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Tax Cuts and Jobs Act Impact on U.K. Multinational Groups

14 November 2017

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© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.

Document Classification: KPMG Public

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With you today:

Melissa Geiger Head of International Tax KPMG in the UK

E: [email protected] T: +44 20 3078 4027

Fred Gander Head of US Tax Desk in London KPMG in the US

E: [email protected] T: +44 20 7311 2046

mailto:[email protected]

mailto:[email protected]

Program agenda 1

Background for U.S. corporate income tax reform — Where are we now? — Perspective and high-level overview

2 Legislative path to enactment and timeline

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Key provisions for U.S. inbound companies — Lower 20% corporate tax rate — Immediate 100% expensing for qualified property acquisitions — Two significant new limitations on interest expense — New 20% excise tax on certain payments to foreign affiliates/base erosion payments tax — Mandatory repatriation tax on deferred overseas earnings — Participation exemption for foreign dividends — Global minimum tax on ‘foreign high return’ income/low tax foreign IP income — NOL changes — U.S. IP incentives and hybrid mismatches — Notable U.S. international tax provisions left unchanged

4 Action steps for immediate consideration

© 2017 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


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Background and perspective



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Tax reform

Where are we now? For first time since 2006, Republican Party control House, Senate, and White House BUT slim congressional majority = very little room for dissenters

After months of stop/start action (behind scenes negotiations) and failure to repeal ‘Obamacare’, U.S. tax reform process rapidly accelerating

2 November the House published Tax Cuts and Jobs Act draft; Senate version released 9 November--many similarities/SIGNIFICANT differences

Extremely ambitious goal of 2017 enactment into law; on the horizon, critical November 2018 mid-term elections

Release of actual draft legislation is major step forward and much has been achieved recently BUT several significant politically complicated steps remain



Largest tax reform since 1986–HR1/Senate overview House Bill Released

2 Nov 2017

Senate Bill Released 9 Nov 2017

Senate Bill - Corporate provisions -$697B - International provisions +$104B- Individual provisions -$903B

$1.5 Trillion Cut

(over 10 years)

Effective (mostly) Tax Years After

31 Dec 2017 (Senate bill includes

certain retroactive provisions

effective for 2017 tax year) House Bill - Corporate provisions -$754B

- International provisions +$278B

- Individual provisions -$964B

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The Tax cuts and Jobs Act: The numbers tell the story House Provisions Senate $1,456 Reduce corporate rate to 20% $1,329

$25 Temporary, limited expensing $61

$205 Territoriality $216

-- Onshore IP Incentives $86

$293 Mandatory Repatriation $190

$95 Base eroding payments/transfers $158

$68 Super Subpart F $116

$206 Interest expense reforms $317

$156 NOL reform $170

$95 Repeal section 199 $81

$476 Corporate and Int’l Tax Reform Deficit(1,2) $593

1 Based on scores provided by the Joint Committee on Taxation. Dollar amounts are in billions. 2 Approximate amounts

Legislative path to enactment and possible timeline



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Path to enactment and intended timeline Late October 2017, House approved the Senate’s budget plan allowing tax reform with a simple majority (51 votes) in Senate via arcane ‘Budget Reconciliation’ procedure and maximum $1.5 trillion revenue loss over 10 years

On 9 Nov 2017, House Ways and Means Committee Completes Markup and sends revised HR1 to full House for consideration

On 13 Nov 2017, Senate Finance Committee started “markup” with aim to conclude this week and send revised bill to full Senate

By 23 Nov 2017 (Thanksgiving), full House to vote on U.S. tax reform legislation

Full Senate to debate and vote on Senate version late November/early December

Joint House and Senate Conference Committee (“Joint Committee”) to convene to resolve differences between Senate and House versions and agree unified tax reform bill

By 31 Dec 2017, House and Senate to vote on (and pass) Joint Committee legislative draft

By 1 Jan 2018, President Trump to sign U.S. tax reform bill into law

Any slight delay to any of the a bove s teps could derail prospects f or enactment in 2017 IT WILL CERTAINLY NOT BE EASY….THIS COULD EASILY SLIP TO Q1 2018….COULD IT FAIL ALTOGETHER? PREDICTIONS

U.S. inbound company-specific considerations

The T ax Cu ts and Jobs Act: Cornerstone provisions fo r US inbounds (Sena te and House Bills)

£$

Global game-changing

tax reforms

Immediate Expensing But

Strengthened Interest Expense Limitation Rules

Imports Excise Tax/Base Erosion

Payment Tax

Tax on overseas excess returns/low taxed IP income

Net operating loss limitations and enhancements

Participation Exemption & Mandatory

Repatriation Tax



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Lower Corporate Rate – 20%



Key provisions for U.S. inbound companies Corporate tax rate reduction with no phase-in period

Corporate tax rate lowered to

20% beginning in 2018 (deferred to 2019 in Senate version) Approx. $100B revenue loss per point

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Key provisions for U.S. inbound companies (cont.) 100% expensing for qualified property acquisitions House

— Immediate expensing allowed for capital investments in certain new and used depreciable assets acquired and placed in service after 27 September 2017 and before 1 January 2023 - Does not apply to goodwill or other

amortizable intangible assets - Does not apply to property used in a

real estate business — Certain property acquired prior to 28

September 2017 but placed in service in 2017 eligible for 50% expensing with a phase down from 40% to 30% for certain property placed into service through 2020

— Not applicable to property acquired from certain related parties or in tax-free exchanges

Senate

— Generally similar to House version but limited to certain original use property placed in service after 27 September 2017, and before 1 January 2023



Key provisions for U.S. inbound companies (cont.) Targeting base erosion – HR 1 vs. Senate Finance Chairman’s Mark

Key: House & Senate Bill

Senate Bill Only

House Bill Only

Anti-Base Erosion

Provisions

Global Intangible Low Taxed

Income

Hybrid Mismatch

Base Erosion Payment Tax

Group Interest Expense Limitation

‘Imports’ Excise Tax

Global Minimum Tax

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Key provisions for U.S. inbound companies (cont.) Net interest expense limitation – 30% rule

House

— Net U.S. busi ness interest expense limited to 30% of ‘Adjusted Taxable Income’ (‘ATI’) - ATI is generally taxable income

without regard to NOLs, interest income, amortization/depreciation, and non-business gains or losses

- Applies to ALL debt (related and third-party obligations)

- No grandfathering — Applies to corporate and non-corporate entities

(e.g., partnerships); real estate industry largely exempt

— 5 year carryforward of disallowed interest (carryforwards are 381/382 limitation item)

— Effective taxable years beginning after 31/12/17

Senate

— Generally the same as the House version – net U.S. busi ness interest expense limited to 30% of ATI - Unlike House version, ATI is

determined without adding back amortization / depreciation (i.e., EBIT)

— Amount disallowed may be carried forward indefinitely

— US affiliated group treated as single entity for computations

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Key provisions for U.S. inbound companies (cont.) Disproportionate US interest expense limitation – 110% rule House

— Additional limitation where U.S. interest expense disproportionate relative to multinational financial reporting group’s total financial statement reported interest expense (i.e., based on GAAP interest allocation)

— Limitation computations, in general, based on 110% of US corporation’s share of global group’s financial statement EBITDA

— Applies to large global groups – gross receipts > $100M annually

— Apply both 30% and 110% limitation; allow only lower amount

— Disallowed expense carried forward 5 years; no excess limitation carryforwards

— Effective tax years beginning after 31/12/17

Senate

— Generally similar to the House provision, but is determined by reference to US versus global group debt/equity ratios (rather than EBITDA ratio) by reference to tax values (rather than book)

— Amount disallowed may be carried forward indefinitely

— US consolidated group treated as single entity — Applies to all global groups regardless of size — Global group determined using modified US

tax ‘affiliated group’ definition rather than House-based financial reporting consolidation

Key provisions for U.S. inbound companies (cont.) Imports excise tax (House) vs. Base erosion payments (Senate) (1/2)



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House

— New 20% excise tax on certain deductible payments (‘specified payments’) made to related foreign corporations and controlled partnerships

— ‘Specified payments’ - Generally, payments that are (i)

deductible, (ii) includible in COGS, or (iii) depreciable or amortizable

- But excludes (i) interest, (ii) U.S. ECI, and (iii) non treaty-rate reduced portion subject to U.S. gross-basis WHT

— Excise tax not applicable if recipient makes ECI election to subject net income to tax at 20% corporate tax rates - Complex deemed expense

deductions based on product lines

Senate

— Broadly, a minimum 10% tax imposed on US companies having certain deductible ‘base

erosion payments’ made to related foreign companies

— Minimum tax liability equals excess of 10% of the US company’s ‘modified taxable income’ (”MTI”) over its regular US tax liability reduced

by certain allowable credits (but not R&D credit)

— Broadly, MTI is taxable income plus certain ‘base erosion payments’ and NOLs allocable to such payments

— Similar to House, ‘base erosion payments’ include (i) deductible payments and (ii)

depreciable/amortizable amounts (and exclude U.S. ECI and non treaty-rate reduced

portion subject to U.S. gross-basis WHT)



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Key provisions for U.S. inbound companies (cont.) Imports excise tax (House) vs. Base erosion payments (Senate) (2/2) House

— Certain FTCs available against ECI tax liability (in general, 80% of foreign taxes paid on the income)

— Only applies to large multinational groups with significant U.S. intragroup payments - global group gross receipts >

$100M annually - in aggregate, U.S. companies (and

U.S. branches) must make annual average $100M+ ‘specified payments’ to certain foreign affiliates over 3-year period

- relatedness based on 50% common ownership

— Delayed effective date -- tax years beginning after 31/12/18

Senate

— Unlike House provision, deductible base erosion payments generally exclude COGS payments (except to expatriated companies), but include allowable interest expense

— Only applies to large taxpayer groups, but relatedness based on significantly lower common ownership threshold (only 25%) - Groups with average global gross

receipts > $500M over 3-years and - base erosion % (base erosion

deductions/total allowable deductions) > 4%

— Earlier effective date -- tax years beginning after 31/12/17



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Key provisions for U.S. inbound companies (cont.) Global minimum tax (House) vs. Global intangible low taxed income (Senate) House

— New ‘global minimum tax’ on U.S. corporate shareholder’s pro-rata share of certain foreign subsidiaries’ earnings (‘Foreign high returns amount’) applied on aggregate, global basis effective tax years beginning after 31/12/17

— Current U.S. taxation limited to pro-rata share of 50% of ‘foreign high returns amount’ across entire group of foreign subsidiaries

— In essence, 10% tax on foreign subsidiaries’ non-subpart F / non ECI income in excess of deemed routine return amount on tangible depreciable property (7% + short term AFR)

— Allowable FTCs: - Capped at 80% of foreign taxes paid

- New separate basket, and

- No carryforwards or backwards

Senate

— Similar to HR1’s ‘global minimum tax’, the Senate’s version taxes U.S. corporate shareholders on their portion of a CFC’s global intangible low taxed income (‘GILTI’) - Current inclusion under subpart F - Uncertainty regarding applicable

ETR threshold (10% vs. 12.5%?) - Effective for tax years of CFCs

beginning after 31/12/17 — Very broadly, GILTI is the excess of US

shareholder’s share of each CFC’s non-subpart F / non ECI income over a 10% return on tangible depreciable property

— Allowable FTCs: - Capped at 80% of foreign taxes paid - New separate basket, and - No carryforwards or backwards



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Key provisions for U.S. inbound companies (cont.) Mandatory repatriation House

— One time tax charge on historical untaxed profits of foreign subsidiaries - 14% rate on cash & equivalents - 7% rate on non-cash - Election to spread tax liability

payments ratably over 8 years — Onerous multiple E&P testing dates:

- 2 November 2017 or 31 December 2017 (whichever E&P amount is greater)

- Generally, aggregate E&P not reduced by distributions in 2017

— Applies to >10% U.S. shareholders (regardless of CFC status)

— Scaled back FTCs – but excess credit carryforward available

— Same effective date as Senate version

Senate

— Generally similar to the House version, but lower rates of tax - 10% rate on cash & cash equivalents - 5% rate on non-cash

- Tax liability payments backloaded rather than ratable, but also over 8 years

— Potentially less onerous E&P testing date rule (uncertainty remains)

— Applies to >10% U.S. shareholders (vote or value)

— Harsh recapture rule targeting expatriated US companies anytime w/in 10 years after enactment

— Effective last tax year of foreign corporation beginning before 1/1/18 and US shareholder’s year within which it falls



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Key provisions for U.S. inbound companies (cont.) Participation exemption for certain foreign dividends but NOT share gains House

Replacement of FTC (or related deductions) with a 100% ‘foreign- source portion’ dividend exemption regime — distributions made after 31/12/17 — from 10% or greater foreign subsidiaries — expenses allocable to exempt dividend not

deductible — 6 month holding period req. Repeal of current taxation of CFC investments in U.S. property (i.e., Section 956) Stock basis adjustment for exempt distributions to limit loss transactions from sale of stock

Senate

Foreign source dividend received deduction regime mostly similar to House version, but: — doesn’t apply to ‘hybrid dividends’ (i.e., if payor

receives local country deduction for dividend payment)

— stricter holding period requirement (1 year w/in 2 year window)

— applies also to portion of stock gain treated as dividend income under existing rules

Key provisions for U.S. inbound companies (cont.) Subpart F modifications: Overview

Subpart F rules retained mostly

unchanged (except oil income rules)

Expanded stock attribution rules for determining CFC status (next slide)

“Hybrid Dividends” treated as Sub-F income

(Senate only)

10% US S/H definition

expanded to vote or value

(Senate only)

Look-thru rule for

related CFCs permanent

30-day CFC ownership

Subpart F rule eliminated

Senate only House and Senate



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Key provisions for U.S. inbound companies (cont.) Subpart F: Modification of stock attribution rules & U.S. shareholder definition

House

— Expanded CFC constructive ownership rule toinclude stock held by its foreign shareholder

— No change to definition of U.S. S/H (>10% vote only)

— Applies to tax years beginning after 31/12/17

Senate

— Expanded CFC constructive ownership rule to include stock held by its foreign shareholder

— New U.S. S/H status definition by reference to vote or value

— Retroactive to last tax year beginning before 1/1/18.

— Potentially significant increase in CFCs – Creates CFCs from foreign corporations brother-sister to U.S. Shareholder

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Key provisions for U.S. inbound companies (cont.) Net operating losses (NOLs) House

— Annual use of NOL carryforwards limited to 90% of the loss corporation’s taxable income

— Carryforwards allowed indefinitely — No carrybacks (except certain casualty and

disaster losses) — Carryforwards increased by an interest rate

adjustment factor to preserve value — Effective for NOLs arising in tax years

beginning after 2017 (BUT 90% limitation applies to pre-existing NOLs)

Senate

— Generally, same as House version except no indexation of NOL carryforward amounts and the new 90% limitation does not apply to NOLs from years prior to 2018

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Key provisions for U.S. inbound companies (cont.) Eliminate certain deductions House

— No deduction for domestic production activities (Section 199) tax years beginning after 2017

— No deduction for certain costs related to entertainment, membership dues, fringe benefits provided to employees, and other similar expenses for tax years beginning after 2017

— Tax free ‘like-kind exchanges now limited to real property only for transfers occurring after 2017 (however, denial of ‘like-kind exchange’ treatment to non-real property largely offset by grant of 100% expensing for used property)

Senate

— Mostly similar to House version — Also includes termination of DISC/IC DISC

regime for years after 31/12/18

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Key provisions for U.S. inbound companies (cont.) Intellectual property incentives Senate only

Tax-deferred domestication of foreign-owned IP — No US tax from ‘on-shoring’ CFC’s IP via distribution to US shareholder (generally carryover CFC’s

tax basis in IP to preserve built-in gain, subject to limited basis step-down rule) — Limited to 3-year period beginning first tax year after 31/12/17 — NOTE: BOTH HOUSE/SENATE P RESERVE EXISTING R & D CREDITS ( House requires 5-year

amortization of certain R & D expenses)

Deduction for Foreign-Derived IP Income (US-style patent box or BAT-light?) — 37.5% deduction (12.5% ETR) for US entity’s ‘foreign-derived intangible income’ plus US includible

GILTI — Applies to income from sales and leases (and perhaps licenses?) of property or provision of

services to non-US entities/persons for use outside the US — Deemed intangible income eligible for deduction determined as excess of certain gross income

over deemed 10% return on average tax basis of certain tangible assets — Applies for tax years beginning after 31/12/17

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Key provisions for U.S. inbound companies (cont.) Hybrid mismatch rule

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Senate only

— Similar to BEPS Action 2, disallows US tax deductions for interest or royalties paid or accrued to a related party in connection with hybrid transactions and/or involving hybrid entities to extent that: - There is no corresponding income inclusion for recipient under applicable foreign tax law; or - Related party recipient entitled to deduction with respect to payment received

— Exception applies to extent payment is subject to US tax as subpart F income — Treasury granted broad authority to promulgate regulations: (i) conduit rules, (ii) rules for

determining tax residence of foreign entity, (iii) application to foreign branches and certain structured transactions and (iv) application when recipient income taxed under a ‘preferential tax regime’ or eligible for a participation exemption

— Effective for tax years beginning after 31/12/17

Key provisions for U.S. inbound companies (cont.) Notable U.S. international tax rules left (mostly) unchanged

FIRPTA

Section 385 Regs ???

Anti-Inversion Rules

PFIC



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Action steps



Action steps for immediate consideration 1 Develop high-level economic model of overall effect on group’s tax position/ETR

2 Consider investment in U.S. capital equipment to benefit from immediate expensing

3 Consider restructuring related-party supply chain to minimise ‘imports’ excise tax/ baseerosion payments tax

4 Evaluate benefits under Senate IP incentives, including possibly inbounding foreignsubsidiary IP to the US and modelling deduction for foreign intangibles income

5 Evaluate U.S. and global debt levels under interest expense and hybrid mismatch rules

6 Compute E & P to the extent of mandatory repatriation tax exposure

7 Evaluate opportunity to defer income to 2018 and accelerate expenses/losses in 2017

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Evaluate DTA/DTL financial reporting impact of the legislation

Q&A

Thank you


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