Law Times

Page 8 January 29, 2018 • Law Times www.lawtimesnews.com U.S. tax reforms present challenges BY JIM MIDDLEMISS For Law Times T ax lawyers say recent U.S. tax changes will present challenges for Canadian companies operating south of the border and U.S. subsidiaries operating here. That could be bad news when it comes to Canada's competi- tiveness with its largest trading partner, spurring calls for the federal government to review Canada's overall tax policy. In fact, some business groups have warned that the U.S. tax changes could hurt Canada's economy more than a NAFTA pullout. Paul Seraganian, New York managing partner at Osler Hoskin & Harcourt LLP, says the U.S. Tax Cuts and Jobs Act "has changed the cost benefit analysis of investing in the U.S. It means there will be a capital shift at the margins away from Canada and into the U.S. "I think they [the govern- ment] will have to consider seriously whether changes to Canada's own system are needed to try to make it more attractive to bring jobs and capital invest- ment back into Canada," he says. Scott Semer, a tax partner in Torys LLP's New York of- fice, says the U.S. move to slash its corporate rate to 21 per cent from 35 per cent will "push a lot of governments to consider low- ering their tax rates or certainly not to raise them. "It's almost a 50-per-cent rate cut. That's a pretty big cut," he says. Semer says that, prior to the cuts — the legislation was passed just before Christmas — the U.S. had one of the highest corporate tax rates among countries that are members of the Organisa- tion for Economic Co-operation and Development. The OECD average is closer to 20 per cent, he says, adding that both Can- ada and the U.S. were "outliers." The tax cuts are being hailed as the biggest tax reform since the years when U.S. president Ronald Reagan was in office, from 1981 to 1989. "It's in the same zip code as that," says Seraganian. "It's a very, very huge event." He adds that "it's going to take a while to see exactly what happens. "These changes run so deep, they might change behaviours in a way that can't be fully pre- dicted," he says. In less than a month, though, the impact was being felt across the U.S. economy. A growing number of U.S. companies are sharing the wealth with their employees, either through raises or bonuses. As well, the law allows U.S. companies to repatriate cash from overseas at reduced tax rates, as low as eight per cent. U.S. companies hold as much as US$2.6 trillion offshore, reluctant to repatriate it because of the then-high tax rate. Already, some companies are taking advantage of the op- portunity to pay less tax on their offshore holdings. Apple Inc. has announced it will pay U.S.$38 billion, likely the single biggest tax payment ever to the U.S. Treasury, to re- patriate US$245 billion it holds overseas and it will use that money to create 20,000 new jobs over the next five years, as part of what it calls a "[US]$350- billion contribution" to the U.S. economy. The impact is being felt on this side of the border, as a num- ber of cross-border companies book one-time charges to ref lect the impact the reforms have on deferred tax assets. Manulife announced in a statement that it would take a $19-billion charge in the fourth quarter. "The estimated amount of the charge ref lects the impact of U.S. tax reform on policyholder liabilities and deferred tax assets which includes the lowering of the U.S. corporate tax rate from 35 per cent to 21 per cent and limits on the tax deductibility of reserves," according to a press release by the company. Seraganian says the changes will impact Canadian compa- nies operating in the U.S. In an update from the firm, Osler noted that, "given the extreme interconnectivity between the Canadian and U.S. markets, both U.S.-inbound and U.S.- outbound rules can have impor- tant consequences for Canadian business. "[C]anadian businesses oper- ating in the cross-border space should systematically rethink their cross-border arrangements from the ground up and realis- tically assess their continuing value to the enterprise," said the note. "In some cases, no action will be merited but, in others, un- winds should be considered." Seraganian says Canadian companies with U.S. subsidiar- ies would be wise to "go back to the drawing board in terms of their game plan." That's because he says the reform has "changed the landscape" and "affects a lot of choices" that companies have made in their structure and the way they finance their U.S. op- erations, which could now be negatively impacted. New tax base erosion provi- sions also mean U.S. companies that make deductible payments to a related foreign parent or subsidiary could be subject to an excise tax. "It's designed in part to en- courage people to do more stuff in the United States and protect the U.S. tax base," says Semer. There is "a lot of interest from investors who think it is going to be a pretty good time to invest in the U.S. as opposed to out- bound," says Semer, who focuses on inbound investment into the U.S. "The big takeaway to watch for is does the U.S. become a more attractive place to head- quarter international business and does the U.S. become a more attractive place for inves- tors than Canada and other ju- risdictions because of the lower tax burden?" he says. LT FOCUS ON Tax Law Scott Semer says the U.S. move to slash its corporate tax rate will 'push a lot of governments to consider lowering their tax rates or certainly not to raise them.' FOCUS The Canadian Lawyer InHouse Innovatio Awards is the preeminent award program recognizing innovation by members of the in-house bar within the Canadian legal market. These awards celebrate in-house counsel, both individuals and teams, who show leadership by becoming more efficient, innovative and creative in meeting the needs of their organizations. The Innovatio awards program draws on a panel of in-house counsel judges to determine the winners, based on a range of criteria. Accepting nominations from large, small and public sector/non-profit legal departments. NOMINATIONS OPEN FROM JANUARY 15 - MARCH 15, 2018 For more information or to nominate visit www.innovatio-awards.com SAVE THE DATE September 20th | Arcadian Court, Toronto NOMINATE AN INDIVIDUAL OR TEAM IN THE FOLLOWING CATEGORIES: • Law department leadership • Law department management • Diversity • Best practices in compliance systems • In-house M&A/Dealmakers • Working with external counsel • Litigation management • Risk management • Tomorrow's leader in innovation FORGING A STRONGER FUTURE Untitled-3 1 2018-01-23 11:17 AM

• Cover