From US tax laws to BEAT, Indian firms are preparing for global tax reforms

It is that time of the year when most chief finance officers, along with team members, go on an overdrive to make financial accounts match for the March 31st year-end deadline. Some questions that many CFOs of companies with overseas presence are asking tax experts are: How do we disclose in the impact of the recent changes in the US tax laws? Or will Brexit – the event capturing Britain’s exit from the European Union – have any tax implications on Indian businesses operating out of the UK? Do US MNCs operating out of India need to re-work their tax outgo?

The implications of the cut in corporate tax rate in the United States from 35 per cent to 21 per cent has been widely discussed and debated. Experts say Indian businesses operating in the US need to go beyond the changes in the corporate tax rate structure.

 “That corporate tax rate has come down is a great piece of news. Base Erosion Anti-Abuse Tax (BEAT) is the bad news,” says Rodney Lawrence, partner and global head, international tax, KPMG in the US. BEAT is the non-deductibility of certain related party payments beyond a certain threshold.  Where ever applicable, it will increase will tax rate beyond 21 per cent, say experts.

So, Indian multinationals in the US would need to do the math to understand how they should do business with customers in that country. 

Some may need to re-structure their operations in the US to mitigate the effect of BEAT, say tax experts.  “They may have to redo customer contracts or the structure of inter-company arrangements,” says Lawrence.

Tax experts say the BEAT rules will also apply to the US companies with Indian subsidiaries. However, most expect the impact to be limited for these companies given the high threshold for deductions.

Lawrence’s advice to Indian businesses is figure out the impact of the changes in the tax rules in the US at the earliest. “They have time till April 1, 2018 to do the calculations,” he says. Some elements of the new tax rules will kick in from the next financial year.

As globally countries react to the changes in the US tax system, experts expect tax related litigation to go up substantially. “The European Union is already looking at whether the US tax system breaches any of the trade laws,” says Jane McCormick, partner and global head – tax, KPMG International.

McCormick points out that all countries are trying to increase the corporate tax base. A flip side of expansion in the tax base is that two countries may end up taxing the same profit. This could lead to double taxation and increase in tax litigation. Businesses need to be prepared for such eventualities, she adds.

On the future of lower tax jurisdictions- popularly referred to as tax haven – McCormick says some are offering tax neutrality to the investment fund industry. “They are facilitating a lot of investment”.

While Brexit – expected over a transition period – may not have any major impact on corporate tax rates, the issues that could impact Indian businesses operating in the UK are around trade and custom duties. These are going to impact supply chains, say experts.

For Indian businesses operating in markets  in the UK and the EU, McCormick’s advice is to get ready for the worst. “But hold on from pressing the button till you have clarity on how the future looks like,” she adds.

“It is not an Armageddon scenario. London is still the biggest financial centre in the world”

Watch out

Global Intangible Low-Taxed Income 

An anti-base erosion measure that targets US corporations owning Controlled Foreign Companies for US tax purposes

Interest deductibility

New rules limit the deductibility of interest expense. Most businesses need to look at the capital structure of their US operations

Base Erosion Anti-Abuse Tax 

BEAT effectively applies a 10 per cent minimum tax for taxable income adjusted for base erosion payments

Brexit implications

No big impact on corporate tax rate. However, changes in trade and custom duties may impact supply chains