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The global tax regulatory environment has gone through a historic change and is still changing. This has forced companies to re-evaluate and become proactive concerning their global operating model to keep a competitive advantage.
The magnitude of transformation is different for every company and driven based upon company profile (locations, employees, functions, risks, etc.), pressure points and business objectives. For each business situation, every level of an organization may be involved, and the implications spanning across operational, tax and legal. Companies are looking at ways to develop and implement an effective value chain management process that considers and brings all these facets together to help achieve smoother operations, greater profitability and more sustainable growth.
PwC’s Value Chain Transformation practice works with your company to guide you through the transformation process by:
Providing insight on how other companies are handling the changing environment as well as strategies being implemented
Listening to your business objectives to gain an understanding of what your goals are
Evaluating your value chain management process and finding a path to improvement
Exploring value chain improvement options & co-developing the best solution for your company
Presenting tailored options that are aligned to your specific footprint and fact pattern.
What areas of Tax Reform are impacting your Value Chain?
- Base erosion and anti-avoidance tax (BEAT)
- Global intangible low-taxed income (GILTI)
- Foreign derived intangible income (FDII)
- Limitation on deduction for business expense - 163(j)
Base erosion and anti-avoidance tax (BEAT)
What is it? This provision limits ‘business interest’ expense deductions to the sum of a taxpayer’s business interest income, 30% of adjusted taxable income, and floor plan financing. Unlike old section 163(j), the new section 163(j) applies regardless of whether the interest payment is made to a US or foreign person, or whether the recipient of interest is exempt from US tax.
How could it impact value chain decisions? For many taxpayers, the limitation of deductible interest expense will have a significant impact. The new section 163(j) rules also impact other new provisions introduced with tax reform. Interest expense apportionment may drive excess GILTI foreign tax credits as well as impact the BEAT calculation.
Global intangible low-taxed income (GILTI)
What is it? This provision is designed to tax low-taxed foreign income that under current law is not taxed until repatriated to the United States (such as a shelter company in Bermuda).
How could it impact value chain decisions? Companies may need to reevaluate their legal entity structure and refresh their VCT/ Ops strategy. For many, the tax cost of the GILTI rules will be an unexpected cost to balance with overall tax savings – a greater impact on US MNCs with low asset bases overseas.
Foreign derived intangible income (FDII)
What is it? The BEAT targets certain related-party deductible payments (and, notably, not cost of goods sold) that shift income outside the United States. It is imposed if the taxpayer’s modified taxable income (meaning without the deductible payments) exceeds the taxpayer’s regular taxable income after certain allowable credits.
How could it impact value chain decisions? Companies need to understand existing intercompany transactions, including who they are to and the reason for the underlying payment. Opportunity may exist to reclassify all or portions of payments to meet a BEAT exception. Companies may need to reevaluate their legal entity structure and refresh VCT/Operations strategy due to the cost of doing business in the US suddenly going up for many foreign-based companies with US operations (in-bound companies). This may require a significant FFG/cost takeout for the US subsidiary. BEAT also will be a cost for many US-headquartered companies, given the evolution of many companies’ global operations and customer base.
Limitation on deduction for business expense - 163(j)
What is it? This provision is designed to tax low-taxed foreign income that under current law is not taxed until repatriated to the United States (such as a shelter company in Bermuda).
How could it impact value chain decisions? Companies may need to reevaluate their legal entity structure and refresh their VCT/ Ops strategy. For many, the tax cost of the GILTI rules will be an unexpected cost to balance with overall tax savings – a greater impact on US MNCs with low asset bases overseas.
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