15 February 2018

US 2018 Tax reform for corporations

After an exiting -for a few- and shameful –for many others- legislative process, last December 22th president Donald Trump signed into Law the highly expected US tax reform that includes the more in-depth changes and overhaul of the Tax Code in more than 30 years.

From the original Blueprint, to the final version that, finally, has been enacted, many changes were made after economic impact was assessed. On this document, we are pointing out those changes that affect only Corporations.

First, we need to remember that the tax reform is temporary because it passed through the “Reconciliation Process”, so, it expires after 2025.

With this in mind, now we move on reviewing the main changes:

  • Effective tax rate will be 21% instead of 35%. This new rate applies for tax years beginning in 2018. This change may prompt a fast reaction on many other corporate tax rates.
  • Deduction of the net interest expenses will be limited up to 30% of the “adjusted taxable income” an item that its described as very similar to the financial EBITDA
  • 100% Expensing will apply only over specific tangible property (intangibles are almost completely excluded). This bonus is available for property put in service after September 27th, 2017 and before January 1st, 2023. Rate will go down in further years as follows:
tax and legal Mexico
  • For years beginning after December 31th, 2017 Net Operating Losses applicable to offset taxable income will be limited to 80% of such taxable income. Two years option for “carrybacks” are repealed (losses arising after 2017 tax year)
  • Regarding a shift to a Territorial Tax System, domestic corporations are entitled to claim a 100% deduction from some dividends received from foreign corporations when the local US entity owns 10% of stocks or 10% of the “value” of such foreign corporation.
  • The Transition Tax that rules mandatory inclusion of accumulated foreign income affecting big Multinationals will be 15.5% for earnings held in cash and 8% in other forms. The payment will be through a 8 years period as follows:
transition tax
  • As an outcome from BEPS, surges up a Base Erosion and Anti abuse Tax (BEAT) equal to the excess of a modified taxable income. Corporations subject to BEAT are those with at least average gross receipt of 500 million for the three years period with the preceding tax year. This tax aims to fight some payments to foreign related parties (payments related with the cost of sales of products and services seems to be out of the scope).
  • Denial of deduction of some hybrid payments according with a new regulation about hybrid transaction or hybrid entities. This is a very important tax reform because it may affect not only transaction but entities as well. Payments to related parties, transparent entities and income subject to effective tax rate 25% below of country´s generally statutory tax rate may be affected.
  • AMT (Alternative Minimum Tax) has been repealed
  • Repeal of deductions:
    • 50% for meals provided at an employer facility from 2018 to 2025
    • Qualified transportation fringe benefits
    • 50% for entertainment, amusement or recreation activities or facilities

International and Local impact must be analyzed very carefully according with specific regulation available for each topic.

There are many other changes in the Tax Bill that may affect doing business in the USA, so we invite you to review them with a tax advisor.

Miguel Rodriguez, Auren Mexico

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