Most importantly, while companies face a decline in the value of tax attributes such as net operating losses, the value of deferred depreciation and impairment allowances will also decline relative to a non-inflationary environment. Planning allows businesses to take advantage of deductions before inflation erodes them, making certain accounting methods more attractive as prices and costs rise. Corporate Financial Organizations, Management Strategies, Tax Planning, and Influencing Strategies will help solve all the problems.
Inflation affects the economy in general and interest rates in particular, creating unique challenges for tax planning. Companies should consider how interest rate increases will affect Section 163(j) interest deduction limits, intra-group cross-border lending, cash repatriation, and transfer pricing. Companies that need to amend their covenants in the face of rising interest rates should also consider the tax implications of debt modification. Corporate Financial Organizations, Management Strategies, Tax Planning, and Influencing Strategies will help solve all the problems.
Tax Credit
Nominal fixed asset values are eroded by inflation as the relative value of the dollar falls. Tax attributes are no exception. Expenses that must be capitalized, depreciated, amortized, or deferred are worth less in future years when they are finally available as deductions. Loan carryforwards and net operating losses are also affected. Businesses should consider scheduling options for accelerating deductions or deferring earnings that are available now.
Businesses have many opportunities to reduce taxable income through elections, accounting methods, and other tax planning strategies. Most businesses use dozens of separate accounting methods for everything from inventory and rebates to software development and prepaid expenses. For example, identifying more favorable options through a strategic accounting policy review may result in favorable adjustments, such as the realization of additional current-year deductions or the deferral of additional income to later years. Corporate Financial Organizations, Management Strategies, Tax Planning, and Influencing Strategies will help solve all the problems.
Cost isolation can be an effective tool for companies that own commercial real estate. There are often ways to identify and reclassify building assets that can depreciate much faster than the 39 years for most buildings.
Debt Considerations
Interest rates are rising steadily across the economy as the Federal Reserve tries to fight inflation. Tax implications can be far-reaching. Corporate Financial Organizations, Management Strategies, Tax Planning, and Influencing Strategies will help solve all the problems.
Interest deduction limit
Businesses evaluating debt consolidation amid rising interest rates should consider the potential impact of Section 163(j), which limits interest expense deductions to 30% of adjusted taxable income. For tax years beginning 2022 onwards, provisions for depreciation must be included in the calculation and will reduce adjusted taxable income for purposes of the 30% limit. This shift, combined with rising interest rates, could push many new businesses to their limits for the first time.
Lawmakers are considering postponing the change retroactively, but the outlook is uncertain, and a likely resolution is likely after November’s midterm elections. Companies should consider whether interest deductions may be restricted in 2022 based on the new calculations and assess the potential impact of other items on earnings.
Debt correction
Low-interest rates have led to a liquidity boom in recent years as companies rely on cheap funding. Some debt may mature as interest rates rise sharply, and companies may seek to preemptively adjust funding to reflect the new outlook. Companies should consider the tax implications that may arise from changes in debt terms. A “significant change” under IRS regulations can lead to debt forgiveness (COD).
IRS regulations provide clear rules about when a change in yield, safety, recourse, or timing of payments constitutes a material change. Eliminations or changes to common financial measures are generally not material changes, but fees paid for the change should be accounted for as a change in return.
Significant changes may result from the following:
Change of displayed interest rate
- Extension of maturity at maturity of the principal
- Postponement of interest or principal payments for the duration of the loan.
- Conclude a moratorium agreement if the debtor defaults
- Convert existing debt into equity or make fixed payments depending on certain events
If the old debt exceeds the issue price of the new debt instrument, significant changes may result in cash redemption proceeds. If the debt is not publicly traded, tax impact may be limited as long as the principal is not written down and the interest rate is at least the long-term federal rate. Cash-on-delivery income from fluctuations in listed bonds is more significant and can often be substantial. The rules that determine whether the debt is publicly traded can be complex, but the Safe Harbor Rule treats all outstanding debt not exceeding $100 million as private trade. Corporate Financial Organizations, Management Strategies, Tax Planning, and Influencing Strategies will help solve all the problems.
International considerations
Inflation and its spillovers can have a significant impact on the structure of international tax planning. Inflation-driven price increases are inconsistent across supply chains, which can pose problems for agreements between companies. These problems are exacerbated by rising interest rates and fluctuations in currency valuations.
4 Best Tax Planning Strategies
Your direct tax team bears the burden of maintaining your international tax administration. This is a task that requires significant strategic effort to keep up with upcoming changes by the OECD and other regulators. Consider the following international tax planning strategies when planning your approach.
1. Prepare your company for international regulatory changes
Continuing changes in international tax and regulation ensure that global tax teams face new tax planning challenges. These regulatory changes include:
The OECD initiative Base Erosion and Profit Shifting (BEPS) is developing guidelines for taxation in the digital economy and introducing a global minimum tax
The EU is proposing Directives on Country-by-Country Reporting (CbC), Mandatory Disclosure Regimes (MDR), and reporting of cross-border agreements. In the United States, the impact of the Tax Cuts and Jobs Act of 2017 (TCJA) on multinational corporations is still under review, and the IRS and Treasury Department regularly introduce new rules and guidance.
2. Find out about the new BEPS rules
The new OECD BEPS rules set out 15 measures tax teams doing international business need to stay ahead of. The measures provide governments with domestic and international rules and tools to combat tax avoidance and ensure that profits are taxed where profit-generating economic activity is conducted, and value is created. Corporate Financial Organizations, Management Strategies, Tax Planning, and Influencing Strategies will help solve all the problems.
These measures range from digitization to his MDR to tax treaty abuse prevention. The tax team’s challenge is to meet all of the new MDR, master file, local file, and country-specific requirements that greatly complicate tax assessments. It is important to analyze the company’s risks related to reporting requirements. Taxes are inevitable, so preparedness and complete transparency are the best strategies.
This analysis will help you develop strategic plans, automate processes, and ensure you have the right systems and tools in place to gain the clarity you need to address evolving regulations.
3. Prepare for the 15D44 Global Minimum Tax. The BEPS initiative consists of two pillars.
Pillar 1 covers where large businesses pay their taxes, while Pillar 2 introduces a global minimum tax of 15%. The second pillar consists of three rules that apply to companies with a turnover of more than €750 million.
Rule 1:
Known as the “income attribution rule”, this rule aims to determine the circumstances under which a company’s foreign income forms part of the parent company’s taxable income.
Rule #2:
This rule, the Undertaxed Payments Rule, will allow companies to control the taxation of cross-border payments.
Rule #3:
This “Tax Reservation Rule” is intended for use in tax treaties to enable countries to tax payments. That may be subject to lower tax rates. The tax rate specified in this regulation is 9%. A major challenge for tax teams is that BEPS and global minimum tax rules are still being negotiated and constantly changing along the way.
Due to the complexity of rules and regulations. Many multinationals rely on BEPS and global minimum tax solutions. To stay compliant with all country regulations and up-to-date reporting jurisdictions. Corporate Financial Organizations, Management Strategies, Tax Planning, and Influencing Strategies will help solve all the problems.
4. Plan hypothetical penalties, fines, and fees
Business decisions can have unintended consequences for executives. Especially when faced with the complex and frequently changing world of international tax law. Before making a decision, organizations should consider the impact on their international tax liability. This may include penalties for violations and unexpected fines and fees.
Use our international tax calculator to weigh the potential impact of business changes. And plan your “what if” before you act. The International Tax Calculator is a trusted companion for management. Who wants to ensure that planned changes will result in acceptable international tax outcomes?
Conclusion
Inflation has proven to be resilient. But agile tax planning can reduce its impact on tax planning and even spot opportunities. Businesses should seek favorable accounting practices when prices rise. Carefully consider the impact of interest rates, and reconsider their international tax planning.
