Recent events have increased the likelihood that United States tax reform legislation could be signed into law in Q4 2017. The proposals put forth thus far would change or introduce a number of major statutory provisions and would significantly alter the taxation of U.S.-based multinationals and foreign-invested U.S. entities.
Importantly, impacted filers would be required to report the effects of the legislation in the financial statements for the period of enactment. The date of enactment would be the date that legislation is signed into law. Therefore, we expect that any enacted legislation will require a significant amount of work before the end of 2017.
Given the multitude of changes and expiring benefits, companies should be actively evaluating how most effectively to calculate, manage and disclose the overall impact.
While the bill is still changing and outcomes are uncertain, based on the provisions in the proposed legislation, the following major items are likely to require attention. Please note, this is not intended to be an all-inclusive list:
- Deferred tax balances would need to be measured at the new tax rate expected to be applicable at the time of reversal. If the House bill is enacted as it is currently drafted, corporate deferred tax balances would generally be re-measured at the reduced 20% tax rate as of the beginning of 2017. The Senate bill, on the other hand, would require additional scheduling of the reversal of existing deferreds in order to determine how much of the total deferred tax balance would be re-measured at 20% and how much would remain measured at 35%.
- A tax liability for the deemed repatriation of certain foreign earnings would need to be calculated, including the determination of available foreign tax credits, based on anticipated manner of repatriation, and in accordance with other provisions of the tax reform package.
- Certain tax attributes including, but not limited to, NOLs, tax credits and other carryforwards would require evaluation of valuation allowances under the new provisions of the law.
- New international provisions concerning the U.S. taxation of controlled foreign corporations would need to be considered as part of the evaluation of their APB 23 positions.
- Any "sunset" provisions in the law would need to be evaluated in light of measuring deferred tax balances (i.e., significant scheduling of certain deferred items).
- Outside basis differences associated with investments in foreign subsidiaries (ASC 740-30, or "APB 23"), along with associated withholding taxes, would need to be assessed to determine whether a liability should be recognized.
Given the compressed timeframe for calendar year filers, we recommend taking immediate action to ensure financial statement deadlines can be met.
In the event that tax reform is not finalized in 2017, and we enter 2018 still anticipating its enactment, certain estimates will be needed to adequately disclose sufficient forward-looking information.
What you should be doing now
Business leaders should begin immediately to catalog the ways in which potential changes may impact their businesses. Changes to deferred tax assets and liabilities are anticipated to be especially significant. In addition to direct tax impacts, executives should also determine whether any indirect tax effects will be significant. For example, the recognition of significant additional liability associated with unremitted outside basis differences of foreign subsidiaries, and a reduction to the deferred tax asset related to the reduced tax rate, may have a detrimental impact on debt covenants or other agreements. Given the multitude of changes and expiring benefits, companies should be actively evaluating how most effectively to calculate, manage and disclose the overall impact.
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