Chairman Brady kicks off the US Tax Reform process | KPMG | AU

Chairman Brady kicks off the US Tax Reform process

Chairman Brady kicks off the US Tax Reform process

Justin Davis and Jonathon Burrows discuss the US tax reform bill released by Chairman Kevin Brady.

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After a number of delays, the United Stated (US) tax reform process is under way with the chairman of the House Ways and Means Committee, Kevin Brady today releasing a “Chairman’s mark” of a tax reform bill, titled the ‘Tax Cuts and Jobs Act’ (TCJA).

Key Business Tax Reform Measures

In addition to an array of measures targeted at providing tax cuts for middle-income families and reducing complexity for individuals, the key business and international tax reform measures in the TCJA include:

Key general business tax reform measures

  • Tax rate cut: Permanent lowering of the corporate tax rate from 35 percent to 20 percent and pass-through tax rate from 39.6 percent to 25 percent 
  • Increased expensing: Full and immediate deduction for qualified property acquired after 27th September 2017 and before 1st January 2023. This deduction will not be available for property used in a real property business or regulated utilities, which will continue to be depreciated under existing rules.
  • Net interest deduction limitations:
    • Earnings stripping limitation: Broadly, every business will be subject to a disallowance of net interest deductions in excess of 30 percent of modified Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Carve outs are proposed for real property business, regulated utilities and small business
    • Worldwide debt cap: Net interest deductions for a US corporation that is a member of an international financial reporting group would be limited to 110 percent of its share of the group’s global EBITDA
    • Disallowed interest expenses can be carried forward for five years
  • Repeal of Corporate Alternative Minimum Tax (AMT): but replaced with net operating loss (NOL) usage limitations
  • Net operating loss modifications: 
    • Repeal of 20 year loss carry forward limitation and general repeal of all carry backs
    • Loss utilization limited to 90 percent of the taxable income in the loss utilization income year
    • Indexation of NOLs carried forward.

Key international tax measures

  • Non-portfolio dividend exemption: Foreign dividends paid to a 10 percent or more US corporate shareholder exempt from US taxation
  • One-off repatriation tax: As previously reported the introduction of the non-portfolio dividend exemption is intended to be funded by a one-off repatriation tax on foreign accumulated earnings (not previously subject to US tax) at a reduced rate of 12 percent for cash and cash equivalents and five percent for the remainder 
  • Excise tax on payments to related foreign corporations:
    • Imposition of a 20 percent excise tax on payments (not including interest) made by a US corporation to a related foreign corporation to the extent that they are deductible, includible in cost of goods sold (COGS) or includible in the basis of a depreciable asset
    • Related foreign corporation can elect to treat the payments as income effectively connected with the conduct of a US trade or business Effectively Connected Income (ECI), in which case they would not be subject to the 20 percent excise tax, but would be subject to full taxation in the US with deductions determined by reference to profit margins reported on the group’s consolidated financial statements for the relevant product line
    • Applicable only to international financial reporting groups with payments from US corporations to their foreign affiliates totaling at least US$100 million annually
  • Limitation on treaty benefits: Treaty limitations to be imposed for deductible Fixed, Determinable, Annual or Periodic (FDAP) payments (including interest and dividends) made by a foreign controlled US taxpayer to a foreign related entity if the ultimate foreign parent is not US treaty resident.

Impact on Australian multinationals and institutional investors

If enacted as proposed, a number of these measures are going to have material implications on the US operations of Australian multinational companies and the US investments of Australian institutional investors. In some circumstances, this may require restructuring of existing cross-border arrangements, revaluation of existing investments and re-evaluation of proposed investments.

Where to next?

While this is an important first step, the road to tax reform is still a long one and there is no guarantee to what extent the current version of TCJA will be reflected in the tax reform bill that will ultimately end up on the President’s desk. This bill will need to pass through the House Ways and Means Committee before being debated in the full House.

Concurrently the US Senate will also be releasing its own tax reform bill and it is not yet clear to what extent this will differ from Chairman Brady’s version released today. Ultimately both the House and Senate will need to pass identical versions of a bill before sending it to the President for his signature or veto.

Stay tuned for further industry specific insights for Australian multinationals and institutional investors in the coming days.

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