consumption or where the value is generated through user participation.

Such directive would apply to all companies that are resident in an EU member state. It would also apply to companies in non-EU member states rendering digital business to EU based users and customers unless there is a double tax treaty in place which does not provide for similar rules on significant digital presence and profits attribution (this is for the time being the case, since currently existing double tax treaties do typically not allow for such digital taxation). Hence the below recommendation to the EU member states to re-negotiate double tax treaties to include such digital business taxation rules.

Draft Directive on Digital Services Tax (short term, interim solution)

Unlike the common EU reform of the underlying tax rules, the interim DST would apply to revenues created from certain digital activities which under the current tax rules would not be taxed in the countries where the value is generated. This DST would only remain in force as an interim measure, until the comprehensive solution is in place. However, it would apply to any company rendering digital services in the EU irrespective whether an EU member state based company or not and irrespective of existing double tax treaties.

The tax would apply to revenues created from activities where users play a major role in value creation and which are the hardest to capture with current tax rules, such as those revenues:

  • created from selling online advertising space;
  • created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them;
  • created from the sale of data generated from user-provided information.

The DST would only apply to companies with total annual worldwide revenues of EUR 750 million and taxable revenues of EUR 50 million in the EU. This would help to ensure that smaller start-ups and scale-up businesses remain unburdened.

Recommendation relating to the corporate taxation of a significant digital presence

In connection with the long term Draft Directive on the corporate taxation of a significant digital presence, the EU Commission also issued an accompanying Recommendation to the EU Member States for cases where the proposed Directive would not apply, i.e. when Member States have tax treaties in place with non-EU countries (which would also be the case for Switzerland).

In particular the EU Commission recommends to Member States to amend their tax treaties with non-EU countries by a) changing the definition of permanent establishment to take into account significant digital presence and b) including rules for respective profit attribution.

For further details regarding the EU Digital Tax Package please refer to the detailed newsletter of the PwC Network EUDTG.

Implications of proposed rules for Switzerland

Although the above legislative proposals are EU Directives, the directives still impact companies operating out of Switzerland or other non-EU states, if finally adopted.

Draft directive on Digital Services Tax:
The DST would affect Swiss groups performing digital services in the EU as the tax becomes due if the user / customer is in the EU, provided they meet the thresholds mentioned above.

Draft directive on the corporate taxation of a significant digital presence:
These rules shall not apply if an entity is resident for tax purposes in a non-EU jurisdiction (e.g. Switzerland) that has a double tax convention (DTC) in force with the relevant Member State, and if the DTC does not provide for a taxable digital presence (which is currently the case for all Swiss DTCs). Hence, groups operating out of Switzerland are expected to be affected by this potential measure only in the longer term, i.e. when DTCs are renegotiated (as proposed in the EU Commission’s Recommendation) to include the taxable digital presence, subject also to any further OECD developments.

For further details on the progress of the OECD work in this respect as well as for a summarised overview of the different approaches between the OECD and the EU, please find here OECD’s Interim Report 2018 respectively our PwC Tax Policy Bulletin.

Overall, the attractiveness of Switzerland as a location for digital businesses is not negatively impacted compared to the EU as a result of these directive proposals.

Related VAT Aspects

Even if the digital taxation proposals implicate significant changes in the corporate tax landscape, from an indirect tax (VAT) point of view the taxation of turnovers for digitally provided services at the place of the consumer (B2C) is already in force in the EU since 2015. However, the question remains whether the digital presence will also affect the definition of fixed establishments for VAT purposes and such change would have a major impact on how digitally provided services would be taxed in a B2B context.

Current position of Switzerland regarding taxation of digital economy

The State Secretariat for International Finance (SIF) recently has performed an analysis regarding the taxation of the digitalised economy and is generally committed to tax rules that allow for and promote fair competition. However, there have not been any concrete measures yet. In any case Switzerland holds the opinion that measures outside the scope of DTCs are to be avoided and interim measures (e.g. DST) should be limited in scope and time. Read SIF’s position on taxing the digitalised economy here.

Call for action

At this stage it is not clear yet whether respectively how the proposed directives will be adopted by the EU (formal adoption still pending and subject to unanimity among the EU Member States). Further, also the developments on the OECD BEPS project should be taken into consideration and monitored.

Nevertheless, it is recommendable for groups operating out of Switzerland to:

  • identify the digital services rendered in each of the EU Member States;
  • start performing impact assessments of (i) the DST and (ii) a taxable digital presence in the EU Member States, and
  • continue monitoring the EU legislative process and potential unilateral country measures (such as the unilateral measures in Italy, introducing a new tax on digital transactions effective January 1, 2019).

Your contacts

Stefan Schmid
Tel. +41 58 792 44 82
E-Mail: stefan.schmid@ch.pwc.com

Anna-Maria Widrig Giallouraki
Tel. +41 58 792 42 87
E-Mail: anna-maria.widrig.giallouraki@ch.pwc.com

Christa Elsässer
Tel. +41 58 792 42 66
E-Mail: christa.elsaesser@ch.pwc.com

Jeannine Haiböck
Tel. +41 58 792 43 19
E-Mail: jeannine.haiboeck@ch.pwc.com

Geneva International VAT Breakfast: E-invoicing & hot topics in indirect taxes

E-invoicing & hot topics in indirect taxes

So far, 2018 has been a very dense year for indirect tax professionals with various hot topics arising. In Switzerland, for instance, the recent clear rejection of the initiative “No Billag” will lead to changes in the scope of the radio-television fees that will be applicable to businesses as from 1 January 2019.

At the same time, compliance with e-invoicing and e-archiving obligations are being introduced in various jurisdictions such as Italy. During our upcoming event, we will go through the new rules and the compliance obligations across EU and Switzerland in terms of e-invoicing and e-archiving.

We will also follow up on the definition of fixed establishment providing insight on the recent developments particularly in Poland. The International VAT Breakfast will also feature recent hot topics that can impact businesses operating worldwide, such as the EU commission proposal for flexible VAT rates, the measures to strengthen VAT fraud prevention adopted by EU and non-EU countries and the introduction of the reverse charge mechanism for imports of goods in Portugal as from 1 March 2018.

Finally, as always, we will share with you the most significant developments with respect to the EU and Swiss case law.

To register for this event: Click here

Contact us

Patricia More
Tel.+41 58 792 95 07
patricia.more@ch.pwc.com

US Tax Reform – Impact on US individual owners of foreign corporations (entrepreneurs and small business owners) residing outside of the United States

In an effort for the United States to become fiscally competitive on the world stage, the new US Tax Reform included provisions to move towards a territorial tax system by imposing a “toll tax” on undistributed profits on US-owned foreign corporations. Its purpose is particularly meant to stimulate the economy by motivating corporations to repatriate cash generated from previously untaxed profits abroad to invest in the economy and create jobs.

The following comments will provide a high level overview of the adverse and unfortunate effects US individual shareholders of foreign corporations will endure from the new toll tax and GILTI rules in comparison to US corporate shareholders.

Effective for the last taxable year of a foreign corporation that begins before January 1, 2018, the “toll tax” is a one-time tax of 15.5% on aggregate cash balances and 8% on all other undistributed profits earned since 1987 on the balance sheet of a foreign corporation as of December 31, 2017 or November 2, 2017, whichever is higher. Consequently, future dividend distributions to its US parent will be free from US taxes thus achieving the “territorial tax regime”.

Many of us may have read the headlines on how this toll tax, also referred as the Repatriation Tax, affects US corporate shareholders of foreign corporations, (e.g. Goldman Sachs, Apple: news article) However, the toll tax also applies to US individual shareholders of a foreign corporation that is a Controlled Foreign Corporation (a “CFC”).

A foreign corporation is a CFC if US shareholders own more than 50% of the total combined voting power of its stock or more than 50% of the stock’s total value. For this purpose, the law defines a US shareholder as any US person who owns 10% or more of a foreign corporation, including a US citizen, a green card holder or an individual who meets the physical presence test (or elects) to be considered as a tax resident of the United States. These rules also apply if a US person resides outside the United States due to the preservation of the worldwide tax regime for US individuals.

The method to arrive at the toll tax liability is relatively complex. The 15.5% and 8% effective rates are in fact prescribed as “equivalent percentages”. A deduction based on the US corporate tax rates is used to arrive at these effective rates. To the extent the toll tax is due for a CFC as of December 31, 2017, the deduction is based on the 2017 corporate tax rate of 35% (max) rather than the individual rate of 39.6% (max) and US individuals will have to follow that same corporate rate deduction mechanism using the 35%, not the individual rate. Hence, US individual shareholders of a CFC will bare a higher toll tax burden than that of a US corporate shareholder. While this provision provides for partial foreign tax credits to decrease the net toll tax due of US corporate shareholders, individuals are not allowed to claim foreign tax credits to reduce their net toll tax liabilities. In addition, US individuals will continue to pay US taxes on future dividend income, not previously taxed, received from their CFCs as the new dividend exemption only applies for US corporate shareholders.

An election to pay the toll tax liability in installments over an 8-year period is available and if such election is made, the first payment is due by the original due date of the shareholder’s 2017 US tax return determined without regard to any extension i.e. April 15, 2018 for a calendar year taxpayer. To date, it is unclear if individual US shareholders residing abroad will be allowed the regular automatic extension until June 15, 2018 to make their first toll tax payment.

Also included in the US Tax Reform are the GILTI implications. Going forward, applicable for the first tax year of a CFC beginning after December 31, 2017, the US will also require individual shareholders of the CFC to include in their annual taxable income a “global intangible low-taxed income” or GILTI; which notwithstanding its name, is not limited to intangibles nor low-taxed income. Prior to the GILTI rules, CFCs with active business income used to qualify for deferral from US taxes and received qualified dividend treatment (preferential tax rates if from a treaty country) at the time profits were distributed to their US shareholders.

The GILTI rules practically eliminate the active business income deferral. The treatment for US corporate shareholders is again different from that of a US individual. While a 50% deduction will be allowed to reduce the annual taxable GILTI including an available 80% deemed foreign tax credit against the GILTI tax for US corporate shareholders, US individuals subject to the GILTI tax will not benefit from such deduction nor the foreign tax credit. Accordingly, it is strongly recommended that the current organizational structure, involving a CFC with a 10% or more US individual shareholder (resident in or outside the United States), is carefully reviewed under the new rules all the while exploring certain available elections permitted by the IRS.

Every circumstance is different and the new rules are extremely complicated. Although US tax practitioners are still waiting for more guidance from the IRS and how it will particularly impact their clients, it is uncertain if the impact on individuals will be addressed further. It is crucial for US individual shareholders of foreign corporations to work closely with their advisors to consider potential planning opportunities on how they can reduce, or prepare for, these additional tax burdens.

If you have any questions or wish to discuss, our US tax experts at PwC in Switzerland are available to assist.

Contact Us

Richard Barjon, CPA
PwC | US Tax Director
+41 58 792 13 53
richard.barjon@ch.pwc.com

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

EMEA Webcast: EMEA ITS US Tax Reform Series – Practical Guidance for European Multinationals – Episode 4: State tax implications of federal tax reform

State tax implications of federal tax reform

Wednesday, 7 February 2018, 4.00 – 5.00 pm CET

While US tax reform is focused on measures at federal level, it will lead to a diverse and wide-ranging number of state tax implications as a result of how/whether states conform to the federal Internal Revenue Code provisions. There are accordingly a number of critical elements that have the potential to significantly affect state tax and financial statements, such as deemed repatriation toll charge; interest expense limitations; and the international provisions discussed on our previous calls, namely BEAT, GILTI and FDII.

Episode 4 of our webcast series will therefore look in more detail at the state tax implications, with particular focus on the international measures and the tax accounting implications.

We will be joined by our state tax and tax accounting specialists in order to provide an overview of the key areas you should be considering.

Please follow the link below to register for episode 4 and note that recordings will be available if you register and you cannot join the live session itself.

To register for Episode 4: Click Here

In case you were not able to join our previous episodes and would like to view the recording, find hereafter the required links (you will need to register to watch the recording):

Contact Us

Richard Brunt
Tel.+41 58 792 81 82
richard.brunt@ch.pwc.com

Grasiele Teixeira Neves
Tel.+41 58 792 98 25
grasiele.neves@ch.pwc.com

Geneva International VAT Breakfast – New Year and new challenges in Indirect Taxes

International VAT Breakfast

In the fever of December’s last moment, many VAT topics such as the GST implementation in India or the change of the Swiss VAT rates across systems before New Year could have gone unspotted. For those who manage indirect taxes, it is clear that unnoticed changes can have significant consequences.

As a New Year’s resolution, during our next VAT Breakfast, we will look into recent topics that enable strategic development as well as those that are less game-changing but nevertheless require your attention in the start of 2018.

From a strategic perspective, we will address the latest progress in Brexit negotiations, the implementation of GST in India and the introduction of VAT in the GCC. We will also discuss the latest updates about the EU Commission initiatives and the upcoming end of the Cross Boarder Ruling pilot. Sharing feedback from various European countries, we will focus on reporting developments in 2017/2018 in Poland, Hungary and Serbia; the introduction of anti-fraud measures such as split payment in Romania, Poland and Italy; the reporting of imported e-services in Turkey as well as the Polish transport package.

Finally, we want to share with you the lessons learned and the biggest challenges faced in the first months after the Swiss VAT reform and the recent Swiss / EU case law. We hope to receive your views in return.

To register for this event: Click Here

Contact Us

Patricia More
Tel.+41 58 792 95 07
patricia.more@ch.pwc.com

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