Gearing up for a changing tax landscape
Bolstering your company’s international tax-planning toolkit can be a smart move in the face of change and uncertainty.
International tax professionals and business owners often feel apprehensive about how to proceed in a climate in which change is certain, but the details have not yet come into focus. In the US, a proposed significant decrease in corporate tax, a mandatory repatriation tax and an end to interest deductibility could mean sweeping changes to how multinational companies conduct their business.
To be prepared in the face of such uncertainty it is important to incorporate concepts that, regardless of the outcome of proposed legislation, will remain relevant in your tax-planning repertoire.
Earnings, profits and tax pool studies
Being as familiar as possible with earnings and profits (E&P) and tax pools may be very important for a couple of reasons ahead of anticipated tax reform. Repatriation planning for both inbound and outbound companies may turn out to be a high priority, and knowing E&P is necessary in order to characterize cash repatriation as dividends or return of capital.
Tax pools are important for understanding the foreign tax credit impact of dividends coming from controlled foreign corporations (CFCs). Additionally, if tax reform replaces the currentforeign tax credit system in the US with a territorial system, it is likely that offshore E&P will be deemed to be repatriated either immediately, or over some transition period yet to be determined.
Corporate financial structure
Reviewing your corporate finance structure will be important ahead of tax reform. It is likely that – with anticipated changes to corporate income tax rates and the possible change to a territorial taxing system – cross-border movements of cash will be necessary or desired. Ahead of cash movements, US multinational companies will need to know their cash position and intercompany debt structure if they are to be economically and tax efficient.
In addition to the above-mentioned E&P and tax pool attributes, knowing the basis of CFCs and US inbound companies will be necessary when repatriating cash to either US or foreign parent companies. Ordering rules generally provide that distributions with respect to shares owned will be treated as dividends to the extent of E&P. Distributions in excess of the E&P amount will be a return of basis. Therefore, the amount of basis is important to avoid eroding the basis amount too much. Additionally, the tax basis of CFCs is necessary to complete proper interest expense apportionments for foreign tax credit planning.
Business health check
Rather than allowing the uncertainties around proposed tax reform to stifle your international activities, use the possibility of change as an opportunity to perform a health check for your business. It will give you a set of stronger, more comprehensive tax-planning tools to help you deal with the vast array of outcomes future tax reform could bring.