What do the latest US tax reforms mean for the Natural Resources sector?
15 February 2018
US tax reform is the biggest change to the US tax system since the 1980’s, and the most wide-ranging tax reform a major economy has undertaken in the past few years. At a first glance, there are a number of areas that should be significant for the natural resources sector:
- The US corporate tax rate has reduced from 35% to 21% - a significant reduction which is welcomed. However, to the extent that any businesses in the US are in a net deferred tax asset position, the fall in tax rate could negatively impact their effective tax rate in 2018.
- Tax relief for interest costs will be capped broadly to 30% of EBITDA (EBIT from 2022) meaning groups will need to consider the financing of their US operations.
- Brought forward net operating losses (NOLs), created after 1 January 2018, will be restricted such that only 80% of NOLs will be available to offset against taxable income i.e. costs incurred in year one of a project will not be able to offset 100% of taxable income in year two. This means that the timing of claiming deductions will become increasingly important.
- A US personal income tax benefit remains (until 2025) for investors who invest through a Master Limited Partnerships (MLPs). MLPs are a staple investment vehicle in the natural resources sector and we see this continuing to be the case.
There are a number of other significant topics, ranging from anti-avoidance provisions (the BEAT and GILTI), to the participation exemption and capital expensing. A number of industry specific reliefs have been maintained, but the US tax legislation is expected to be fluid as these provisions are bedded in and refined. Keeping updated on any changes will be crucial for all businesses with a US footprint.
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