Doing business in the United States: Looking at 2018

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We can help you navigate the new tax law

After thirty years, the United States has a new income tax law in place. Add an already complex system of federal, state, and local levels of taxation… and that is a lot to manage for multinational companies doing business or considering investments in the United States.

Doing business in the United States is available to help you navigate the newly enacted US tax law. We share our observations, practical insights, and overview of the basic tax implications for US operations of global businesses.

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Considerations to help you do business in the US

When it comes to your global business and investment in the United States, we can help global global companies to:

Navigate US tax reform

1. Tax reform’s effect on your US investments

The recent enactment of US tax reform represents a dramatic shift in the US tax regime, moving the United States from a ‘worldwide’ system to a 100% dividend exemption ‘territorial’ system. These changes have many implications for global businesses with US operations. As a company investing in the US, you will need to:

  • understand the complex law
  • assess how to apply it to your facts and circumstances, and
  • calculate the impact on your overall operations.

Some notable provisions with potentially significant implications for your US operations include:

  • a new, permanently reduced US corporate rate from 35% to 21% for tax years beginning after 2017
  • a base erosion and anti-abuse tax (BEAT) that targets certain ‘foreign’ payments by imposing an additional corporate tax liability
  • interest expense deduction limitations
  • new ‘hybrid’ financing rule denying deductions for certain interest and royalties paid to related ‘foreign’ persons
  • sale of partnership interest rules that affect a non-US partner’s gain or loss from the sale or exchange of a partnership interest.

Read our Doing business in the United States to learn more about how these tax law changes may affect your operations in the United States.

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Tackle 50 states

2. How do you tackle 50 states?

Did you know that US tax treaties generally do not apply at the state level? While your business activities may not amount to a permanent establishment in the US under a treaty, you may have ‘nexus’ in a particular state. Nexus allows a state to tax a corporation -- and the threshold can be quite low, including mere physical presence. Does your activity in various states create nexus and subject you to tax?

How will US federal tax reform provisions be adopted by the state(s) where you do business? It all depends! States conform to federal tax law:

  • as of a certain date
  • automatically or
  • pick and choose which provisions to adopt.

You need to understand how each state where you do business addresses these issues given that the effect to your business may be wide-reaching.

Have you heard of state tax haven laws? Under a ‘tax-haven’ inclusion rule, as a global company, your global income and apportionment factors may be included in a state combined return. Some of these laws look at your business’s country of incorporation or whether any business activity exists in a specific country (not the state) and there is generally no further inquiry into whether you have a business activity in that relevant state.

Read our Doing business in the United States to learn more about how these tax law changes may affect your operations in the United States.

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Finance your US operations

3. Financing your US operations

A lot changed in the United States in 2017 that delivered much to consider when it comes to financing your US operations.

New tax reform legislation includes two provisions that likely will lead to increased cost of financing US operations. Both apply to tax years beginning after 2017.

  1. The new interest expense deduction limitations, found in new 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 net 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).
    • the taxpayer’s floor plan financing interest for the tax year.
  2. New 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.

Stock or debt? Section 385 regulations address whether an interest in a related corporation is treated as stock or debt, or part stock and part debt. These regulations could apply to many types of related-party debt transactions that routinely arise in the ordinary course of operations. That means they could have a profound impact on a range of modern treasury management techniques, including cash pooling, by characterizing related-party financings as equity, even if they are in form ordinary debt instruments. It is unclear at this time what the future holds for the Section 385 regulations.

What’s a company to do? Continue preparations to achieve compliance, but stay focused on the potential for some (or even dramatic) changes affecting the application or even existence of these regulations. IRS focus on whether an instrument is debt or equity is likely to continue, regardless of the future of these regulations.

Focus, focus, focus… The IRS currently is devoting more resources to auditing global companies in the United States, especially regarding financing transactions. Demonstrating results consistent with the arm's-length standard is and will continue to be vital.

Read our Doing business in the United States to learn more about how these developments may affect financing of your operations in the United States.

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Set up a tax department in the US

4. How do you set up a US tax department?

Defining success for tax — Each US tax department must identify the factors that determine success for the organization. These performance considerations are the basis on which tax should establish benchmarks and objectives for all functional areas within the US tax department.

Deploying technology and data analytics — Technology and data analytics solutions are now critical to efficiently and effectively executing all aspects of the tax lifecycle, including planning, financial reporting, tax return compliance, controversy, and advocacy. Technology solutions can even improve how the US tax function collaborates across functions and geographies.

Focusing on people and organizations — Technical tax skills are no longer sufficient. Tax departments now need professionals with capabilities in areas including technology and project management to manage growing complexity. Where deployment of people and/or 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 — A well-run US tax department must have defined processes, enabled by technology, to collaborate with stakeholders at all levels and effectively fulfill tax requirements.

Read our Doing business in the United States to learn more about how these developments may affect your operations in the United States.

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Consider the individual

5. It’s personal

The 2017 US tax reform law has changed individual provisions significantly:

  • US tax liability -- some provisions lower while others are expected to increase
  • applicability for a certain period -- generally through December 31, 2025, given ‘sunset’ rules

How does all of this affect you?

  • Individual income tax rates – There now are seven individual income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The new rates apply for tax years 2018 through 2025.
  • Individual alternative minimum tax (AMT) – The AMT regime is not repealed for individuals, but exemption amounts are increased.
  • Standard deduction and personal exemptions – The standard deduction is now doubled for all filing statuses and the personal exemption is eliminated.
  • Overall limitation on itemized deductions is repealed. The deduction for state and local taxes not paid or accrued in a trade or business generally will be eliminated, except for $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 is allowed for interest on ‘acquisition indebtedness’ (real property), but limited to $750,000 of debt for new loans.
  • 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, you and your mobile workforce – those individuals working in the United States, or US citizens or residents working abroad – will need to:

  • understand the interplay between the individual and corporate tax rate change
  • 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 our Doing business in the United States to learn more about how changes to the US individual tax provision may affect your US operations.

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Contact us

Christopher Kong
US Inbound Tax Leader, PwC US
Tel: +1 (416) 869 8739
Email

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