US Tax reform – Impacts for US companies and FX impacts on European Companies with US subsidiaries
François Masquelier, Chairman of ATEL - May 2018
Cette année l’ATEL avait décidé d’aborder trois différents sujets d’actualité à l’occasion de sa conférence PME/PMI.
The recent US tax reform is a major change and maybe for American the tax reform of the century. Such a huge reform will have impacts on US and European companies. It could also change the way some MNC’s manage their liquidities across the world and transfer part of the delocalized treasury activities. No one can give us at this stage a full picture of these consequences for treasurers in Europe.
No one could contest that the last US reform was the one of the centuries. The corporate tax reduction is the largest of all OECD countries (i.e. 14% reduction). The US subsidiaries of EU companies will benefit from this interesting reduction. The American also granted immediate expenses of 100% of the cost of capital investment (provides incentive to acquire eligible assets). However, on the other side, they have adopted a limit on Net Interest Expense Deductions (as recommended by OECD BEPS 15 actions). We should also keep in mind that as a drawback, BEAT (i.e. Base Erosion and Anti-Abuse Tax) tax may put foreign subs at some competitive disadvantages to US companies. As consequences (among others), the European companies may have to inject equity into sub’s to avoid limit on interest deduction, to borrow locally with parent guarantee and redenominate intercompany transactions in lower yielding currencies. As we all heard, the taxes on accumulated unrepatriated foreign earnings will also encourage MNC’s to repatriate funds from abroad at preferred conditions. They propose a one-time tax of 15,5 % on cash and cash equivalents and 8% on illiquid assets. They also instituted an exemption on dividends received by US corporations from eligible subsidiaries exempt. Eventually, they have limited the net interest deductibility to 30% of EBIT (EBITDA until 2022). This last measure could potentially benefit equity injection into US sub’s, as alternative to intercompany funding. We need to keep in mind the fact that the BEAT tax will create 2 big issues for US sub’s of EU companies: (1) intercompany interest payments will be captured in the BEAT calculation and (2) intercompany derivatives with negative mark to market will also be captured by BEAT. You will also hear about GILTI. Although US has a territorial system, the IRS will look at the offshore sub’s of the US sub’s (if it has any) and calculate the minimum foreign tax that should be have been paid. If a difference is due, it will have to be paid in the USA. There are on top lots of other new tax provisions (e.g. incentive for funding pension deficit, limit on deductibility of net operating losses, deferred tax liability, …). Therefore, as we can easily understand this American corporate tax reform is the major one of all Western countries and it will have lots of consequences on European companies and will give competitive advantages to US ones.