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

2. Donald Trump elected 45th President of the United States

3. 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

4. US legislative process and tax reform

5. How a tax bill becomes a law (regular process)

6. 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

7. Tax Foundation “static” and “dynamic” revenue estimates
Tax Foundation “static” and “dynamic” revenue estimates Critical to tax reform passage!
Tax
CBO baseline ( )
“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.

8. US tax reform: current options

9. 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:

10. 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)

11. 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

12. 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).

13. 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 -$
Deemed repatriation
$ 138
Border adjustments
$1,180
Repeal identified corporate tax expenditures
$ 172
Source: Tax Policy Center, September 16, 2016.

14. 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

15. Questions ?