Multinationals Consider How Tax Reform at Home and Abroad Will Alter Their Businessesby
From President Trump’s one-page outline of a tax reform framework and the House GOP blueprint to the Organization for Economic Cooperation and Development’s (OECD) 15-point Base Erosion and Profit Shifting (BEPS) Action Plan, tax changes are afoot – both at home and abroad.
Global reform is well underway and domestic changes are poised to have a powerful effect on international businesses. Companies are left to determine how best to adjust.
Domestic Tax Reform: A Move Toward a Territorial System
As tax reform dominates conversations in both the news and boardrooms, companies are trying to predict what parts of the House GOP blueprint and President Trump’s tax reform framework may survive and what that may mean for them – keeping in mind that the Senate likely will introduce some form of tax reform as well.
While the details of such tax reform are being fleshed out, two goals reflected in the Republican plans include:
- Lowering the corporate tax rate to create a more favorable tax environment in the United States for companies.
- Moving to a territorial system to encourage the repatriation of earnings in foreign subsidiaries.
Under the House GOP blueprint, such a territorial system would allow a 100 percent exemption for dividends from foreign subsidiaries. These goals are generally priorities for tax executives as well.
According to BDO’s 2017 Tax Outlook Survey, 77 percent of tax executives believe significant tax reform will occur under the current president. Many senior members of the Republican Party are insisting that tax reform take place by the end of this year.
Should reform come to fruition, tax executives should largely be pleased. According to the survey, a reduced tax rate and a shift to a territorial tax system are two of the most desired reform-related outcomes.
If there is a switch from a worldwide tax system to a territorial system, a transition tax will also likely be included as part of the tax reform package. A transition tax is a one-time tax on nonpreviously taxed earnings in foreign subsidiaries of US companies. This tax is viewed by many lawmakers as a necessity in order to move to a territorial system.
Although the transition tax on such earnings likely will be at a lower tax rate – the House GOP blueprint would tax earnings represented by cash and cash equivalents at a rate of 8.75 percent and other earnings at a 3.5 percent rate – it nevertheless could result in a large tax liability for many US-based multinationals that currently have significant untaxed earnings in their foreign subsidiaries. This transition tax, however, would pave the way for a territorial tax system, making it easier for businesses to repatriate future earnings – effectively ending the lockout effect that currently exists.
In light of this and many other uncertainties, tax executives are weighing in on how this reform may affect their business’ bottom lines. Questions companies are asking themselves include:
- How will this impact my business specifically?
- What would be my potential tax liability if a transition tax is included as part of tax reform?
- Is there any planning or restructuring that can been done currently in anticipation of tax reform?
It is also important to monitor other aspects of tax reform that may not have the required traction politically to be enacted. For instance, one of the more controversial provisions relating to tax reform is the border-adjustment tax that was included in the House GOP blueprint. Although there are substantial obstacles, if the border-adjustment tax were to be enacted, it could have a significant impact on certain companies and industries. For instance, many retailers that import goods from abroad and sell those goods domestically could be negatively impacted by such a tax.
Beyond US Borders, Updates Are Well Underway
While the prospects of changes to the US tax code appear likely, reform abroad is already a reality. Central goals of global tax reform include increased information sharing between countries and a crackdown on certain transactions and structures.
The OECD has led the charge with its BEPS Action Plan, which has been underway for a number of years. This BEPS Action Plan has numerous action items to address base erosion and profit shifting that has occurred because of certain transactions or structures used by multinational corporations.
According to BDO’s survey, a majority (51 percent) of executives cited BEPS actions around transfer pricing as their greatest concern. Other BEPS items that concern tax executives include:
- Limitations on interest deductions, as well as other deductions.
- Permanent establishment rules.
- Controlled foreign corporation rules.
The bulk of the OECD’s BEPS actions have been finalized, and the project now has provided guidelines for most action items and an established timeline for implementation. To implement the BEPS Action Plan, many countries have gone through domestic law changes in the past few years to enact policies and procedures in line with the BEPS recommendations.
At this point, many multinationals are at the stage of adjusting structures or business operations as a result of the BEPS recommendations. As of January 2017, more than half (57 percent) of tax executives were taking proactive measures as a result of the BEPS action items, based on the OECD’s plan. However, there are still some holdouts – more than a third (35 percent) of tax executives plan to wait for individual countries to implement BEPS measures before taking affirmative action.
Tax Executives Ready for Reform
Plans for tax reform are heating up – both domestically and abroad. Whether a company is a US-based multinational or a foreign-based multinational, tax planning has many blind spots as reform efforts move forward. Multinational groups should be sure to take a hard look internally to ensure they have a 360-degree scope of their potential liabilities before permanent measures are in place to ensure that they are able to change with the times.
Joseph Calianno is a partner and the international technical tax practice leader in BDO USA LLP’s National Tax Office. Monika Loving is a partner and the international tax practice leader for BDO USA.