Sweeping US tax reforms designed to stimulate the economy and create jobs were signed into law by Donald Trump on 22 December 2017. These reforms are known as the Tax Cuts and Jobs Act (TCJA) and represent the first major overhaul of the US tax system in 30 years.
Whilst these extensive tax changes will require consideration of the tax efficiency of existing business structures, they will also have a more immediate impact on the tax accounting calculations of all entities which have a US presence, such as UK corporates with material US operations.
The key corporate tax changes include the below.
- A flat corporate federal income tax rate of 21 per cent introduced from 1 January 2018, replacing previous rates which ranged from 15 to 35 per cent. The corporate alternative minimum tax (AMT) has been scrapped.
- A move to a largely territorial tax system. As a result, certain dividends received by US parent companies from overseas subsidiaries (over 10 per cent owned) will be deductible for the recipient US company.
- A one-off ‘deemed repatriation’ charge of 15.5 per cent (for cash, reduced to 8 per cent for less liquid assets) on previously undistributed profits of non-US subsidiaries of US parent companies.
- A limitation on the utilisation of corporate tax losses (to 80 per cent of taxable income) together with removal of the ability to carry back tax losses, although losses can now be carried forward indefinitely.
- Greater limitations on the deductibility of interest.
- Immediate tax deductions on the purchase of certain assets.
- Provisions to prevent the erosion of the US tax base. For example, the base erosion and anti-abuse tax (BEAT) provides a new system for ensuring that a minimum US tax applies where there are group payments that reduce the US tax base.
Tax accounting impact
There are various tax accounting impacts which affected groups should be aware of. Examples of a selection of some of these accounting impacts are provided below.
Reference is made to the impact under IFRS in all cases. IAS 12, which prescribes the accounting treatment for income taxes, is most relevant. Income taxes include all domestic and foreign taxes that are based on taxable profits.
The TCJA affects the financial statements of entities with a US tax presence and will impact, amongst other things:
- the current tax charge;
- the measurement of deferred tax assets and liabilities; and
- the recoverability of deferred tax assets.
The impact for many affected entities is likely to be material.
Timing of accounting changes
IAS 12 requires the effects of changes in tax rates and laws on tax balances to be recognised in the period in which the legislation is substantively enacted.
For the purposes of IFRS, the relevant income tax laws would be considered substantively enacted on the date the president signed the legislation, 22 December 2017. The impact of the changes should therefore be reflected in financial statements at 31 December 2017.
Reduction in tax rate
The decrease in the US tax rate reduces the future tax benefits of existing deferred tax asset balances. For example, deferred tax assets in respect of unutilised tax losses carried forward and pension liabilities would be affected.
At the same time, it reduces the expected future taxes payable from the reversal of deferred tax liabilities such as those relating to accelerated tax depreciation on fixed assets.
Given that opening deferred tax assets or liabilities are likely to reflect the 35 per cent corporate tax rate in effect for 2017, the impact of recalculating these balances using the new 21 per cent rate is likely in many cases to be material.
Additional complexities arise from the requirement to apply a blended tax rate to US profits for companies which do not have a 31 December year end.
Deemed repatriation tax
The accounting impact of the one-time deemed repatriation tax charged on historic undistributed non-US earnings should be recognised in the period of substantive enactment. This will require the resulting tax liability to be calculated at the balance sheet date.
As part of this, entities should consider whether any unutilised tax losses and foreign tax credits are available to offset the transition tax.
Electing to settle the transition tax over the course of eight years will require consideration of the balance sheet classification between current and non-current liabilities.
Ongoing effects of the TCJA
Additional tax charges arising from the application of new anti-avoidance provisions such as the BEAT legislation noted above will need to be evaluated and accounted for accordingly.
In the case of UK companies with US affiliates or other US business interests, these reforms will require thought on both sides of the Atlantic. There is plenty to think about, and advice may be needed on a number of issues, including to determine the potential tax accounting impact on all relevant entities.
The above analysis provides a flavour of what is likely to be a complicated exercise for many groups affected.
For further information please get in touch with Michael Plant, or your usual RSM contact.
To keep up-to-date with the latest insights and events, please click here.