Regulation & Standards

Question Answered: US tax reform

Published: Mar 2018

“How should corporates in Asia be preparing to handle US tax reform?”

Tony Kinnear

Tony Kinnear, Managing Director, ASEAN and North Asia, Thomson Reuters:

The US Republican government led by President Trump has arguably ushered in the biggest tax reform in US history, and its ramifications extend way beyond the US. As a part of the tax reforms under the ‘Tax Cuts and Jobs Act of 2017’, the United States will:

  1. Reduce its corporate tax rate from 35% to 21% and reduce or eliminate other related deductions and credits.
  2. Eliminate corporate alternative minimum tax.
  3. Change the US tax system from global to territorial with respect to corporate income tax.

Following these reforms, corporations in Asia – whether they be a holding company, a subsidiary or a permanent establishment with a presence in the US – will need to review their tax structures to ascertain the impact of the reforms. Here are a few things corporations in Asia might consider:

  • For Asian corporations with US links, it will be important to review their transfer pricing structures. Relevant US reform measures include the new anti-deferral tax on global intangible low-taxed income (GILTI) and the new base erosion and anti-abuse tax (BEAT) on outbound related-party payments. Coming hard on the heels of the BEPS measures and the compliance processes they mandate, the US reforms will keep many corporations very busy.
  • The reforms also allow US corporations a 100% deduction for foreign-sourced dividends received from foreign corporations which are owned at least 10% by the US company. This applies to dividend distributions made after December 31st 2018. Asia Pacific companies that fit the 10% ownership rule may see some pressure to pay dividends if the US parent is seeking that 100% deduction. This will, however, be a case-by-case situation.
  • The value of unused tax losses for the Asia corporations could also be impacted as a result of the US reforms. When a re-measurement of deferred tax balances arising from a change in the relevant tax rate is done, the amount of the change will be recognised through income tax expense, unless the deferred tax relates to an item recognised directly in equity (for example, movements in an asset revaluation reserve).
  • Post the Tax Cuts and Jobs Act (TCJA) implementation, Asian corporations will have to pay particular attention to:
    • The interest expense limitation to 30% of adjusted taxable income (tax EBITDA for tax years beginning on or after January 1st 2018).
    • The base erosion minimum tax measures – these apply to taxpayers with US gross receipts exceeding US$500m and are calculated on income modified to add back certain deductible payments made to foreign related parties (5% for tax years beginning on or after January 1st 2018, increasing to 10% until December 31st 2025 and then to 12.5%).
    • The allowance of immediate 100% expensing of qualified property for five years purchased after September 27th 2017 and before December 31st 2022. This could provide significant tax benefits where applicable.

Lastly, Asian corporations must be cognisant that lower tax rates may make the United States an attractive investment destination and create a strong pull for American corporations to repatriate funds from other economies where companies are taxed at a higher rate. This might pose a challenge to Asia’s competitive position at a time when labour costs in the region are already rising. However, owing to the reduced tax rates, this reform may also present an opportunity for Asian corporations to make new or enhanced direct investment into the US market and deploy more cash into the US market.

The practical implications of the US tax reforms will take some time to for corporations to properly work through. If they have not started already, the time to start is now.

Sandip Patil

Sandip Patil, Asia Pacific Global Liquidity and Investments Head, Treasury and Trade Solutions, Citi:

The US tax reform is one of the biggest tax regulation changes we have seen in a long time. In addition to lowering tax rates, it brings fundamental changes including moving to a territorial tax system, Base Erosion Provisions (BEAT) and Tax on Global Intangible income (GILTI). This presents a unique set of opportunities for companies in Asia – for both US companies based in the region as well as Asian companies operating in the US.

For US subsidiaries in Asia, this presents a unique opportunity in the long term for clients to revisit their legal entity and vehicle structures. As a consideration to the potential impact of BEAT provisions to high value services, US corporates should review restructuring intercompany recharging mechanisms for treasury and shared services, inter-company funding and trading structures, as well as potentially establish/revise the scope of their regional treasury centres or in-house banks.

In the short term, most companies are reviewing the remittance of historic retained earnings back to the US. As US companies in Asia still have operations and significant business presence, we do not expect any immediate action or material USD liquidity shifts from Asia to US as a consequence.

While cash and cash equivalent retained earnings are estimated at US$1trn internationally, less than one-third of this is estimated to be in Asia. As such, we do not estimate significant shifts given the growth potential in Asia, irregularities of working capital funding, regulatory nature of markets as well as wider manufacturing operations.

However, it does provide an ongoing window for companies to remit longer duration surplus back to headquarters. Another factor impacting these decisions is the need for liquidity at HQ in terms of retiring debt or capex or stock buybacks. Corporate restructuring opportunities will drive the broader direction but without material impact to Asian foreign exchange markets.

As the largest bank for US companies in Asia, we continue to work very closely with our clients, guide them on specific aspects of their evaluation as well as connect the thought process with their headquarters.

Similarly, for Asian companies operating in the US, we continue to help them operationalise their cash management strategy in the US and work with their headquarters in Asia to streamline inter-company transactions by providing them with structured solutions around their specific needs. We do anticipate the direction and enablement of these companies achieving increased self-sufficiency of vehicles operating in US.

Overall, we expect these tax changes to provide fundamental restructuring opportunity for our clients’ global business.

Allison Cheung
Allison Cheung
Nikki Mullins
Nikki Mullins

Allison Cheung, International Tax Partner and Nikki Mullins, Senior Manager, PwC Singapore:

As multinational businesses evaluate opportunities (both regionally and globally) to position their operations for success, a key consideration is to assess the impact of US tax reform on treasury departments. As such, modelling the impact of US tax reform is pivotal to rewrite the rules of treasury departments for Asian MNCs.

Below we highlight four key areas of focus where disruptions are more often experienced by the treasury department of these MNCs, assuming they maintain a moderate to significant operation in the US:

Cash management and planning.

The improved cash tax position arising from the reduced corporate tax rate from 35% to 21%, accelerated cost recovery of capital expenditures and other cash tax improvement items under the new law will need to be rebalanced with the additional tax costs attributable to the less cash tax-friendly provisions. These provisions include the toll tax on mandatory deemed repatriation of foreign untaxed earnings, expanded limitation of net business interest expense deduction, potential additional tax burden from base erosion payments, GILTI.

FX/hedging risk management.

As additional cash needs become apparent for US arms of Asian based MNCs to meet their toll tax obligation (albeit over an eight-year payment period), these US companies may be required to bring back offshore cash which could be in various non-US currencies, likely disrupting standing FX hedging programmes. Treasury departments will need to revisit FX and trades to ensure adequate levels of US currencies are maintained in meeting the additional US cash tax needs.

One common practice for multinationals is separate cash pool structures for US and non-US cash. An influx of cash to the US, combined with lower tax costs associated with the dividend participation exemption, may trigger increasing interest in exploring one global cash pool, or cash pool arrangements with multi currency notional cash pooling features.

Capital market and cost of funding.

The expanded limitation on net business interest deduction is expected to increase the cost of capital in the US. Depending upon companies’ access and ability to borrow locally, this may hamper attractiveness to borrow in the US for funding the investment needs of the group’s global operations. However, in countries such as Hong Kong and Singapore, where interest expense incurred for the acquisition of investment that generates non-taxable income is not deductible, the US interest deduction regime becomes more attractive when MNCs borrow in the US for the group’s financing needs in and outside of the US (where the deduction limit is not breached).

Liberation of repatriation increasing collective liquidity/investments.

The participation exemption essentially liberalises the means to bring back non-US earnings to the US arm of Asian based MNCs. The MNCs now have freedom to implement repatriation plans without the legacy US tax burden. As part of cash management planning, MNCs will need to consider how to redeploy the cash efficiently including paying down existing high interest debt, increasing capital expenditures spend, fund M&A activities and declaring dividends.

Next question:

“Can corporate treasury live without Excel spreadsheets?”

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