The Tax Cuts and Jobs Act (TCJA) has dramatically changed how U.S. multinational corporations are taxed, forcing tax professionals to learn an entirely new rule set for offshore taxation. New provisions such as the tax on global intangible low-taxed income (GILTI), the base erosion and anti-abuse tax (BEAT), and the deduction for foreign-derived intangible income (FDII) have put the entire industry on high alert to develop new tax models and processes, not only to calculate this year’s tax accurately, but also to discover a sense of what is normal on this new playing field. Further complicating matters is that the Internal Revenue Service has issued hundreds of pages of proposed regulations in the final weeks of 2018 to clarify matters, which still leave many uncertainties.
What Is the New Normal?
With all this change, U.S. tax professionals are immersing themselves in the new rules, developing new Excel models, and working through the calculations. With the help of skilled advisors, old models and processes are being revamped. Reporting deadlines are being met. Clarity is replacing confusion. But complexity remains.
As the dust settles on most tax departments after the year-end provision, the new rules now require a heightened focus on foreign operations. It is no longer the case that foreign calculations can be overlooked unless there is an inclusion. New GILTI rules now ensure that most foreign entities will have an inclusion. Nor can U.S. taxpayers in a net operating loss (NOL) position or in an excess foreign tax credit (FTC) position opt out of doing a U.S. FTC/tax calculation: new FTC basketing and FDII and BEAT rules ensure that all taxpayers run a U.S. FTC/U.S. tax calculation. Aside from the immediate focus on new systems and processes, a more dedicated effort quarterly and at year-end will be needed to run these calculations.
Are Old Workhorses Still Viable?
Historically, when it comes to the U.S. provision, U.S. multinationals have used Excel to calculate Subpart F, dividends, and the U.S. FTC. To manage recent tax reform updates, most have either updated their Excel models or outsourced them to advisors. But now that the year-end deadline has passed, does it still make sense to use Excel? Dynamic calculations such as rollup are now multiplied in the new rules through new GILTI, foreign branch, and payment-to-income (PTI) baskets. New data sets are needed to calculate taxable income, foreign and U.S. tangible assets, and base erosion payments. With more data needed, data connectivity and a streamlined workflow from provision and tax return software become more important. The new calculations and data requirements point to the need for a robust calculator and workflow.
For those committed to Excel going forward, the weight of new proposed regulations and new final regulations places an update responsibility on the tax department and in turn on their advisors. Building in new tax law under the pressure of existing quarterly deadlines and year-end reporting obligations means an element of ad hoc work. In a normal tax-law update cycle, errors inevitably creep in as new logic is introduced, and transparency can easily be lost. It’s important to ensure that the owner of the Excel model does not become the only person who understands and can run it.
Outsourcing can help ease the update and maintenance burden, but often at a high cost. Fees to outsource can be high, as can the cost of giving up control over one’s data. Structuring a relationship with an advisor to allow a tax department’s own workforce to stay hands-on with the data and to have rights to the model after the engagement can help keep things balanced.
Is There a New Way?
A third option—an alternative to Excel and outsourcing—is third-party software. The right solution will make foreign and U.S. calculations transparent so that the progression of steps is clear. The right solution will also offer detailed and helpful calculations for the rules most relevant to a particular tax department, so that the system is a good fit. The software solution’s workflow should also be clear and streamlined, so that producing quarterly and year-end reports is fast.
Data connectivity with existing tax provision and enterprise resource planning (ERP) tools is also critical. The better the ability to pull data from other tax provision tools or from the trial balance, the easier the job will be. Automating data exchange can make calculations that might otherwise take a lot of work seem effortless.
Another important feature for a third-party solution is its modeling capability. A good software solution offers forecasting and modeling capabilities to help answer “what-if” questions from the finance group. Similarly, it should offer tax departments the ability to run scenarios to work through tax-minimizing ideas.
Especially with the current heavy statutory and regulatory changes in international tax, the desire to keep up with new rules may actually drive the decision to go with a third-party solution. Look for a solution supported by an expert team of tax analysts. It’s important that the solution also has the ability to incorporate updates quickly.
In the end, going with third-party software to handle the offshore inclusion calculations is partly about saving money, partly about offloading the job of tax-law updates, and partly about making quarterly and year-end reporting easier. In the new reality of more detailed and data-heavy international tax calculations—as an alternative to Excel and outsourcing—third-party solutions are certainly worth a look.
Don Chung is the cofounder and chairman of Orbitax and a graduate of the Georgetown University Law Center. Orbitax is a partner of Thomson Reuters. Jonathan Lysenko is the president of Orbitax’s tax quantification and planning division, which developed the Onesource International Tax Calculator.