Impact of the Tax Cuts and Jobs Act (("TCJA") or Tax Reform) to Mexican businesses
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Impact of the Tax Cuts and Jobs Act ((“TCJA”) or Tax Reform) to Mexican businesses
Disclaimer
► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not
provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and
circumstances.
► These slides are for educational purposes only and are not intended, and should not be relied upon, as
accounting advice.
► The views expressed by the presenters are not necessarily those of
Ernst & Young LLP.
► This presentation is © 2017 Ernst & Young LLP. All Rights Reserved.
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Key business tax provisions aimed to make the tax system more
attractive
Corporate tax rate and corporate AMT
► 21% tax rate, effective 1/1/18
► Eliminates corporate AMT
FDII
► Domestic corporations allowed a deduction against foreign-derived intangible income (37.5% deduction initially, reduced to
21.875% for tax years beginning after 12/31/25),
► In general, the provision includes sale of goods and rendering of services
Expensing
► Allows immediate write-off of qualified property placed in service after 9/27/17 and before 2023. The increased expensing would
phase-down starting in 2023 by 20 percentage points for each of the five following years. Eliminates original use requirement.
Qualified property excludes certain public utility property and floor plan financing property. Taxpayers may elect to apply 50%
expensing for the first tax year ending after 9/27/17
Participation Exemption
► Domestic corporations allowed a 100% deduction for the foreign-source portion of dividends
received from 10% owned (vote or value) foreign subsidiaries. (Deduction not available for capital
gains or directly-earned foreign income)
Key business tax provisions
Net operating losses (NOLs)
► Limits NOLs to 80% of taxable income for losses arising in tax years beginning after 2017. Repeals carryback
provisions, except for certain farm and property and casualty losses; allows NOLs to be carried forward
indefinitely
Interest expense deduction
► Limits deduction to net interest expense that exceeds 30% of adjusted taxable income (ATI). Initially, ATI
computed without regard to depreciation, amortization, or depletion. Beginning in 2022, ATI would be decreased
by those items. Regulated utilities generally excepted
Several Domestic Changes
► Dividend Received Deduction
► Domestic production Deduction
► Others
Key international tax provisions
Global Intangible Low-Taxed Income (“GILTI”)
► Tax on offshore “active” income (i.e., non-Subpart F income) of foreign subsidiaries. 10% “routine return” on tangible assets =
exempt from GILTI
► Excess over “routine return” = taxed at 10.5% ETR for corporate shareholders (up to 13.125% ETR starting 2026). Foreign tax
credits subject to 80% haircut.
Base Erosion Anti-Abuse Tax (“BEAT”)
► Minimum tax on corporation’s “modified taxable income” calculated by adding back most deductible payments to non-US affiliates.
Notable exceptions (i) cost of goods sold, (ii) the “services cost” exception, and (iii) amounts subject to 30% US withholding tax.
► BEAT tax rate is 5% for 2018; 10% for 2019-2025; 12.5% starting 2026. The BEAT only applies if certain thresholds are met.
Transition Tax
► One-time income inclusion for the 2017 tax year.
► 10%-U.S. shareholders (including individual shareholders) of a “specified foreign corporation” include their proportionate share of
the foreign corporation’s undistributed earnings.
► Tax rate for corporate shareholders: 8% for earnings invested in tangible assets / 15.5% for cashUS tax reform (P.L. 115-97)
International tax provisions
Pre-US tax reform considerations
• Interest payment: 163(j) limitation
Foreign Parent
• Debt/Equity safe harbor
Co. Interest
• 50% adjusted taxable income
• Royalty payment
Royalty
• Arm’s-length standard
• US withholding tax
90% US Sub Foreign Affiliate
• FS1
• No subpart F income risk
10% • Look-through on dividends with foreign tax credit
• FS2
100%
• Subpart F income risk
Foreign
FS1 FS2
10/50 company
Disregarded
disregarded
CFC
• Look-through on dividends with foreign tax credit
Entity
entity
• Foreign DRE: direct foreign tax credit
• Separate foreign tax credit limitation for
• Passive income
• General limitation incomeUS tax reform (P.L. 115-97)
International tax provisions
Post-US tax reform considerations
• Interest payment: 163(j) limitation
Foreign Parent
Co. Interest
• No debt/equity safe harbor
• 30% of EBITDA for tax years beginning before 1 January 2022, 50%
of EBIT thereafter
• No deduction if hybrid payment made pursuant to a hybrid transaction
Royalty
or hybrid entity
90% US Sub Foreign Affiliate • Royalty payment
• Arm’s-length standard
10% • US withholding tax
• Base erosion and anti-abuse tax (BEAT) if certain threshold met,
100% including a threshold amount of deductible payments to related foreign
Foreign
FS2
parties
FS1
Disregarded
disregarded
10/50 company CFC • No deduction if hybrid payment made pursuant to a hybrid transaction
Entity
entity
or hybrid entityUS tax reform (P.L. 115-97)
International tax provisions
Post-US tax reform considerations
• FS1 (now a CFC)
Foreign Parent
• Subpart F income risk
Co. Interest • Global intangible low-taxed income (GILTI)
• 100% deduction against foreign portion of dividend
payments
• FS2
Royalty
• Subpart F income risk
90% US Sub Foreign Affiliate • GILTI inclusion
• 100% deduction against foreign portion of dividend
payments
10% • Foreign DRE: direct foreign tax credit
• Additional foreign tax credit limitations
100%
• No foreign tax credit with respect to dividends
Foreign
FS1
Disregarded
disregarded
FS2 eligible for 100% deduction
10/50 company CFC
Entity
entity • Passive income
$0x subpart F income $40x subpart F income • General limitation income
$50x taxable income
$100x taxable income $25x foreign taxes $60x taxable income • Foreign branch (QBU) income
$25x foreign taxes $30x foreign taxes
• GILTI inclusionUS Tax Reform
What to look at from a LATAM perspective
Repatriation alternatives
Holding / Principal structures
Reduction of CIT / WHT in the region
Base erosion / debt push down
Supply chain restructuringUS Tax Reform
What to look at from a LATAM perspective
Lower CIT • Pressure to reduce CIT rate in LATAM BEAT • Potential reevaluation of the supply chain
countries for competitiveness • Potential impact on SSC, free trade zones,
§ Is the US a tax heaven for LATAM countries? and similar structures
Participation • Potential impact to maquila structure (are payments to
Exemption maquilas deductible, partial deductibility or non-
• Pressure to reduce local taxes / reduce dividend deductibility?)
withholding considering disallowance of use of FTCs in the • Challenges on the creditability of BEAT
US
Transition
• Pressure to reduce dividend withholding Interest
Tax to lower the Limitations
cost of effective repatriation • Financing in the US might not be feasible due to
interest deductibility limitations
• Consider debt push-down
FDII • Potential impact on the manner in which
multinationals structure their supply chain GILTI
• Possibility of relocation of functions, risks and assets • Potential relocation of assets, risks and functions
(e.g., intangibles) to the US from LATAM countries to the US
• Possibility of using the US as an export platform for § Changes in supply chain / way US multinational operate
LATAM globallyPerspectiva Fiscal Mexicana
Estados Unidos ¿nueva jurisdicción holding?
• Exención en dividendos en EUA
Dueños
• Para la Holding, régimen internacional mexicanos
complejo; Subpart F con nuevo GILTI
• Retención en EUA sobre dividendos
repatriados a México, ¿aplica CDI EUA-
MX? US
Holding
• Para el inversionista mexicano, ¿EUA es
paraíso fiscal – REFIPRE?
• ¿Qué hacer con recursos que se generen
en EUA? repatriación vs reinversión OpCo OpCo
1 2Cambios en la cadena de suministro – Inversión en México
• Tasa corporativa del 21%
Estados Unidos
• ¿Es conveniente mudar funciones Distribución / Funciones de I&D
de distribución a EUA? Tasa
preferencial del 13.125% por FDII
Venta de Distribución /
bienes Cobro de regalías
• Tesorería centralizada en EUA –
nuevas reglas de deducibilidad de
intereses
• Funciones de I&D y mantenimiento
de intangibles
Empresa Clientes Globales
• Auditorías a pagos de México al Mexicana (independientes)
extranjero - BEPS validado por
tribunales mexicanos:
1. Sustancia
2. Materialidad
3. Realidad económicaPerspectiva estadounidense – Inversión en México
• Tasa corporativa del 21%
• ¿Es conveniente mudar funciones Estados Unidos
Distribución / Funciones de I&D
de distribución a EUA? Tasa
preferencial del 13.125% por FDII
Venta de Distribución /
• Tesorería centralizada en EUA – bienes Cobro de regalías
nuevas reglas de deducibilidad de
intereses
• Funciones de I&D y mantenimiento
de intangibles
Empresa Clientes Globales
• Auditorías a pagos de México al Mexicana (independientes)
extranjero - BEPS validado por
tribunales mexicanos:
1. Sustancia
2. Materialidad
3. Realidad económicaYou can also read
