EY PE Series: US Tax Reform and BEPS
06-03-2018
US Tax Reform

 

On 22 December 2017, the President of the United States signed into law, a bill originally introduced in the House of Representatives as the “Tax Cuts and Jobs Act” (H.R. 1). The law change represents the most comprehensive overhaul of the US tax system in more than 30 years and is expected to impact all types of US taxpayers, including non-US groups with US operations, as well as US multinationals.

 

Some of the notable corporate tax provisions include:


The reduction of the top corporate tax rate from 35% to 21%.
Deemed intangible income earned from exports (i.e., goods, services, royalties, rents) will be subject to a favourable 13.125% tax rate.
Introduction of a new dividend exemption system for certain foreign source dividends paid to US shareholders.
New controlled foreign corporation (CFC) rule targeting global intangible low-taxed income (GILTI), which is defined as income earned by CFCs above a routine 10% return on tangible assets.
New base erosion anti-abuse minimum tax potentially limiting the deductibility of related party payments.
Interest expense deduction limitation, capped at 30% of adjusted taxable income (defined as tax EBITDA until 31 December 2021, then tax EBIT thereafter).
Mandatory one-time transition tax on foreign subsidiaries’ unrepatriated earnings at 15.5% for earnings held in cash and 8% for all other earnings.


 

BEPS

A bill containing fundamental changes to Hong Kong’s international tax system was introduced to the Legislative Council on 10 January 2018. The proposals to implement the Organisation for Economic Co-operation and Development (OECD) BEPS minimum standards (including transfer pricing) are lengthy, complex and arguably the most significant tax changes ever proposed in Hong Kong.  Every financial services organization including asset managers operating in or dealing with Hong Kong needs to consider their approach to the proposed legislation.

 

The provisions are complex in how they may interact with Hong Kong’s existing territorial basis of taxation and for determining when non-residents have a taxable presence in Hong Kong.  As a result there are considerations that all financial services organizations need to consider with respect to their transfer pricing position and risk in Hong Kong.