Tax Reform May Not Be So Simple After All: Key Points to Consider

As I stated in my previous post, simplification may have been one of the primary drivers of U.S. tax reform, but the final legislation has made it clear that tax calculations and filings will be more complex for many businesses and individuals, keeping tax accountants and attorneys very busy for the foreseeable future.

-The repatriation rules will drive need for significant calculations.

To compute the tax on the one-time deemed repatriation of previously untaxed foreign earnings (the toll charge from switching to a “participation exemption system” of taxing foreign profits), tax departments are busy shoring up their detailed calculations of earnings and profits and foreign tax pools. And unlike the 2004 repatriation tax holiday, this one is not voluntary—or simple. Splitting deemed dividends into cash and non-cash components requires a highly detailed analysis that may require decades-old data. Making matters worse, the resultant tax liability must immediately be recorded on the business’ financial statements. Given there are likely trillions of dollars of previously untaxed earnings offshore out there, the numbers will be big. On the bright side, businesses will have eight years to pay the balance due.

Think this is complicated? What about the state tax impact of the deemed repatriation?

-The new law has vocal opponents overseas.

Even once tax professionals figure out all the details of the tax reform legislation, there is the question of how other countries will respond. With the rest of the world watching carefully, a phrase we keep hearing is “the race to the bottom,” meaning the bottom of the corporate statutory rate chart. So, if the average corporate income tax rate is around 16 percent (and there are plenty of countries with an even lower rate), why a race? Countries have long been using low income tax rates to compete for new investments, in the hopes of creating new jobs and a boost for the local economy. But dropping the corporate income tax rate further could come at a cost. This could mean a new or expanded VAT or other transaction-based taxes. The translation – more complexity!

And what does U.S. tax reform mean for the OECD Base Erosion and Profit Shifting efforts? The OECD has advised against unilateral actions like the ones contained in the U.S. tax reform legislation. How might the OECD and its member countries respond?

-The impact of this legislation will endure for years – and the speed of passage and its deeply partisan support could result in more tax legislation sooner than we might expect.

Tax reform may seem to have settled much uncertainty for businesses, after ending years of swirl around what is true tax reform. To some extent, it did, but it also left much uncertainty in its wake. Both the speed with which the final legislation was passed and the fact that it was passed largely along partisan lines has created the very real possibility we will see “fixes” and other one-off legislative efforts for years to come.

-Tax professionals handling the tax provision for the financial statements face a not-so-Happy New Year.

Tax departments of multinational businesses have their work cut out for them. Not only do they need to prepare the complex calculations needed to reflect the immediate impact of the legislation on their companies’ financial statements, there will be much more work required to analyze the impact of new tax adjustments and changes to existing ones. They will also be spending time re-evaluating their existing tax planning techniques and business structures while considering new ones.

Although President Trump signed the Tax Cuts and Jobs Act into law, the impact of tax reform is far from over. As always, we’ll keep you updated as new developments continue to unfold.

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Nancy Manzano

Tax Director

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Nancy Manzano is a Director in the Chief Tax Office at Vertex, responsible for insight and thought leadership regarding in-house corporate tax department operations, spanning income, global and transaction tax. A seasoned tax professional, Nancy is a licensed C.P.A., has a B.S. in business administration from Drexel University and an M.S. in taxation from Widener University.

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