The 2017 Tax Law expands bonus depreciation to include a 100 percent deduction for the cost of qualified property (generally software and tangible depreciable property with a depreciation life of 20 years or less) that is either original use property or acquired by purchase from unrelated persons. Even if the US implements no additional OECD BEPS recommendations in the future, it is important that foreign buyers of US companies consider BEPS-related issues when planning the acquisition of a US company due to the following reasons: From a tax due diligence perspective, areas of key focus that may raise BEPS concerns include, for example, consideration of whether the US target company has any structures in place that include hybrid entities (e.g. debt between related US corporations that do not join together in filing a consolidated return, members of a US-parented group that incur indebtedness, including pursuant to cash pooling arrangements, with foreign group members. The 2017 Tax Law includes a 20 percent increment phase-down of the bonus depreciation percentage for property acquired after 2022. Applicability of the information to specific situations should be determined through consultation with your tax advisor. Specifically, the 2017 Tax Law contains a hybrid mismatch rule that generally disallows deductions for related-party interest or royalties paid or accrued in connection with certain hybrid transactions or by, or to, hybrid entities if (i) the related party does not have a corresponding income inclusion under local tax law, or (ii) such related party is allowed a deduction with respect to the payment under local tax law. Alternatively, an instrument could be treated as equity for US tax purposes and as debt for foreign tax purposes. Previous liabilities (including income tax liabilities) of the target generally are not inherited. The BBBA included changes to GILTI to reflect a roughly 15 percent minimum tax applied to each country where a U.S. company has profits. To avoid the PFIC tax regime, the US target may elect to treat the foreign corporation as a qualified electing fund (QEF election), with the US target being currently taxed on the QEFs earnings and capital gain, or may elect to recognize the built-in gain in the PFIC stock under a mark-to-market election. A joint venture corporation may face issues similar to those described earlier (see Local holding company section). A temporary transition tax was levied on all previously unrepatriated earnings. Under the subpart F rules, subpart F income earned by a CFC may be currently included in the income of a US target that is a US shareholder of the CFC, even if the CFC has not distributed the income. Together with the reduced US corporate tax rate of 21 percent and the GILTI regime, the FDII regime generally makes the US, as compared to before, a more attractive option for the establishment of an export base and may reduce the incentives for US companies to transfer or keep IP offshore. The interest expense must qualify as deductible under the various rules limiting interest deductions discussed earlier. When using GILTI as the template for a global minimum tax became a possibility, the U.S. Treasury department (during President Trumps tenure) argued that if other countries define harmonized rules, then GILTI should be treated as an approved minimum tax regime. Cross-border income tax. For purposes of this hybrid mismatch rule, a hybrid transaction includes any transaction or instrument under which one or more payments are treated as interest or royalties for US federal income tax purposes but are not treated as such under the local tax law of the recipient. The tax authorities will then automatically exchange the information with other relevant EU tax authorities. This is the sixth update of the Directive on Administrative Cooperation, therefore referred to as 'DAC6' and the disclosure regime is now live. Additionally, there has been discussion as to whether the US Congress will enact a technical corrections bill that makes retroactive changes to the 2017 Tax Law; prospects remain uncertain. Taxpayers that wish to further reduce depreciation deductions may elect to use the alternative depreciation system under which assets are depreciated using the straight-line method over a longer recovery period. banks) and Member State tax administrations. In a stock acquisition, the targets historical tax liabilities remain with the target. Companies subject to the BEAT may need to consider supply chain restructuring if the BEAT gives rise to an unmanageable cost that detrimentally impacts the companys competitiveness. In certain circumstances involving a taxable stock sale between related parties, special rules (section 304) may re-characterize the sale as a redemption transaction in which a portion of the sale proceeds may be treated as a dividend to the seller. A sale of assets could also result in capital gains treatment except for depreciation recapture, which may have ordinary income treatment. Generally, for corporations, dividends and capital gains are subject to tax at the same federal corporate tax rate of 21percent. Where the flow-through venture conducts business in the US, the foreign owners may be subject to net basis US taxation on their share of its earnings, as well as US WHT and US tax return filing obligations. Liechtenstein. However, the IRS and Treasury issued regulations that allow certain eligible entities to elect to be treated as a corporation or a partnership (where the entity has more than one owner) or as a corporation or disregarded entity (where the entity has only one owner). a repo transaction treated as a secured financing in one jurisdiction and as a sale and repurchase in another), principal companies, limited risk distributors, commissionaires, and IP license and/or cost sharing arrangements. The BBBA included changes to GILTI to reflect a roughly 15 percent minimum tax applied to each country where a U.S. company has profits. the 2017 Tax Law mandatory repatriation tax) arising from the targets pre-transaction activities. The most recent numbers from the pandemic economy of 2020 shows global FDI at a level below 2005. Howard Steinberg KPMG LLP Structuring Cross-Border Transactions, by a prominent author and practitioner, is a unique book that will help tax and corporate practitioners engaged in structuring both U.S. cross-border transactions, including inbound and outbound acquisitions, and joint ventures, involving both public and privately held companies. US multinational corporations under the old law were subject to immediate and full US income taxation on all income from sources within and without the US. Taxpayers generally are bound by the legal form they choose for the transaction. The purchase price allocated to fixed assets and to certain intangible assets provides future tax deductions in the form of depreciation or amortization. through supply chain restructuring), the collective application of certain provisions of the 2017 Tax Law could have resulted in an unfavorable impact on a foreign companys global effective tax rate despite the US corporate tax rate reduction. These regulations also require that a CFC with business interest expense be subject to section 163(j) for the purpose of computing subpart F income (including GILTI) and income effectively connected with the conduct of a US trade or business. But it does not have a truly territorial system either. In addition to changing the NOL rules, the 2017 Tax Law also repealed the US corporate alternative minimum tax (AMT) regime for tax years beginning after 2017. As a result, it is vitally important for individuals and their families to proactively understand and . A pivot from the Treasury department would reflect the current challenges of getting the BBBA signed into law and show they are concerned about the looming tax uncertainty. An issuer of debt may be able to deduct interest against its taxable income (see Deductibility of interest section), whereas dividends on stock are non-deductible. As previously noted, the 2017 Tax Law eliminated the so-called goodwill exception that many companies previously relied upon to tax-efficiently integrate target company IP with a buyers existing IP holding company structure. A DRC is a domestic corporation subject to income tax in a foreign country on a worldwide income basis or as a resident of the foreign country. This expanded definition of US shareholder applies for taxable years of foreign corporations that begin after 31 December 2017. at least 75 percent of its gross income for the taxable year consists of certain passive income. As a practical matter, utilizing excess AMT credits and generating cash refunds as a result of such credits may be difficult for some taxpayers that face a section 383 limitation. Like the deferred intercompany items previously discussed, immediately before either B or S leaves the consolidated group, any excess loss account must be recognized as taxable income. As previously mentioned, the hybrid mismatch rule generally disallows deductions for related-party interest or royalties paid or accrued in connection with certain hybrid transactions or by, or to, hybrid entities if (i) the related party does not have a corresponding income inclusion under local tax law, or (ii) such related party is allowed a deduction with respect to the payment under local tax law. Where both the section 179 expense and bonus depreciation are claimed for the same asset, the asset basis must first be reduced by the section 179 expense before applying the bonus depreciation rules. net operating loss NOL), how those attributes were generated and whether there are any restrictions on their use. For testing purposes, the section 163(j) limitation is performed at the level of the tax filing entity. In negotiated acquisitions, it is usual and recommended that the seller allow the buyer to perform a due diligence review, which, at a minimum, should include review of: Under US federal tax principles, the acquisition of assets or stock of a target may be structured such that gain or loss is not recognized in the exchange (tax-free reorganization). In an increasingly borderless world, it is not unusual to see cross-nationality marriages, members of the same family living in different countries, or individuals living in one country while working in another. For potential acquisition targets, enhanced tax due diligence may be necessary to determine: As a general matter, the following implications (among others) can arise if debt is recast as equity under the Recast Rules: Withholding tax on debt and methods to reduce or eliminate it, The US imposes a 30 percent US WHT on interest payments to non-US lenders unless a statutory exception or favorable US treaty rate applies. A similar approach is available for classifying eligible foreign business organizations, provided such entities are not included in a prescribed list of entities that are per se corporations (i.e. B borrows in order to fund a dividend distribution) or debt leveraged generation of losses (e.g. The BEAT generally applies to corporations that are not S corporations, Regulated Investment Companies (RICs) or Real Estate Interment Trusts (REITs), are part of a group with at least USD500 million of annual domestic gross receipts (over a 3-year averaging period), and that have a base erosion percentage of 3 percent or higher (2 percent for certain banks and securities dealers). Most tangible assets are depreciated over tax lives ranging from 3 to 10 years under accelerated tax depreciation methods, thus resulting in enhanced tax deductions. For example, when a corporation ceases to be a member of a consolidated group during the tax year, the corporations tax year ends and consideration must be given to the allocation of income, gain, loss, deduction, credit, and potentially other attributes between the departing corporation and the consolidated group. notes) must be treated for US tax purposes as debt and not as equity. If applicable, a US corporation will have a BEAT liability in addition to its regular income tax liability. In an asset acquisition, the buyer may capitalize the earn-out payment into the assets acquired but only in the year such earn-out amounts are actually paid. But if the global minimum tax rules are put in place, the company would have to pay a top-up tax in both jurisdictions where it is currently paying less than a 15 percent effective tax rate. During the tax due diligence phase, it is important to evaluate a US target companys US and global debt levels and to test the US targets section 163(j) deductibility threshold. Section 382 generally applies where a target that is a loss corporation undergoes an ownership change. Generally, an ownership change occurs when more than 50 percent of the beneficial stock ownership of a loss corporation has changed hands over a prescribed period (generally 3 years). Distributions exceeding both E&P and stock basis are treated as capital gains to the holder. Separately, an FAQ document suggests that the coexistence of GILTI (either as current law or as envisioned in the BBBA) will be discussed in 2022. Of course, US WHT is also imposed on US-source constructive (i.e. Certain 2017 Tax Law developments raise tax exposure concerns for a number of common US inbound acquisition financing structures (e.g.
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