S A F SCUOLA DI ALTA FORMAZIONE LUIGI

S. A. F. SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO US tax reform, what could it mean for Italian businesses? Michael W. Burak Milan, Corso Europa 11 – 24 th May 2017

S. A. F. SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO Donald Trump elected 45 th President of the United States

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”. DEREGULATION 1 • 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 2 FISCAL STIMULUS • 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 3 TRADE • 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? 4 IMMIGRATION • 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 3 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

S. A. F. SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO US legislative process and tax reform

How a tax bill becomes a law (regular process) 5 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

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 Benefits • 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 6 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

Tax Foundation “static” and “dynamic” revenue estimates Critical to tax reform passage! CBO baseline (2016 -2025) “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 $0 $57 $263 -$240 $1, 696 $0 $68 $39, 942 -$2, 418 -$191 Tax Estate and Gift Taxes Other Revenue TOTAL 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. 7 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

S. A. F. SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO US tax reform: current options

Current tax reform proposals President Donald Trump House GOP Blueprint • Lower individual tax rates, with three brackets: 10%, 25% and 35% • Lower individual tax rates, with three brackets: 12%, 25% and 33% • 20% top dividend and capital gains tax rate • 50% exclusion for capital gains, dividends and interest (16. 5% top rate) • 15% rate on business income, for C corporations and pass-through business entities • 20% corporate tax rate, with 25% rate for passthrough businesses • Territorial system • 100% expensing for all assets other than land • “Tax breaks for special interests” will be eliminated • No deduction for business net interest expense • Destination-based system • One-time deemed repatriation tax • 100% territorial dividend exemption • 8. 75% cash / 3. 5% other one time deemed repatriation tax: 9 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

Comparison of recent tax reform proposals Business provisions Camp 2014 Tax Reform Act (H. R. 1) House GOP 2016 tax reform ‘blueprint’ Corporate 25% rate (phased in over 5 years) 20% rate International– General income tax regime ‘Territorial’ system, with 95% foreign ‘Territorial’ system, with 100% dividend exemption system Repatriation “toll tax” Previously untaxed foreign earnings: 8. 75% tax on cash and cashequivalents and 3. 5% tax rate for non -cash assets paid over 8 years (No exact provision; subpart F International – provision below has some related Consumption tax features for imports from foreign regime (border tax subsidiaries) adjustment) International – Anti- Subpart F generally maintained base erosion regime New tax on ‘intangible’ (subpart F) income: 15% foreign market sales, 25% for US market sales 10 Same Trump tax principles (4/26/2017) 15% Territorial system One time deemed repatriation tax (Not stated) ‘Destination-based cash-flow’ approach, with border adjustments that exempt exports and tax imports (Not stated) Subpart F reduced to foreign personal holding company income provisions (see border adjusted tax above) S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

Comparison of recent tax reform proposals (cont’d) Business provisions Camp 2014 Tax Reform Act (H. R. 1) Cost recovery Interest expense R&D Domestic production deduction NOLs House GOP 2016 tax reform ‘blueprint’ Trump tax principles (4/26/2017) Repeal MACRS and implement ADS type system, with inflation adjustment Limit for thin capitalization Full expensing for depreciable and amortizable investments (Not stated) 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) Make alternative simplified credit permanent Require 5 -year amortization Phase out and repeal Business credit to encourage research and development Maintains R&D credit Repeal Limited to 90% of taxable income; Repeals special NOL carryback provisions (other than provisions relating to casualty and disaster losses) Carried forward indefinitely (Not stated) limited to 90% of taxable income and increased by interest factor to adjust for inflation; Carryback is not allowed 11 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

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 ‘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. Previously untaxed foreign earnings have a toll tax of 8. 75% imposed on cash and cashequivalents 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. 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). (BAT) Repatriation “toll tax” Cost recovery 12 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

House Blueprint: Border tax adjustment - design • Referred to as a “destinationbased tax system” because the taxability is based on the destination of goods and services as opposed to source or residence Major business provisions 10 -year revenue cost (billions) Reduce corporate to 20% and repeal corporate AMT -$1, 845 • 167 countries, including all other OECD countries, have destination-based value added tax systems Expense investment; disallow net interest deduction on new loans -$ 448 Territorial system -$ Deemed repatriation $ 138 • Limited details provided in Blueprint on how border tax adjustment would be implemented (“border adjustments exempting exports and taxing imports”) Border adjustments $1, 180 Repeal identified corporate tax expenditures $ 172 88 Source: Tax Policy Center, September 16, 2016. 13 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

Immediate steps executives should understand assess potential impact Mapping the current situation • • • 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 Overlay the potential new policies and risks • • • Modeling Corporate reduction, cross-border tax, expensing capital investments Trade – NAFTA, TPP, and others Brexit Environmental 14 S. A. F. - SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO

S. A. F. SCUOLA DI ALTA FORMAZIONE LUIGI MARTINO Questions ?