Translating tax into your business reality
US tax and trade policy and the related legislation and regulations have undergone significant changes since the previous edition of Doing Business in the United States was released. US tax policy has reacted to the global COVID-19 pandemic, which has created economic upheaval and a level of uncertainty to a degree not seen in many years. Meanwhile, US trade policy with respect to many important trading partners also has seen significant changes. These changes may have significant implications for your business operations in the United States. As a company investing in the US, you will need to:
understand the key changes to US tax and trade policy,
assess how to apply them to your facts and circumstances through modeling, and
calculate the impact on your global operations.
Some notable developments with potentially significant implications for your US operations include:
Enactment on March 27, 2020, of the ‘Coronavirus Aid, Relief, and Economic Security Act’ (CARES Act), which includes significant tax provisions and other measures to assist individuals and businesses impacted by the economic effects of the COVID-19 pandemic.
Entry into force on July 1, 2020 of the United States-Mexico-Canada Agreement (USMCA), the replacement for the North American Free Trade Agreement (NAFTA) but with different eligibility requirements.
Release of numerous pieces of regulatory guidance, including several important regulation packages related to the 2017 tax reform legislation such as new ‘anti-hybrid’ rules and regulations related to the base erosion and anti-abuse tax (BEAT).
Read Doing Business in the United States to learn more about how these developments may affect your operations in the United States.
How do you tackle 50 states?
The states are continuing to react to the 2017 US federal tax reform act by passing legislation adopting or rejecting certain provisions of that act, and to the US Supreme Court’s decision in South Dakota v. Wayfair, which allowed states to impose sales tax collection responsibility on entities lacking an in-state physical presence.
On top of those important federal-level developments, states are also addressing the ‘Coronavirus Aid, Relief, and Economic Security Act’ (CARES Act), major federal legislation responding to the COVID-19 pandemic. CARES Act provisions that have potential state tax implications include:
Temporarily increasing the Section 163(j) interest deduction limitation from 30% of adjusted taxable income to 50%, applicable to tax years beginning in 2019 and 2020.
Removing the 80% limitation for NOL deductions in tax years beginning before January 1, 2021, and allowance of the carryback of losses from tax years beginning in 2018, 2019, and 2020 for up to five years.
Allowing qualified improvement property (QIP) to qualify for full expensing retroactive to assets placed in service after December 31, 2017.
Read Doing Business in the United States to learn more about how these tax law changes may affect your operations in the United States.
How can you finance your US operations?
Since enactment in late 2017 of US tax reform legislation that made important changes affecting financing of your US operations — such as new limitations on interest expense deductions, new anti-hybrid rules, and the new ‘base erosion and anti-abuse tax’ (BEAT) — the IRS and Treasury have issued extensive regulations addressing important issues raised by these new provisions.
The interest expense deduction limitations found in Section 163(j) apply to all taxpayers operating in the US for both related-party and third-party debt. Section 163(j) limits a taxpayer’s US business interest expense deduction to the sum of the taxpayer’s business interest income; 30% of the taxpayer’s ‘adjusted taxable income’ (roughly equivalent to earnings before interest, tax, depreciation, and amortization, or EBITDA, through 2022 and to EBIT thereafter); and the taxpayer’s floor plan financing interest for the tax year.
Section 267A denies a deduction for interest (and royalty) payments paid or accrued by a US corporation to a related ‘foreign’ party pursuant to a ‘hybrid transaction’ or made by or to a ‘hybrid entity’ if (i) there is no income inclusion by the ‘foreign’ related party for ‘foreign’ purposes (based on country of residence), or (ii) the related party is allowed a deduction for ‘foreign’ purposes.
The BEAT, found in Section 59A, is imposed on certain deductible payments made to foreign related parties based on the amount of base erosion benefit received.
A fourth important provision in this area is Section 385, which predated the 2017 US tax reform legislation and authorizes Treasury to prescribe rules to determine whether an interest in a corporation is treated for purposes of the Code as stock or indebtedness (or as in part stock and in part indebtedness) by setting forth factors to be taken into account with respect to particular factual situations.addresses whether an interest in a related corporation is treated as stock or debt, or part stock and part debt.
Read Doing Business in the United States to learn more about how these Internal Revenue Code provisions and the regulations issued under them may affect financing of your operations in the United States.
How do you set up a tax department in the US?
Defining success for tax: Each US tax department must identify the factors that determine success for the organization and establish benchmarks and objectives to measure performance related to those factors. Building in agility is key to managing the complexity of tax law changes. Now more than ever before, tax needs to respond quickly to access data and models for planning, forecasting, compliance, controversy and advocacy.
Deploying technology and data analytics: Technology and data analytics solutions are now critical to efficiently and effectively executing all aspects of the tax lifecycle. "Small automation" is a growing trend that empowers tax professionals to leverage multiple technologies to secure quick process wins without the need for large-scale IT involvement. Emerging technology solutions such as artificial intelligence (AI) and machine learning (ML) are also gaining popularity—these powerful new tools can be used to perform structured and unstructured activities, and can gather and analyze data from multiple sources.
Focusing on people and organization: Technical tax skills are important, but they are no longer sufficient. To keep up with the rapid pace of technological change and tax complexity, tax professionals need new capabilities. Digital upskilling will enable tax professionals to use new solutions to perform work more efficiently and effectively. A center of excellence (CoE) for digital innovation—a digital lab focused on developing new solutions to business and tax problems—is a great way to engage and train professionals. When deployment of people and technology resources is not feasible, a variety of sourcing models are available to meet the needs of the US tax department’s functions.
Being mindful of process and collaboration: A well-run US tax department needs to have defined processes, enabled by technology; however, to be successful, the tax department will need to reach beyond its boundaries, collaborating with other enterprise functions to capture synergies and contribute to return on investment. Whether it’s about an enterprise approach to emerging technologies or the growing concerns around customs and trade, the tax function needs to be included in the discussion to offer tax perspective on opportunities and risk. Tax should become the trusted advisor to business leadership that the organization needs.
Read Doing Business in the United States and Tax Function of the Future, Tax and Finance Priorities for 2019 to learn more about how these developments may affect your operations in the United States.
The 2017 US tax reform law changed individual provisions significantly:
- US tax liability: Marginal individual tax rates have been reduced. Other provisions could reduce a taxpayer’s overall effective tax rate but still others could increase it, depending on the individual's particular circumstances.
- Applicability for a certain period: Most individual income taxes are reduced until December 31, 2025, given 'sunset' rules.
How does all of this affect you?
- Individual income tax rates: The tax reform legislation reduced the rates, but there are still seven individual income tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37%. These rates for now apply for tax years 2018 through 2025.
- Individual alternative minimum tax (AMT): The AMT regime have not been repealed for individuals, but AMT exemption amounts have been increased.
- Standard deduction and personal exemptions – The standard deduction has been doubled for all filing statuses and the personal exemption has been eliminated.
- Repeal of overall limitation on itemized deductions: The deduction for state and local taxes not paid or accrued in a trade or business generally has been capped at $10,000. Foreign real property taxes may no longer be deducted, but foreign income taxes may (for those not claiming foreign tax credits).
- Mortgage interest deduction: A deduction still is allowed for interest on "acquisition indebtedness" (real property), but limited to $750,000 of debt for new loans.
- Itemized deductions: Itemized deductions previously subject to the 2% floor are no longer deductible. This includes employee business expenses, tax preparation fees and other 2% miscellaneous items.
As a result of these changes, you and your mobile workforce—those individuals working in the United States, or US citizens or residents working abroad—need to:
- Understand the most important aspects of the US tax system as it affects individual taxpayers.
- Evaluate mobility tax reimbursement policies.
- Identify mobility-related processes and controls that may be impacted.
- Assess expected costs and savings, and consider appropriate actions.
Read Doing Business in the United States to learn more about how changes to the US individual tax provisions may affect your US operations.