April 17 is Tax Day for Americans this year and some will be dealing with the effects of tax reform, which was enacted by the U.S. government on December 22, 2017.
To discuss both the potentially good and bad impacts of U.S. tax reform for residents and business entities here, the Camana Bay-based Cayman Islands Institute of Professional Accountants organised a two-hour training session at the Marriott Grand Cayman Beach Resort on Feb. 13. On hand to present the training were U.S. tax specialists from KPMG, including Director Cathy Houts, who introduced the topic.
“We thought we’d discuss why this tax reform is so important and why everyone is talking about it,” she said. “This is an incredible, expansive change that is affecting all businesses and individuals in the U.S.”
Houts explained that while the legislation was passed in 2017, it generally isn’t effective until tax years starting after Dec. 31, 2017. She also pointed out that some of the provisions have “sunset clauses,” or expiration dates, which in the case of this legislation, means they end in 2025.
THE GOOD NEWS
The good news for business owners subject to U.S. taxes is that the corporate tax rate is reduced from 35 per cent to 21 per cent, said KPMG Partner David Conen.
“[The U.S. corporate tax rate] was considered one of the highest out there, so it is a big change,” he said. “It’s a massive boost to U.S. corporations.”
Senior Manager Andrew Blevins agreed. “The golden egg of tax reform is the corporate tax was reduced 14 per cent to 21,” he said. “So thank you, President Trump.”
Blevins said tax reform would have little effect on the Cayman Islands’ captive insurance industry, particularly the healthcare captives owned by a tax-exempt parent company.
“For most of the captive insurance companies here … the good news is they are unaffected by the tax reform,” he said. “It’s something as a jurisdiction we have to market and let people know.”
The Base Erosion Anti-Abuse Tax — or BEAT tax — that has many owners of Bermuda insurance companies scrambling to restructure, is unlikely to apply to most Cayman Islands companies, Blevins said.
“It’s not really going to affect the way we do business in Cayman.” KPMG Director Todd Armstrong said the news was also good for Cayman’s hedge fund industry.
“We’re not going to see too much impact on hedge funds,” he said.
THE BAD NEWS
There are some U.S. individuals or entities in the Cayman Islands that could face higher tax burdens as a result of tax reform.
Armstrong said the U.S. tax reform would result in more corporations being classified as “controlled foreign companies” if more than 50 per cent of the company is owned by U.S. shareholders, which are defined as U.S. individuals or entities that own 10 per cent or more of the foreign corporation.
Before tax reform, these corporations could be taxed on their earnings globally, but they were allowed to defer paying any taxes owed until they repatriated the earnings to the U.S. This allowed some companies to accumulate many years’ worth of profits offshore.
However, with tax reform, it is mandatory that these companies repatriate their earnings going back to 1986 and to pay a reduced tax of eight per cent on non-liquid assets and 15.5 per cent on cash and cash equivalents.
The tax can be paid over an eight-year period, but the first payments are due on April 17th of this year, Armstrong said.
Conen noted that some businesses in the Cayman Islands owned by U.S. persons were getting caught up in the mandatory repatriation requirements.
“It’s intended for the big guys, but it’s affecting some small businesses that have foreign earnings and profits.”