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US Tax Reform
Issues for Danish-based multinationals to consider
Tax and accounting considerations
5 December 2017
Page 2
Ernst & Young P/S
Osvald Helmuths Vej 4
P.O. Box 250
2000 Frederiksberg
Denmark
ey.com/dk
On the following pages, we have set out a description of material parts of the US Tax Reform and how such changes can
impact Danish-based multinationals.
The description touches upon elements relating to corporate tax with an anticipated broad impact and, thus, does not cover
more industry-specific changes, such as change in subsidy to the wind industry, changes in taxation of employees, etc.
Furthermore, we have set out how the US Tax Reform will impact the 2017 financial statements, depending on the timing of
the ongoing negotiations between the House and the Senate.
The draft legislation is changing on a daily basis, and thus, the following description is based on currently available
information. The current status is that both the House of Representatives (16 November 2017) and the Senate (2 December
2017) have approved tax reform bills and now have to align those into one tax bill.
We strongly recommend that anyone using this document should keep themselves updated on the progress in the
negotiations and changes made to the US Tax Reform. Updated information can be accessed at www.ey.com/taxreform.
We and your local EY advisors will be happy to assist you in this respect.
Yours sincerely
Ernst & Young P/S
Bjarne Gimsing Søren Kok Olsen Søren Gammelgaard
US Tax Reform
Bjarne Gimsing
Partner
Business Advisory Tax
M +45 25 29 36 99
Information in respect of potential impact
Søren Gammelgaard
Executive Director
Transaction Tax
M +45 25 29 34 48
Søren Kok Olsen
Partner – IFRS specialist
Assurance
M +45 25 29 38 69
US Tax Reform
Page 3
US Tax Reform
Introduction
► The US Tax Reform is moving at a rapid pace. Following the release of draft legislative wording by the House on 2 November
2017, we have seen numerous amendments to this wording by the House that resulted in the bill being passed by the House on
16 November 2017. In addition, the Senate's bill was passed by the Joint Committee on Taxation on 16 November 2017, and
an amended bill was approved on 2 December 2017. The draft legislation changes daily, and therefore, it is difficult to make
clear assessments, but areas of agreement are becoming clearer that could have an immediate impact on companies as early
as 1 January 2018.
► The main differences between the two tax bills relate to the timing of the reduction of the corporate tax rate, rules on interest
limitation, percentages applied for transition tax and whether the Alternative Minimum Tax should be repealed or not. However,
there are various other differences where the outcome of the alignment of the two bills could be material to the affected
companies/groups.
► It seems that the managements of many multinational companies may have been surprised by the speed at which things are
moving, and there is a real possibility that an act will be adopted before the end of December as both House and Senate
leaders have committed to adopting the legislation by year end. As a result, most companies will need to immediately consider
a wide range of potential impacts from the tax reform because, even if the bill is not passed prior to New Year, many provisions
included in the bill will most likely still have an effective date of 1 January 2018, even if the bill is not passed until Q1 2018.
► Given the speed of the reform process, we have gathered some initial thoughts on the key areas of impact that Danish-based
multinationals with US operations and/or US customers should consider now and establish contingency plans for, even though
the rules are still in flux. EY will continue to monitor and update you as the reform process progresses and will re-assess likely
impacts and consequences, as the House and Senate bills evolve into a cohesive final bill.
► Even though the final legislation has not been released, it is important that managements think beyond modelling and scenario
planning and consider the potentially deeper and more impactful proposals that could affect tax, treasury, supply chain, global
transfer pricing, etc., so that they are well-positioned to prepare their stakeholders for the changes ahead.
► In terms of accounting, there will be different challenges depending on the timing of the effective date. The obvious impact
relates to the reduction of the corporate tax rate from the current 35% to the proposed 20%. However, as the following slides
will show, there are many other substantial changes.
US Tax Reform
Page 4
Reduction in corporate tax rate and territorial tax system
Corporate tax rate
The tax bill includes a reduction in the corporate tax rate to
20% compared to the existing 15-35% tax rate. The
House's bill eliminates the Alternative Minimum Tax (AMT),
whereas the Senate's bill retains it.
Currently, the House's proposal includes effective dates for
years beginning after 31 December 2017, while the
Senate's proposal includes effective dates for years
beginning after 31 December 2018.
The 20% corporate tax rate might change depending on the
final assessment as to whether changes to other elements
will increase the costs of the bill.
Incentive for sales abroad
The Senate has proposed that goods and services provided
abroad will be effectively taxed at 12.5%.
Territorial tax system
US companies will be exempt from US taxes on 100% of
dividends received from foreign corporations in which they
own 10% or more.
What should Management consider?
► Should activities previously performed and therefore
taxed outside of the US be transferred to the
subsidiaries in the US utilising the lower corporate tax
rates?
► How will the reduction impact deferred tax assets or
liabilities recognised in the financial statements?
► Can income be brought forward for taxation within the
subsidiaries in the US before the end of 2017,
ensuring utilisation of prior year tax losses applying
the higher tax rate, and thus from an accounting
perspective reducing the accounting loss on tax
assets?
What should Management consider?
► Review current group structure, and assess whether
changes should be incorporated in order to benefit
from the participation exemption.
US Tax Reform
Page 5
Debt proposals
Interest limitations
► This is a clear focus area for most companies with US
operations, and it seems that punitive debt restrictions
will most likely be included in any US tax reform
scenario.
► Both the House and the Senate have a rule restricting
deductions to 30% of EBITDA (House) and 30% of
EBIT (Senate – this is more restrictive).
► In addition, both the House's and the Senate's bill
include a worldwide debt capacity limitation rule that
can further restrict the deductibility of US debt based
on certain US groups to worldwide group ratios.
► Many EMEIA headquartered groups with debt-funded
US operations could see significant disallowance of
US interest deductions under either proposal.
► The Senate has proposed to implement the limitations
gradually in the period 2018-2021.
What should Management consider?
► Will these proposals impact existing US debt
financing? If so, how material is the impact expected
to be based on EBITDA/EBIT and/or debt/equity
levels?
► If interest is disallowed, should debt be capitalised?
Can it be capitalised without triggering a tax charge?
► Is it possible to increase US group EBITDA/EBIT, but
manage US tax costs via foreign tax credits?
► Can the US tax base be managed via other forms of
deductible payments?
► Will there be an impact on overall group treasury
hedging policy if debt is moved and/or capitalised?
► Can the US company
I. decrease its interest expense by converting non-
deductible interest expenses into deductible non-
interest expense; and/or
II. increase its interest income by converting taxable
non-interest income into interest income?
Strategies for realising these incentives could
involve the use of financial products as well as
changes to a variety of ordinary course of
business arrangements.
US Tax Reform
Page 6
Debt proposals
Anti-hybrid proposal
► The Senate has proposed a rule that would make
related party payments to hybrid entities or payments
to related parties on hybrid instruments non-
deductible.
► The current proposal is vague, but it does authorise
Treasury to write legislation that could expand the
scope of targeted structures (i.e. anti-abuse rules).
► If adopted, it is assumed that "obvious" hybrids would
be caught, such as repos and payments to reverse
hybrids but queries whether these rules could also
stretch to other lending structures with hybrid
entities/instruments further removed from the US
debtor (e.g. interest-free loan structures).
What should Management consider?
► How much debt is currently in hybrid structures vs.
non-hybrid structures (including back-to-back hybrid
structures)?
► Could the non-deductible receivable positions be
moved to a more tax efficient territory? What impact
would the movement have in the current receivable
territory?
► Is there an existing state aid risk and thus a need to
revisit the structure regardless of the US tax reform?
► Will there be Treasury considerations associated with
refinancing hybrid structures?
► Non-hybrid rate arbitrage opportunities due to
relatively high US combined state and federal rate
(e.g. potentially 25%).
US Tax Reform
Page 7
Anti-base erosion proposals
Anti-base erosion
► Both the House's bill and the Senate's bill contain
provisions that appear to target so-called "base
eroding" payments from the US to a related foreign
affiliate that could have a significant impact on supply
chains.
► House excise tax proposal
The House has proposed a punitive 20% excise tax
(imposed on the US payor) on the gross amount of
deductible payments to related parties, notably
including payments for COGS, inventory, services,
royalties, etc., but excluding interest as well as
services charged at cost. Alternatively, the excise tax
will not apply if the foreign affiliate opts to be subject to
US tax with respect to such payment. Such opt-in
would allow the foreign affiliate to be subject to US tax
on a net (rather than gross) basis and would allow for
a reduced foreign tax credit. The tax on the foreign
affiliate would be levied in addition to US tax due on
the US company for the US-based activities. The
excise tax applies to US groups with base eroding
payments in excess of USD 100 million and has an
effective date of 1 January 2019.
► Senate base erosion minimum tax proposal
The Senate has proposed a base erosion minimum
tax (BEMT) that would be calculated by reference to
all deductible payments made to a foreign affiliate for
the year. The ordinary US tax amount of the US
company must be compared to the BEMT – a 10% tax
rate applied to "modified adjusted taxable income"
(calculated without allowance for base eroding
deductions) with the higher tax due. The 10% rate is to
be increased to 12.5% for years beginning after 31
December 2025. The excise tax applies to US groups
with average annual gross receipts of USD 500 million
or more over three years. The Senate BEMT would
apply from 1 January 2018.
What should Management consider?
► What portion of the company's supply chain could
trigger US tax under these proposals?
► Is the company prepared to act quickly in the event of
an 1 January 2018 effective date?
► How flexible is the supply chain?
► How might these proposals impact M&A activity?
► Consider structures and operating models that may
not be subject to these provisions (e.g. US service
providers versus buy/sell distributors).
US Tax Reform
Page 8
Participation exemption and transition tax
Participation exemption and transition tax
► Both the House and Senate proposals include a
participation exemption regime for dividends (but not
capital gains). In order to pay for the regime, both
proposals would impose a one-off transition tax on US
groups' accumulated untaxed foreign earnings and
profits (E&P). The House's proposal would impose a
14% tax on cash/cash equivalents and a 7% tax on all
other assets, whereas the Senate's proposal would
impose a 14.5% tax on cash/cash equivalents and a
7.5% tax on all other assets. Any tax due can be paid
over an 8-year period.
► For "sandwich structures" (foreign parented groups
with foreign affiliates held by their US groups), there
may be a limited window of opportunity to dilute US
ownership of foreign affiliates (with a potentially longer
window of opportunity for fiscal year groups).
What should Management consider?
► Has an earnings and profits (E&P) assessment been
performed?
► What is the potential cash tax impact of the transition
tax?
► Does a dilution opportunity exist?
► Does a European subsidiary of a US group prepare for
payment of dividends to the parent company, including
planning dividends from multi-lawyer groups covering
various jurisdictions?
US Tax Reform
Page 9
Controlled foreign corporation rules
Controlled foreign corporation rules
► Intangible income proposals
Both proposals retain the US-controlled foreign
corporation (CFC) rules (i.e. Subpart F) mostly
unchanged, though an additional category of Subpart
F income has been added that targets high intangible
profits earned by CFCs and may cause such income
to be subject to US tax currently. Notably, the Senate's
proposal also includes a reduced US tax rate on
income earned on intangibles held by a US group for
offshore use. The Senate's proposal also provides a
limited window of opportunity for US groups to
onshore IP held by CFCs without triggering a US tax
charge.
► CFC attribution rules
Both proposals include a change to the CFC
attribution rules that could impact EMEIA groups with
sandwich structures and EMEIA groups with 10% US
shareholders.
What should Management consider?
► Should IP be moved to the US?
What should Management consider?
► Will the CFC attribution rules impact the group?
► What sort of US tax compliance filing requirements
could be triggered? At what cost?
► Are there advantageous planning opportunities to use
the Subpart F CFC look-through exception.
US Tax Reform
Page 10
Tax loss carryforwards
Tax loss carryforward rules
The tax bill proposes that tax losses generated in years
ending after 31 December 2017 will be allowed to be
carried forward indefinitely, but tax losses carried forward,
generated in years beginning after 31 December 2017, will
be capped at 90% of the taxable income (senate plan will
cap at 80% for losses arising in tax years beginning after
2022).
Carry-back of losses will no longer be permitted.
Additional limits might be imposed affecting the ability to
use tax losses carried forward.
What should Management consider?
► Assess the impact on current tax losses carried
forward
► Assess impact on expected future utilisation of tax
loss carryforwards and tax payments
US Tax Reform
Page 11
Accounting considerationsIFRS and ÅRL impact
Recognition and disclosure requirements
Pursuant to IAS 12, current and deferred taxes are to be
measured using tax rates and legislation adopted or
substantively adopted at the balance sheet date. In this
case, substantively adopted would be the date when signed
by the US President.
Signature before 31 December 2017
This would require recognition of the impact of the changes,
including changes in deferred tax assets/liabilities due to
change in the tax rate from the current corporate tax rate of
35% to the proposed 20%.
If the impact of the changes is significant, it should be
disclosed in the tax notes as well as in the Management's
review.
Signature between 1 January 2018 and the date of
approval of the financial statements
Pursuant to IAS 10, a change in tax legislation, including tax
rates, which is adopted or substantially adopted after the
balance sheet date is to be considered a non-adjusting
event.
Instead, this would constitute a subsequent event where the
impact is to be recognised in 2018.
The subsequent event should be disclosed in the 2017
financial statements, if material.
No signature before date of approval of the financial
statements
If the tax bill is still being negotiated between the House and
the Senate or is pending signature by the President at the
date of the approval of the financial statements, IAS 1.125
requires disclosure of uncertainty and significant estimates
and assumptions the company makes about the future and
other major sources of estimation uncertainty at the end of
the reporting period that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets
and liabilities in the next financial year. In respect of these
assets and liabilities, the notes must include details of
a. their nature
b. their carrying amounts at the end of the reporting period
This means that the uncertainty and the potential
quantitative impact on deferred and current tax balances as
well as other potential impacts should be disclosed.
US Tax Reform
Page 12
Accounting considerationsIFRS and ÅRL impact
ÅRL
The accounting for income taxes under Danish GAAP
complies with the recognition and measurement principles
in IAS 12. Therefore, there will be no differences in the
accounting for the US Tax Reform between IFRS and ÅRL.
Even though the tax disclosure requirements under ÅRL are
limited, the nature of the US Tax Reform might be so
substantial that disclosures under ÅRL – depending on
materiality – would be the same as under IFRS.
Conclusion
Unless the US Tax Reform is completely taken off the
agenda before the approval date of the financial
statements, it will have an impact for a significant number of
Danish-based multinationals and is thus to be considered in
this year's preparation of the financial statements.
US Tax Reform
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© 2017 Ernst & Young P/S. CVR no. 30700228
All Rights Reserved.
This material has been prepared for general informational purposes only and
is not intended to be relied upon as accounting, tax, or other professional
advice. Please refer to your advisors for specific advice.
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