January 10, 2018 Tax Cuts and Jobs Act will affect telecommunications industry On December 22, 2017, President Trump signed into law the "Tax Cuts and Jobs Act" (H.R. 1) (the Act), capping off the first major overhaul of the federal income tax in more than 30 years. The Act includes a number of business and international provisions that affect inbound (foreign owned) and outbound (US) telecommunications (telecom) companies. At the heart of the Act is a lower corporate tax rate (21%) for businesses, which is significant for telecom companies, which are among the most heavily taxed industries in the US. Lower taxes will enable telecom companies to increase their capital expenditure (capex) budgets to build out and upgrade infrastructure and networks, including efforts to expand broadband fiber and wireless buildout. More broadly, the Act retains many of the important industry-related provisions originally provided under both the House and Senate proposals, including provisions allowing for immediate expensing of certain property, and the retention of the research and development tax credit. From an international perspective, US-headquartered telecom companies generally have, from foreign investment perspective, a limited international footprint. The provisions will primarily pose compliance burdens to calculate and comply with the transition tax and other international tax provisions, as opposed to significant tax costs. Inbound telecom companies may face more challenges with implications of payments to foreign affiliates than their US-headquartered competitors. In addition, telecom companies that have a significant debt may feel some pain from a cap on the net interest deduction, but that will be mostly offset by the lower tax rate. While effects on domestic and multi-national telecom companies will vary, this Alert highlights some of the provisions with the broadest reach within the industry. Telecom companies should evaluate the legislation and model the effect of the provisions to enable timely planning. Increased expensing (bonus depreciation) for certain qualified property Prior law1 provided taxpayers the ability to claim additional depreciation (i.e., bonus depreciation) under Section 168(k) in the year in which qualified property was placed in service through 2019 (with an additional year to place the property in service for qualified property with a longer production period, as well as certain aircraft). Bonus depreciation generally equaled 50% of the cost of the property placed in service in 2017 and phased down to 40% in 2018 and 30% in 2019. Qualified property was defined as tangible property with a recovery period of 20 years or less under the modified accelerated cost recovery system (MACRS), certain off-the-shelf computer software, water utility property or qualified improvement property. To be eligible for bonus depreciation, the original use of the property must have begun with the taxpayer (i.e., used property did not qualify). Taxpayers had the option of making an annual election to not claim bonus depreciation with respect to qualified property under Section 168(k)(7). Alternatively, taxpayers could elect under Section 168(k)(4) to accelerate alternative minimum tax (AMT) credits (as refundable credits) in lieu of claiming bonus depreciation with respect to qualified property. Such election came with the added requirement to depreciate that qualified property using a straight-line recovery method. The Act extends the additional first-year depreciation deduction through 2026 (2027 for longer production period property and certain aircraft). The Act further provides that bonus depreciation increases from 50% to 100% for "qualified property" acquired and placed in service after September 27, 2017 and before January 1, 2023. The Act follows the House bill in that the original use of the property need not commence with the taxpayer; instead, property is generally eligible for 100% bonus depreciation if it is the taxpayer's first use of such property (provided that such "used" property is not acquired from a related party or in a carryover basis transaction.) The increased expensing phases down starting in 2023 by 20 percentage points for each of the five following years — i.e., 80% for qualified property placed in service before January 1, 2024, 60% for qualified property placed in service before January 1, 2025, 40% for qualified property placed in service before January 1, 2026, and 20% for qualified property placed in service before January 1, 2027 (with an additional year to place in service available for long production period property and certain aircraft associated with each phase-down percentage). Qualified property excludes — as with the Section 163(j) interest limitation discussed later — certain public utility property and floor plan financing property. For purposes of these provisions, public utility companies would not include trades or businesses that predominantly provide telephone or other communication services. A transition rule allows for an election to apply 50% expensing for the first tax year ending after September 27, 2017. Telecom real estate investment trusts (REITs) and public utility companies should evaluate whether it makes sense to take advantage of the transition election to apply Section 168, without regard to the amendments made by the provision, to their first tax year ending after September 27, 2017, as such election may still allow them to claim 50% bonus depreciation on eligible property placed in service after September 27, 2017, and before the end of the tax year (as opposed to 0%). The telecom sector is very capital-intensive, and it often takes many years to recoup necessary investments. As such, the reinstitution of 100% bonus depreciation or immediate expensing for property meeting the definition of "qualified property" under Section 168(k)(2) provides operators acquiring such property with an immediate cash-tax benefit, which could then be utilized, among other things, towards the deployment of capital and development of network infrastructure. As Section 168(k)(2)(A)(i)(I) states that qualified property has a recovery period of 20 years or less considering the regular MACRS recovery period (i.e., the general depreciation system and not the alternative depreciation system), bonus depreciation is allowed on telecom network assets defined within all of the Revenue Procedure 87-56 Telephone Communications asset classes: 48.11, 48.12, 48.121, 48.13, 48.14 and 48.42 (e.g., Central Office Buildings, Central Office Equipment, Switching Equipment, Distribution Plant and One-Way and Two-Way Distribution Systems — inclusive of such assets as fiber optic and copper cabling, poles and related land improvements). In addition, the relaxation of the "original use" rules should make 100% expensing available to a wider base of assets. Further, as the legislative language provides for the ability to elect out of the provisions of Section 168(k) (consistent with prior law), taxpayers in a loss position that would not otherwise benefit from immediate expensing have the flexibility to elect not to apply the provisions of Section 168(k) and, instead, utilize the depreciation provisions as set forth in Section 168 generally. Such election, along with other Section 168 elections to "slow down" depreciation (e.g., annual election to use the alternative depreciation system), will become more relevant in tax years beginning on or after January 1, 2022, when depreciation deductions will reduce "adjusted taxable income" for purposes of the 30% interest deduction limitation under Section 163(j). Telecom companies will want to carefully model out the impact that depreciation elections will have on interest deductibility. US-based manufacturing and R&D Retention of research tax credit The research tax credit under Section 41 was preserved in the Act. Telecommunications companies are strong candidates to claim the research tax credit for research that is conducted within the US. Many projects potentially qualify, including projects focused on the improvement of network performance, the development of software to allow for new and improved functional integration or the provision of required services, bandwidth modeling projects, data traffic measurement, design of custom communication networks for specific uses and layouts, testing of next generation network and capabilities, and many other activities. As intense competition takes shape in the telecommunications industry, and operators seek new ways to increase efficiency and remain innovative, the potential opportunities around the research tax credit, now a reconfirmed staple of the US tax regime, should not be overlooked. Amortization of research or experimental expenditures under Section 174 Certain expenditures associated with the development or creation of an asset having a useful life extending beyond the current year generally must be capitalized and depreciated over that useful life under Sections 167 and 263(a). Under prior law, Section 174 provided that a taxpayer could treat research or experimental expenditures that are paid or incurred during the tax year in connection with a trade or business as deductible expenses under Section 174(a), or the taxpayer could elect to capitalize and amortize these expenditures ratably under Section 174(b) over a period of not less than 60 months. Taxpayers, alternatively, could elect to amortize their research expenditures over 10 years. Section 174 applies only to the extent that the expenditure is reasonable under the facts and circumstances. Under the changes made by the Act to Section 174, research or experimental expenditures paid or incurred in tax years beginning after 2021 must be treated as expenditures chargeable to a capital account and amortized over five years (15 years in the case of foreign research). The Act also modifies Section 174 to require all software development costs to be treated as research or experimental expenditures. In addition, any capitalized research and experimental expenditures relating to property that is disposed of, retired or abandoned during the amortization period must continue to be amortized throughout the remainder of the period. The provision removes the ability for telecom companies to recover costs incurred for research and development qualifying under Section 174 in the year in which they are incurred, a considerably negative impact for companies currently treating such costs as deductible expenses. Telecom companies with significant foreign research will feel an even greater impact, as the provision provides a much longer recovery period for foreign research, presumably to incentivize domestic research. Another key effect is that the provision requires amortization of these expenditures and disallows basis recovery if the property with respect to which the research or experimental expenditures are incurred (e.g., a patent) is sold, retired or abandoned. This is a departure from the general rules of basis recovery. Specifically, the provision provides that, upon disposition, retirement or abandonment, no deduction is allowed and the amortization continues for the remainder of the amortization period. Lastly, the impact of the change to software development costs should not be overlooked. Software is a critical component for the sector and will continue to control a significant portion of networks in the foreseeable future. The Act provides that "any amount" paid or incurred in connection with software development is treated as a research or experimental expenditure (and, therefore, within the scope of the provision that makes changes to Section 174), thereby eliminating the ability to currently deduct such costs under Revenue Procedure 2000-50. This will place telecom companies that develop their own software in a tax position that is less favorable than those taxpayers that acquire software, as purchased software may generally be amortized over 36 months under Section 167(f)(1). Domestic production activity deduction (Section 199) The domestic production activities deduction (Section 199) allows a taxpayer to claim a deduction equal to 9% (6% for certain oil and gas activities) of the lesser of the taxpayer's taxable or qualified production activities income subject to a limitation of 50% of W-2 wages paid by the taxpayer during the calendar year that are allocable to the taxpayer's domestic production gross receipts. Qualified production activities income is derived from certain production activities and services performed in the United States and, for tax years beginning before January 1, 2017, in Puerto Rico. The Act eliminates the domestic production deduction, effective for tax years beginning after December 31, 2017. Section 199 may be claimed for any open tax years beginning before January 1, 2018. Accordingly, telecom companies with production or service activities that are within the scope of Section 199 should consider claiming the Section 199 deduction for current years or reviewing claims made in prior tax years and, where warranted, filing amended returns. Special rules for tax year of income inclusion Under the recognition of income rules under the tax law, a cash-basis taxpayer generally includes an amount in income when the amount is actually or constructively received. A taxpayer generally is in constructive receipt of an amount if the taxpayer has an unrestricted right to demand payment. An accrual-basis taxpayer includes an amount in income when all the events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy, unless an exception allows deferral or exclusion. For example, several exceptions allow tax deferral for advance payments of income. The Act modifies the recognition of income rules by requiring a taxpayer to recognize income no later than the tax year in which the income is taken into account as income on an applicable financial statement or another financial statement under rules provided by the Secretary. For a contract that contains multiple performance obligations, however, the provision allows the taxpayer to allocate the transaction price in accordance with the allocation made in the taxpayer's applicable financial statement. Additionally, the Act codifies the deferral method of accounting for advance payments for goods and services contained in Revenue Procedure 2004-34. Under that method, taxpayers may defer the inclusion of income associated with certain advance payments to the end of the tax year following the tax year of receipt if the income is deferred for financial statement purposes. This provision generally results in an earlier accrual of income to the extent amounts are accrued earlier for financial statement purposes than currently required under the tax rules. Telecom companies should consider this provision in conjunction with their ASC 606 adoption as the potential for an acceleration of taxable income exists. The exception for certain advance payments of income is an important one, preserving the current, widely applied, favorable federal income tax treatment for such items. Advance payments governed by Revenue Procedure 2004-34 include amounts received for services, the sale of goods, the use of intellectual property (e.g., by license or lease), the occupancy or use of property if ancillary to the provision of services, the sale, lease or license of computer software, certain ancillary guarantee or warranty contracts, and eligible subscriptions and memberships. Limitation on deduction for interest Section 163(j) limits a corporation's ability to deduct disqualified interest (i.e., interest paid or accrued to a related party when no federal income tax is imposed on the interest) paid or accrued in a tax year if: (1) the payor's debt-to-equity ratio exceeds 1.5 to 1.0 (safe harbor ratio); and (2) the payor's net interest expense exceeds 50% of its adjusted taxable income. In general, adjusted taxable income is the corporation's taxable income calculated without taking into account deductions for net interest expense, NOLs, domestic production activities under Section 199, depreciation, amortization and depletion. Disallowed interest amounts may be carried forward indefinitely and any excess limitation may be carried forward for three years. The Act limits the deduction for net interest expense of all businesses by amending Section 163(j). Unlike the House and Senate bills, however, the Act drops the additional interest expense limitation that would have been imposed through a worldwide debt cap under what would have been new Section 163(n). The revised Section 163(j) limitation is on net interest expense that exceeds 30% of adjusted taxable income (ATI). For the first four years, ATI is computed without regard to depreciation, amortization, or depletion. Thereafter (beginning in 2022), ATI is decreased by those items, thus making the computation 30% of net interest expense exceeding taxable income before interest and tax (which may result in a more significant limitation.) ATI is otherwise defined similar to Section 163(j). Interest expense needs to be related to a "business," which means the interest is properly allocable to a trade or business. Certain activities are excluded from being a trade or business, and as such, are not subject to the limitation on the deductibility of interest — e.g., performing services as an employee, a real property trade or business, and certain activities of regulated utilities. A small business exception is keyed to businesses satisfying a gross receipts test of $25 million. The provision is effective for tax years after 2017. For telecom companies that traditionally consider the deduction of interest expense to be an important factor in their operating business decisions, the Act reduces the advantage of financing M&A transactions with debt. To the extent the acquirer cannot deduct interest on acquisition debt, the economic cost of a debt-financed acquisition is now greater than under prior law. Moreover, because increased expensing does not extend to taxpayers that buy preexisting qualified property, the loss of interest deductions cannot be offset by the benefits of increased expensing (as compared to depreciation and amortization). Finally, the book cost of debt-financed acquisitions also increases compared to prior law. Telecom companies facing deferral or disallowance of interest deductions generally will have incentives to increase their net interest income, either by converting interest into another type of deductible expense or by converting another type of income into effectively tax-free interest income. Thus, telecom companies should consider a review of their current respective capital structure and future financing needs to confirm the impact of this new provision. Modeling is recommended to determine whether the loss of interest deductions may cause the telecom company to be in a net taxable position, which may not have been case under the interest deduction rules before the changes made by the Act. Modification to net operating loss (NOL) rules Before the changes made to Section 172 by the Act, taxpayers could carry back a net operating loss (NOL) arising in a tax year for two years and carry forward the NOL for 20 years to offset taxable income. Generally, an NOL is the excess of the taxpayer's business deductions over its gross income. Section 172 also provides special provisions modifying the carryback period for specific types of losses or losses arising in particular years. Included in these special provisions is Section 172(f), which allows a 10-year carry back of losses arising from specified liabilities. The AMT rules do not allow a taxpayer's NOL deduction to reduce the taxpayer's alternative minimum taxable income by more than 90%. The Act modifies the rules for NOLs under Section 172. For losses arising in tax years beginning after 2017, the NOL deduction is limited to 80% of taxable income. Further, the carryback provisions are repealed, except in certain limited situations. Additionally, for many taxpayers, an indefinite carryforward is now allowed. As many telecom companies often have years in which NOLs result, the limitation on the NOL deduction to 80% of taxable income may have a significant effect, and may result in a form of a minimum tax in certain years. Separately, the indefinite carryforward for certain NOLs ought to be well received by the sector. Like-kind exchanges of real property Before the changes made to Section 1031 by the Act, no gain or loss generally was recognized to the extent that property held for productive use in the taxpayer's trade or business or for investment purposes was exchanged for property of a like-kind that was also held for productive use in a trade or business or for investment. The taxpayer then utilized a carryover basis in the property acquired in the exchange equal to the basis of the property exchanged, decreased by the amount of any money received by the taxpayer, and increased by the amount of gain or decreased by the amount of loss to the taxpayer that was recognized on such exchange, if any. The like-kind exchange rules under Section 1031 generally applied to tangible property (both real and personal), as well as to certain intangible property. Under the Act, the nonrecognition of gain in the case of like-kind exchanges is limited to those involving real property only. Section 1031, before the changes made by the Act, would still apply for like-kind exchanges if the property disposed of by the taxpayer in the exchange was disposed of on or before December 31, 2017, or the property received by the taxpayer in the exchange was received on or before December 31, 2017. Otherwise, the limitation is effective for exchanges completed after 2017. The repeal of Section 1031 for all exchanges of property with the exception of exchanges of real property has an immediate impact on telecom companies contemplating exchanges of tangible personal, as well as intangible property (such as FCC Licenses), including companies that would otherwise participate in an exchange that contains both real and tangible personal property or intangible property. With this said, companies that would otherwise complete one or multiple exchanges of tangible personal property, wherein the acquired property would be considered qualified property for bonus depreciation purposes, will be able to offset the taxpayer-unfavorable impact of not being able to utilize Section 1031 by utilizing the immediate expensing provisions set forth by the modifications made to Section 168(k). Selected international provisions 100% exemption for foreign-source dividends — Effective (generally) for distributions made after December 31, 2017, the Act exempts 100% of the foreign-source portion of dividends received by a US corporation from a foreign corporation (other than a passive foreign investment company (PFIC) that is not also a controlled foreign corporation (CFC)) in which the US corporation owns at least a 10% stake. For further details, please see Tax Alert 2017-2166. Mandatory toll charge on tax-deferred foreign earnings — The Act provides a one-time transition tax on a US 10%-shareholder's pro rata share of the foreign corporation's post-1986 tax-deferred earnings, at the rate of either 15.5% (for accumulated earnings held in cash, cash equivalents or certain other short-term assets) or 8% (for accumulated earnings invested in illiquid assets (e.g., property, plant and equipment)). A foreign corporation's post-1986 tax-deferred earnings is the greater of the earnings as of November 2, 2017 or December 31, 2017. The portion of post-1986 earning and profits subject to the transition tax does not include earnings and profits that were accumulated by a foreign company before attaining its status as a specified foreign corporation. The Act allows post-1986 accumulated earnings deficits of any foreign corporations to offset tax-deferred earnings of other foreign corporations. Additionally, the Act allows the netting to generally be done among all affiliated group members. The US shareholder may elect to pay the transition tax over eight years or less. For other related provisions, please see Tax Alert 2017-2166. Overall domestic loss — The Act provides an election to increase the percentage (but not greater than 100%) of domestic taxable income that may be offset by any pre-2018 unused overall domestic loss and recharacterized as foreign source. Anti-base erosion rules for intangible income — The Act imposes a tax on a US shareholder's aggregate net CFC income that is treated as global intangible low-taxed income (GILTI). GILTI is gross income in excess of extraordinary returns from tangible depreciable assets excluding ECI, subpart F income, high-taxed income, dividends from related parties, and foreign oil and gas extraction income. The extraordinary return base equals 10% of the CFCs' aggregate adjusted basis in depreciable tangible property. Only 80% of the foreign taxes paid on the income is allowed as a foreign tax credit. All CFCs are aggregated for purposes of the computation. For tax years beginning after December 31, 2017, and before January 1, 2026, the highest effective tax rate on GILTI is 10.5%. For tax years beginning after December 31, 2025, the effective tax rate on GILTI is 13.125%. The Act maintains the tax incentive in the Senate bill for US companies to earn intangible income from US intangibles abroad. Income from foreign derived intangible income (FDII) for tax years beginning after December 31, 2017 and before January 1, 2026, is provided an effective tax rate of 13.125%. For tax years beginning after December 31, 2025, the effective tax rate on FDII is 16.406%. Eligible income does not include, among other items, financial services income under Section 904(d)(2)(D). Definition of US shareholder — The definition of a US shareholder was changed to include any US person who owns 10% or more of the total value (as well as vote) of shares of all classes of stock of a foreign corporation. Modification of stock attribution rules for CFC status — The Act changes the stock attribution rules. Under this provision, US corporations are deemed to own the foreign stock that is owned by the US corporation's foreign parent for purposes of determining CFC status. The Act clarifies that the provision is intended to target transactions that avoid subpart F by "de-controlling" a foreign subsidiary so that it is no longer a CFC. Repeal of 30-day CFC rules — Under the Act, foreign corporations are considered CFCs as soon as the ownership requirements are met and subject to the subpart F and base erosion rules. CFC look-through rules — The look-through rule for related CFC dividend, interest and royalties was not made permanent. Thus, the rules expire after 2019. Maintains Section 956 investment in US property rules — Both the House bill and the Senate bill would have repealed or modified current law Section 956. The Act adopted neither change. Foreign tax credit changes — Under the Act, indirect foreign tax credits are only available for Subpart F income. No credits are allowed for dividends associated with exempt dividends. Foreign tax credits are used on a current year basis and may not be carried forward or back. Separate branch FTC basket — The Act establishes a separate foreign tax credit basket for branches. This minimizes a corporation's ability to cross-credit between branches and CFCs. Export sales source rule — The Act amends the source of income rules from sales of inventory determined solely on basis of production activities. Inbound base erosion rule — The Act contains a base erosion anti-abuse tax (BEAT) provision. The BEAT applies to corporations (other than RICs, REITs, or S corporations) with average annual gross receipts of at least $500 million that are subject to US net income tax and have made related-party deductible payments totaling 3% (2% for banks and certain security dealers) or more of the corporation's total deductions for the year. A corporation subject to the tax generally determines the amount of tax owed under the provision (if any) by adding back to its adjusted taxable income for the year, all deductible payments made to a foreign affiliate (base erosion payments) for the year (the modified taxable income). Base erosion payments do not include cost of goods sold, certain amounts paid for services and certain qualified derivative payments. The amount owed is the excess of 10% (5% for one tax year for base erosion payments paid or accrued in tax years beginning after December 31, 2017) of the corporation's modified taxable income over its regular tax liability for the year (net of an adjusted amount of tax credits allowed). For tax years beginning after December 31, 2025, the rate increases from 10% to 12.5%. The rate for certain banks and security dealers is one percentage point higher than the rates previously described. Premiums related to reinsurance of life and property and casualty contracts are specifically included as base erosion payments. The exception for costs of goods sold does not apply to base erosion payments made to a surrogate foreign corporation that first became a surrogate foreign corporation after November 9, 2017. The Act includes a modification to the Senate provision that mostly eliminates the penalty in the BEAT calculation for companies that take advantage of certain business tax credits, including the low income housing tax credit and certain renewable electricity production tax credits. Telecom businesses should think through the GILTI implications of their international legal structures and operating models going forward. Due to the availability of the deduction for foreign derived intangible income (FDII), telecom companies may be eligible for a 13.1% rate on future foreign intangible income regardless of IP ownership in the US or offshore. Companies in the telecom sector should then focus on managing the effective rate on future FDII and GILTI income, as well as the local country tax rate on international operations. State tax implications Since most state income tax laws are inextricably tied to federal tax determinations, the Act will likely have significant implications for US state and local (collectively, state) personal, corporate and business taxes as well, although those implications could be radically different depending upon state conformity to the new federal rules. States generally conform to the IRC in one of several ways: (1) they automatically tie to the federal tax law as it changes (known as "rolling" conformity states); (2) they tie to the federal tax law as of a specific date (known as "fixed" conformity states); or (3) they pick and choose different federal tax law provisions and dates to which they will conform (known as "selective" conformity states). Most states generally define "state taxable income" as either federal taxable income or adjusted gross income, plus or minus certain additions or subtractions (such as adding back federal depreciation and substituting their own methods of depreciation). A handful of states, however, select sections of the IRC to which they will conform and then modify the actual provision (Arkansas, California and Mississippi are examples of states whose tax laws work in this selective manner), meaning that the state's taxable income is computed independently of the federal computations. Twenty-two states currently adopt a "rolling" IRC conformity date and, as such, automatically conform to the IRC as enacted. Accordingly, now that federal tax reform has occurred, these states generally will automatically adopt the federal tax changes unless the state choses to decouple from the new federal provisions (for example, when facing significant IRC changes in the past, states have often enacted special provisions to decouple from some of the federal measures they sensed would be too costly, such as accelerated depreciation). Absent any change in state conformity or the state tax rate, taxpayers generally would see an immediate impact on their state effective tax rate. In contrast, another 20 states currently adopt a "fixed" IRC conformity date and thus generally will only incorporate changes to the IRC if they changed their conformity date to a date on or after the effective dates of the corresponding federal tax reform provisions. Accordingly, for the federal changes to apply, these states generally will have to update their IRC conformity date. As such, taxpayers in these states generally will continue using the pre-federal tax reform version of the IRC to determine their state effective tax rate unless the state takes specific action to update its conformity date. The remaining five states with an income tax use a "selective" approach and adopt only specific provisions of the IRC, typically as of a specific fixed date. In these states, taxpayers generally could see a hybrid of the approaches used in the "rolling" and "fixed" conformity states that would affect their state effective tax rates. Regardless of which method a state uses, federal tax reform could have an assortment of effects at the state level depending not only on how states conform but also how each state responds to these federal tax law changes and how a particular group of related taxpayers files returns in the state (e.g., water's-edge combined, worldwide, consolidated, separate-entity reporting). For example, many states have had a robust history of proactively decoupling from federal bonus depreciation provisions. Considering that the Act provides for immediate expensing of 100% of the cost of "qualified property" under IRC Section 168(k), such decoupling efforts are expected to continue, which will further exacerbate the differences between federal and state asset basis determinations. Telecom companies should assess the effects of federal tax reform on their state tax profile across multiple financial reporting periods because the state approaches could be very different from what occurs for federal income tax purposes, depending upon how and when the states conform. Tax accounting impacts From a financial reporting perspective, the enactment of H.R. 1 requires companies, under Accounting Standards Codification (ASC) 740, Income Taxes, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws (including the one-time transition tax) in the period in which the new legislation is enacted. The enactment date in the US is the date the bill becomes law, which is when the President signs the bill, i.e., December 22, 2017. Under US GAAP, these financial statement effects of changes in tax law are recorded as a discrete item and part of tax expense or benefit in continuing operations, regardless of the category of income or loss to which the deferred taxes relate. Under IFRS, the tax effects related to deferred taxes must be backwards-traced to the component of income to which they relate. Realizing the difficult task for many companies to record the effects of the new tax law in their financial statements including the period of enactment, the Securities and Exchange Commission (SEC) staff recently issued Staff Accounting Bulletin (SAB) 118 — Income Tax Accounting Implications of the Tax Cuts and Jobs Act, and Compliance and Disclosure Interpretation 110.02, addressing the tax reform legislation. This guidance allows companies to record in the period of enactment a reasonable estimate of the effects. If a reasonable estimate cannot be made, companies can wait and record the effects in a later period (up to one year) when a reasonable estimate can be made. The SEC had previously acknowledged the operational and accounting challenges companies may face if US tax reform were enacted. Among many other issues, companies will need to review the tax accounting aspects related to the international tax changes. For instance, companies that had not provided deferred taxes on unremitted earnings of foreign subsidiaries under the exception in ASC 740-30-25-18(a) for earnings that would not be remitted for the foreseeable future will now have a one-time transition tax for the mandatory income inclusion on unremitted post-1986 deferred foreign earnings of specified foreign corporations. Conclusion As a general matter, the overall impact of the Act is very favorable to the telecommunication sector. The reduction in corporate income tax combined with enhanced deductions for capital expenditures over the next five years will allow operators to invest more in broadband and 5G buildout. From an international perspective, US headquartered telecommunication companies generally have, from foreign investment perspective, a limited international footprint. The Act will pose primarily compliance burdens to calculate and comply with the transition tax and other international tax provisions as opposed to significant tax costs. ———————————————
——————————————— 1 For purposes of this Alert, references to "prior law" means the law that was in effect prior to the signing into law of the Act by President Trump on December 22, 2017. | |||||||||
| |||||||||
