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Talking Tax round-up: Tax reform rulemaking updates, impacts on M&A activity and operating models, and trade policy developments

24 April, 2019

John Livingstone
Industrial Products Tax Leader, PwC US

I recently hosted our latest quarterly ‘Talking Tax’ executive webcast which provided updates on tax reform rulemaking, the impact of tax reform on M&A activity and operating models, and trade policy developments. Following are some of the highlights:

Tax reform rulemaking updates

Scott McCandless, a principal in our Tax Policy Services practice, joined us on our first panel to share his insights regarding Treasury and IRS guidance we may see around tax reform. To date, the IRS has issued three notices (2018-07, 2018-13, and 2018-26), Rev. Proc. 2018-17, and updated IR-2018-53 around the Section 965 toll charge; Notice 2018-28 around the Section 163(j) interest limitations; Notice 2018-35 around the new Section 451(c) advance payment rule; and Notice 2018-38 around the application of the Section 15(a) blended tax rates for fiscal-year taxpayers.

Scott anticipates that the IRS will issue additional notices around the Section 965 toll charge. This guidance should be welcomed by many — 22% of our webcast attendees told us that the toll charge is the issue of the greatest urgency in terms of obtaining regulatory guidance.

Treasury also has identified the following as priority tax reform guidance areas: (1) carried interest, (2) fringe benefits, (3) Section 274 entertainment expenses, (4) Section 162(m) executive compensation, (5) Section 199A deduction of qualified business income through pass-through entities, and (6) bonus depreciation. Treasury has stated that it intends to issue proposed tax reform regulations by the beginning of the summer of 2018 and to complete final tax reform regulations by June 2019.

Omnibus appropriations bill

President Trump on March 23 signed into law a $1.3 trillion omnibus appropriations bill that will fund the federal government through the September 30 fiscal year-end. The law provides $320 million in IRS funding for implementation of the new tax law. Tax provisions in the legislation include (1) a change to the Section 199A deduction for agricultural cooperatives enacted as part of the 2017 tax reform legislation, (2) an expansion of the low income housing tax credit, (3) a package of tax technical corrections for certain legislation enacted before 2017, and (4) an extension of the Federal Aviation Administration’s authority.

Other tax proposals not included in the legislation include additional corrections to the 2017 tax reform legislation and tax extenders. The 2018 Congressional calendar provides limited opportunities for tax legislation. Accordingly, Scott said that it is unlikely that Congress will enact technical corrections or tax extenders legislation before late 2018, if at all.

Trade policy

President Trump on March 8 authorized a 25% tariff on steel imports and a 10% tariff on aluminum imports. An indefinite exemption applies for Canada and Mexico while NAFTA negotiations are ongoing, and other countries with a ‘security relationship’ with the United States can apply for exemptions.

President Trump on March 22 announced new tariffs and trade restrictions on approximately $50 billion of Chinese imports as retaliation for China’s intellectual property practices. China responded by releasing its own list of US products on which it says it will impose duties.

Over one-third of our webcast attendees told us that general disruptions to stocks or trade relations is the trade-related consequence of greatest concern to their companies.

Tax reform impact on M&A activity

Tim Lohnes, a partner in our M&A practice, joined us on our second panel to discuss tax reform’s impact on M&A activity. Tim noted that a lower corporate tax rate, the elimination of US tax on most distributed foreign profits, and the resulting repatriation of cash into the United States could boost M&A activity.

Tim laid out the tax reform changes for M&A affecting buyers, including (1) access to foreign cash for acquisitions, (2) immediate expensing of a target’s tangible assets, (3) the reduced benefit of tax attributes, (4) the limited utilization of post-2107 NOLs, and (5) potentially limited interest deductions. Tax reform changes for M&A affecting sellers include (1) reduced tax on asset sales, (2) reduced tax exposure for taxable spin-offs, and (3) a more complex due diligence process.

Tim discussed post-tax reform themes impacting M&A transactions, including (1) rising valuations and after-tax earnings, (2) an increased appetite for US inbound investment and M&A, and (3) new tax incentives for US outbound investment for global expansion. Tim also outlined actions for corporate development, including reviewing M&A objectives and strategies in light of tax reform, and how the tax department could help the corporate development agenda with strategy, valuation and structuring, and negotiating and integration. In addition, Tim gave several examples around tax due diligence and structuring considerations involving domestic and cross-border stock and asset transactions in light of tax reform.

Over 25% of our webcast attendees said that tax reform has not yet impacted their organization outside of their tax department since they have been busy with year-end reporting and 2018 ETR forecasting.

Tax reform impact on operating models

Tom Quinn, a partner in our International Tax Services practice, joined us on our third panel to discuss tax reform’s impact on operating models. Tom gave examples of how US tax reform affects an organization’s operating model through its new anti-base erosion provisions, including the limited interest deduction, GILTI, BEAT, and FDII provisions. Tom also gave examples of questions being asked by business executives, including:

  • Which markets/segments offer the best growth opportunity for us?
  • Does tax reform change our capital deployment strategy? Which investments balance productivity versus growth goals?
  • What is my digital strategy? How should this change my operating model?
  • What should my supply chain footprint be to best serve my customers? How do I manage trade-offs?

Tom said that it is critical for organizations to perform a holistic evaluation of the following elements of their operating models: (1) revenue models, (2) supply chain strategy, (3) intellectual property strategy, (4) digital strategy, (5) service models, (6) sourcing strategy, (7) trading models, and (8) transaction models. Tom also said that the top planning priorities of US MNCs should be (1) modeling the impact of the new tax provisions, (2) aligning tax and transfer pricing with the organization’s operating model, (3) adopting a sustainable foreign tax posture, (4) managing GILTI and BEAT, and (5) developing an FTC strategy.

Tom’s key takeaways were that (1) global tax reform changes the ROI of many strategic and operating model decisions, (2) the impact of these new tax provisions is often counter-intuitive — holistic modeling and scenario planning are a must, and (3) tax departments are expected to work much closer with the business than ever before, providing real-time inputs on the economics of business decisions.

Almost one-third of our webcast attendees told us that the level of impact that they expect tax reform to have on their company’s US operating model going forward is uncertain since the tax rules are too new to know the impact.

Looking ahead

Tax reform was intended to improve US competitiveness and productivity through lower corporate tax rates, a modernized international tax system, and incentives to invest in the United States. In light of the new tax law, it is critical that industrial products companies reassess their business models and look at how recent legislative changes may affect their operations. Join us on July 24, 2018, for our next segment of Talking Tax, where we will continue our discussion around tax reform readiness for industrial products companies.