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US tax reform is one of the biggest challenges facing Canadian organizations doing business in the United States. The unprecedented speed at which the Trump administration and Congress passed this reform, with some provisions taking almost immediate effect, has left many companies scrambling.
With limited guidance on how to follow the provisions, and many of the accompanying regulations yet to be approved, it’s important for your company to prepare for how this overhaul may disrupt your operations and tax obligations.
Its effects are expected to ripple through economies worldwide. For Canadian businesses, here’s what you can do to support your organization and transform your tax function in the face of this uncertainty.
Preparing for unknown unknowns
The best way Canadian organizations with US subsidiaries can understand how US tax reform impacts their business is to set up models for potential scenarios. Modelling helps you discover how the new provisions interact with one another instead of looking at them in silos. For example, while you may benefit from interest deductions, these may factor into your Base Erosion and Anti-abuse Tax (BEAT) and Global Intangible Low-Taxed Income (GILTI) calculations.
Businesses also need to stay agile and be ready to act quickly when new rules are announced. As a result, organizations should think about integrating flexibility into their structure—such as when setting up financing or bank loans—to avoid being locked into situations that can't be easily changed.
Understanding potential implications and taking a wider view
US tax reform is a catalyst for disruption. Canadian businesses will have to examine their cash flow management, financing, value chain and how their organization is structured. While they may not necessarily face compliance issues or penalties, some businesses may find they’re operating in a manner that’s no longer tax efficient. Moving forward, they’ll want to see what they can do better.
In carrying out this exercise, immigration regulations are another factor to consider. It’s not as easy for Canadian or foreign workers to enter the United States. Organizations looking at transferring Canadian employees to US subsidiaries or relying on foreign workers to build up their US operations may face issues with work permits or visas.
As talks between Canada and US trade negotiators over NAFTA drag on, this could have negative effects for Canadian businesses, not only in terms of tax regulations and cross-border trade, but for the Canadian economy as a whole. Organizations will have to stay alert to what actions the Canadian government takes in response to US tax reform and NAFTA as well as to developments in Europe related to Brexit, state aid and BEPS.
On September 30, 2018, Canada, the United States and Mexico agreed to a new and modern trade agreement called the United States-Mexico-Canada Agreement (USMCA). The USMCA revises and updates the terms of the North American Free Trade Agreement (NAFTA) between the three countries.
Changes in trade can impact acquisitions and divestitures, tax planning and structuring, treasury, supply chain and logistics, regulatory compliance, technology, crisis management and so much more. Organizations will have to stay alert and adjust as the details are finalized from USMCA as well as developments in Europe related to Brexit, state aid and BEPS.
Determining exceptions to the rule
Different industries will be affected in different ways. For instance, an exception included in the interest limitation rules of Section 163(j) will benefit certain businesses in the real estate industry.
What’s more, there’s the carve-out in the BEAT for cost of goods sold (COGS). This may prove to be a disadvantage for certain businesses in technology and services industries, where expenses are not recorded as COGS.
Look for exceptions for small and medium businesses (SMBs), as many Canadian businesses fall into this category, particularly under Section 163(j) and BEAT. Also keep an eye on how different US states are enacting or decoupling from certain provisions. Working with an adviser who has a solid grasp on the new rules can help you navigate them to your advantage.
Use modelling
Prepare for the unknown by modelling how the new regulations will affect your business.
Stay informed
Keep on top of rapidly changing rules to minimize surprises. Monitor the implications for your own business and the wider economy.
Understand exceptions
Determine if exceptions will benefit your business and use them to your competitive advantage.
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