2018/2019 Edition of the Global Regulatory Update

Global Regulatory Update  | Corporates Edition 57 There are also specific base erosion mechanisms to prevent companies from shifting profits out of the U.S. to lower-tax jurisdictions abroad. These include an alternative minimum tax on payments between U.S. corporations and foreign-related companies and limitations on the shifting of corporate income through transfers of intangible property, including patents. Key provisions with the largest impact on multinational corporations especially those parented in the U.S.: • Lower U.S. corporate income tax rate (reduced from 35% to 21% effective this year). • Immediate expensing of capital investments (including used property). • Limited net interest deductibility. Net interest has been limited to 30% of EBIT (EBITDA until 2022). • Exempt dividends received by U.S. corporations from eligible foreign subsidiaries, but retain tax on investment in U.S. property. • Mandatory one-time tax on previously un-repatriated foreign earnings. The one-time tax is set at 15% on cash and equivalents and 8% on illiquid assets. There is an option to pay the tax over eight years. Due to the move to a territorial tax system, the TCJA includes a series of complex base erosion provisions (similarly to other countries that have adopted territorial systems) as a way to limit the loss in tax revenue that typically occurs if companies decide to move profits offshore to low tax jurisdictions. Companies must pay a base erosion minimum tax amount which will generally be equal to the excess of 10% of its modified taxable income over its regular tax liability. However, in calculating its modified taxable income for base erosion and anti-abuse tax (BEAT) purposes, certain payments (called Base Erosion Payments) to related parties are disallowed and must be ‘added back’ to income. That being said, the legislation does allow certain types of inter-company payments such as cost of goods sold (COGS), derivatives that are mark to market (MTM) etc. Next steps The TCJA has been signed into law. The focus has now turned on implementation. The U.S. Treasury and Internal Revenue Service are preparing guidance. There may even be technical statutory corrections to the Bill which will need to be subsequently enacted into law.