US tax reform, what could it mean for Italian businesses? Michael W. Burak Milan, Corso Europa 11 – 24th May 2017

Donald Trump elected 45th President of the United States

Possible macro implications from Trump policies If campaign rhetoric translates fully to economic policy, it will be a profound break with policy not just of the last eight years, but the last six decades. This is still more “what could happen” than “what will happen”. Regulatory reform is a central tenet of Trump economic policy Dodd Frank, ACA, energy, climate….replace, repeal, amend, overhaul…harder than it looks Bully pulpit “name-and-shame” tweets aside, these reforms are generally pro-business 1 DEREGULATION More infrastructure and defense spending, lower taxes …Mr. Keynes, meet Mr. Reagan Will provide stimulus, but also will pressure the deficit, raise inflation due to timing in cycle Will reverse the policy regime between fiscal and monetary stimulus, so little sustained boost 2 FISCAL STIMULUS 3 If it proceeds, economic nationalism will reduce US global engagement and trade Campaign promises will not deliver the outcomes promised, could create serious risks Could see a dramatic reshuffling of global economic world order. End of US hegemony? TRADE 4 A signature issue for Trump, but not a win for the US economy Lower demand, higher costs, higher prices, smaller workforce Visa restrictions would disadvantage the US in the global war for technical talent IMMIGRATION

US legislative process and tax reform

How a tax bill becomes a law (regular process)

There is more than one path for tax reform Regular legislative process Benefits Legislation can be enacted permanently No artificial restrictions on which measures can be included Limitations 60 votes needed at every step in the Senate (i.e., to begin debate, vote on amendments, vote on passage, to conference, etc). Budget reconciliation process Requires only simple majority vote at every step in the Senate (no filibuster allowed) Expedited consideration (time limits for amendments and overall debate) Key Limitations Legislation that increases the deficit outside of the budget window (typically 10 years) is subject to automatic sunset or other measures to avoid long term deficit effect 60-vote Senate super-majority required to waive deficit rule Senate rules also require reconciliation to be used only to enact measures that have a fiscal effect on the federal budget

Tax Foundation “static” and “dynamic” revenue estimates Tax Foundation “static” and “dynamic” revenue estimates Critical to tax reform passage! Tax CBO baseline (2016-2025) “Static” Change* “Dynamic” change Individual Income Taxes $20,265 -$981 $566 Payroll Taxes $13,025 $0 $683 Corporate Income Taxes $3,634 -$1,197 -$1,324 Excise Taxes $1,059 $57 Estate and Gift Taxes $263 -$240 Other Revenue $1,696 $68 TOTAL $39,942 -$2,418 -$191 Source: Tax Foundation (July 2016); CBO baseline (August 2016). Assumes certain transition rules. * In second 10 years, static revenue loss is reduced by 50% relative to GDP, due to larger transition losses assumed in first 10 years of proposal.

US tax reform: current options

Current tax reform proposals President Donald Trump Lower individual tax rates, with three brackets: 10%, 25% and 35% 20% top dividend and capital gains tax rate 15% rate on business income, for C corporations and pass-through business entities Territorial system “Tax breaks for special interests” will be eliminated One-time deemed repatriation tax House GOP Blueprint Lower individual tax rates, with three brackets: 12%, 25% and 33% 50% exclusion for capital gains, dividends and interest (16.5% top rate) 20% corporate tax rate, with 25% rate for pass-through businesses 100% expensing for all assets other than land No deduction for business net interest expense Destination-based system 100% territorial dividend exemption 8.75% cash / 3.5% other one time deemed repatriation tax:

Comparison of recent tax reform proposals Business provisions Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform ‘blueprint’ Trump tax principles (4/26/2017) Corporate rate 25% rate (phased in over 5 years) 20% rate 15% International– General income tax regime ‘Territorial’ system, with 95% foreign dividend exemption ‘Territorial’ system, with 100% dividend exemption system Territorial system Repatriation “toll tax” Previously untaxed foreign earnings: 8.75% tax on cash and cash-equivalents and 3.5% tax rate for non-cash assets paid over 8 years Same One time deemed repatriation tax International – Consumption tax regime (border tax adjustment) (No exact provision; subpart F provision below has some related features for imports from foreign subsidiaries) ‘Destination-based cash-flow’ approach, with border adjustments that exempt exports and tax imports (Not stated) International – Anti-base erosion regime (subpart F) Subpart F generally maintained New tax on ‘intangible’ income: 15% for foreign market sales, 25% for US market sales Subpart F reduced to foreign personal holding company income provisions (see border adjusted tax above)

Comparison of recent tax reform proposals (cont’d) Business provisions Camp 2014 Tax Reform Act (H.R. 1) House GOP 2016 tax reform ‘blueprint’ Trump tax principles (4/26/2017) Cost recovery Repeal MACRS and implement ADS type system, with inflation adjustment Full expensing for depreciable and amortizable investments (Not stated) Interest expense Limit for thin capitalization Deductible only against net interest income Special rules TBD for financial services (Not stated, except with a broad mention that plan to eliminate tax breaks for special interests) R&D Make alternative simplified credit permanent Require 5-year amortization Business credit to encourage research and development Maintains R&D credit Domestic production deduction Phase out and repeal Repeal NOLs Limited to 90% of taxable income; Repeals special NOL carryback provisions (other than provisions relating to casualty and disaster losses) Carried forward indefinitely limited to 90% of taxable income and increased by interest factor to adjust for inflation; Carryback is not allowed

Tax Reform – Key provisions impacting US Inbounds House GOP tax reform ‘blueprint’ provisions Impact on US inbounds C - corporation tax rate Reduced rate to 20% rate Consider accelerating deductions now during higher tax rate years and deferring income to later years with lower tax rates. Interest deduction Loss of net interest deduction with special rules to be determined for financial services With interest being one of the largest issues for US inbounds, consideration needs to be given whether the statutory rate reduction will compensate for the loss of the interest deduction. Border adjusted tax (BAT) ‘Destination-based cash-flow’ approach, with border adjustments that exempt exports and taxes imports With a large number of US inbounds being net importers, the BAT will likely increase significantly their US tax liability. Repatriation “toll tax” Previously untaxed foreign earnings have a toll tax of 8.75% imposed on cash and cash- equivalents and 3.5% tax rate for non-cash assets paid over 8 years US inbound companies with “sandwich structures” (F. Parent-US Sub-F. Sub.), will be subject to the repatriation toll tax. Cost recovery Full expensing for investments, excluding land Full expensing of tangible personal property and intangibles may have significant impact, especially around a foreign-headquartered MNC’s overall IP strategy, requiring evaluation of whether to on-shore IP and principal functions to the US (e.g., R&D activities).

House Blueprint: Border tax adjustment - design Referred to as a “destination- based tax system” because the taxability is based on the destination of goods and services as opposed to source or residence 167 countries, including all other OECD countries, have destination-based value added tax systems Limited details provided in Blueprint on how border tax adjustment would be implemented (“border adjustments exempting exports and taxing imports”) Major business provisions 10-year revenue cost (billions) Reduce corporate rate to 20% and repeal corporate AMT -$1,845 Expense investment; disallow net interest deduction on new loans -$ 448 Territorial system -$ 88 Deemed repatriation $ 138 Border adjustments $1,180 Repeal identified corporate tax expenditures $ 172 Source: Tax Policy Center, September 16, 2016.

Immediate steps executives should understand and assess potential impact Physical flows and financial flows including financial transactions Trade data and agreements and other indirect tax levers used Physical asset footprint (manufacturing, distribution, and other) Capital plans, forecasts, and costs Legal entity structures Mapping the current situation Modeling Corporate rate reduction, cross-border tax, expensing capital investments Trade – NAFTA, TPP, and others Brexit Environmental Overlay the potential new policies and risks Financial Supply chain risk and continuity of supply Quality and regulatory Geopolitical exposure Assess the impact and risks Plan and monitor ongoing Scenario planning Risk and mitigation planning Implementation of mitigation plans as appropriate Refresh of models as legislation evolves Ongoing risk management

Questions ?