Inbound Capital Equipment Investment

Changing Legal Landscape

With a highly developed, liquid, and efficient secondary equipment market, strong corporate governance, and stable legal institutions, the U.S. has traditionally provided foreign investors with a stable and welcoming market. Prior to the recently passed Tax Cuts and Jobs Act (“TCJA”, the “Act”), there was a tendency to lend into the US and benefit from the tax rate arbitrage between the U.S. and foreign lending jurisdictions.

Now, with the passage of the pro-growth TCJA and reduction in regulatory hurdles, we can expect more foreign direct investment in the U.S. equipment leasing equity and debt financing markets.

With respect to inbound investment, the most groundbreaking changes under the Act include the lowering of the U.S. corporate tax rate to 21%, implementation of new NOL deduction and carryforward rules, new and more stringent interest expense deduction limitations, the denial of interest expense deductions from hybrid* transactions and entities, and the new base erosion and anti-abuse tax.

*Hybrid transaction structures are designed to create ‘stateless income’ through the manipulation of differences in the treatment of entities under the laws of different jurisdictions.

Equipment Investment

There are many different types and methods of investment, such as the direct acquisition of a capital asset or the purchase of an equipment leasing portfolio. Cross-border investment has been addressed by the Organization for Economic Co-operation and Development (OECD) through its Base Erosion and Profit Shifting (BEPS) legislation which is designed to address the practice of shifting profits and assets across borders to minimize overall global taxation.

The TCJA adds a new Base Erosion and Anti-Abuse Tax (“BEAT”) designed to provide a disincentive to ‘erode’ the U.S. tax base by making deductible payments (including interest and royalties) to foreign related parties. It’s largely aimed at inbound investment and its anti-base erosion provisions effectively apply a 10% minimum tax for taxable income adjusted for base erosion payments (but only for businesses where US gross receipts are greater than $500 Million, aggregated on a global group basis).

Additionally, highly levered foreign-owned capital-intensive businesses will be impacted by the denial of interest and royalty deductions from “hybrid” transactions.

Invest Now

U.S. affiliates of majority foreign-owned firms produce more than a fifth of all U.S. goods exports. With the first major reform of the U.S. tax code in 30 years, the Act is extending U.S. domestic economic growth. Combined with a renewed focus on enabling businesses to operate with greater efficiency, “There has never been a better time to invest, grow, and create jobs in the United States.”

The scope of the implications of inbound investment changes, particularly in the context of inbound financing structures may cause many inbound financing structures to fail to qualify for the portfolio interest exemption (The ‘portfolio interest exemption’ allows a non-U.S. lender to avoid U.S. tax on U.S.-sourced interest income).

As a result, an understanding of individual fact patterns is necessary to determine the net effect of these reforms on specific foreign direct investment activity. Drawing conclusions remains a question of working through the rules on a fact-specific basis, making assumptions, and assessing the impacts. And, with the upcoming 2018 midterms might there be a shift in the balance of political power? Will tax reform survive in part or in whole?

For inbound capital equipment investment and management solutions, Call RESIDCO.