US tax reform brings potential benefits for many infrastructure investors
US tax reform benefits for infrastructure investors
On 22 December, the President signed significant changes to the US tax code into law welcomed by many corporate and individual tax-payers.
On 22 December, the President signed significant changes to the US tax code into law (Public Law No. 115-97). The legislation ushers in an interesting new year as diverse constituents, from general partners and developers to domestic and foreign pension investors, dissect the new law to identify the underlying opportunities and challenges it creates.
Many investors cheer base rate reduction
Among the biggest-impact elements of the new law, a wide swath of investors may cheer the new 21-percent corporate tax rate, down from 35 percent.
Some investors may also be pleased with the details regarding interest deductibility. After earlier versions of the legislation threatened to severely limit the amount of interest expense certain taxpayers could deduct based on worldwide ratios, the worldwide related limit was scrapped in its entirety from the final legislation. The final legislation contains a revised, somewhat expanded version of the earnings stripping rules, however. In addition, the final legislation has a relatively limited impact on certain other types of base stripping payments from the US, as compared to earlier versions of proposed tax reform rules.
The new tax law also expands the ability of some companies to accelerate depreciation and enjoy immediate expensing of certain capital expenditures.
Also, in the category of “It could have been worse,” many institutional investors may be pleased that certain key elements of the existing business tax system were retained. Some sponsors and developers may be pleased that the tax-preferred status of private-activity bonds and tax free municipal bonds has been retained, so those bonds can continue to be a useful tool for financing infrastructure projects.
The US tax reform
The new law also raises a number of considerations specific to different groups of infrastructure investors.
For example, for domestic pension systems, proposals to eliminate their super tax-exempt status on unrelated business income did not materialize, so they can continue to invest in domestic assets largely without US tax considerations.
For foreign investors, although the 2017 tax overhaul did not extend FIRPTA tax exemptions (Foreign Investment in Real Property Tax Act) to a larger class of investors as many had hoped, it did reduce the withholding rate on FIRPTA gains. The reduced corporate tax rate also would be available to many of the common domestic blocker structures.
Finally, general partners also escaped some proposed changes to the tax code, particularly some proposals that would have added adverse ordinary income `carry' rules. Broad legislation previously had been suggested to tax all or most carry of investment partnerships at ordinary income rates rather than the lower long term capital gains rate that is often applied under current law. The new law now requires that certain carried interests be held for a minimum of three years to enjoy long term capital gains rates, but for many infrastructure (long term) investments such holding period should not be problematic.
Devil in the details
In the midst of this largely good news, infrastructure sponsors, developers, and investors will need to perform careful analysis to recognize the precise impacts on their projects. For example, the temporary new $10,000 limit on individuals' deductions of some state and local taxes may prompt some investors to consider the possibility of incorporation. Fund complexes that apply different stacked partnerships will also want to carefully analyze their structures since revised rules can apply to limit the tiering up of interest deductibility capacity. Corporations will need to take into account new restrictions on the use of net operating losses and their ability to use this important tax attribute as an income shield. Thus, taxpayers will need to review their historic models and assumptions.
“In addition to studying the immediate effects of the tax bill, investors will want to watch for middle- and longer-term impacts, as industry participants adapt their pricing and structures to respond to changes in their operating landscape.”
Other potential benefits foreseen for 2018?
In the meantime, investors will be wise to hunker down with their financial models and quantify the real impacts of this massive tax package, to determine the exact opportunities, costs and complexities of the new law for the infrastructure investment community.
An infrastructure sector blog focused on timely trends and issues impacting governments and organizations around the globe.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2018 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.