VIDEO: ‘Different World’ for Banks After Tax Law: EY’s Stevens

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By Allyson Versprille

Financial institutions like banks and insurance companies need to carefully consider changes in the new tax law, especially international provisions, when making business decisions going forward, a tax practitioner said.

“I think banks and other financial institutions are going to have to think very carefully about where they’re earning their income, what kinds of foreign taxes their income is subject to, and therefore, whether they want to earn that income through a foreign subsidiary or—where local law permits—directly by the U.S. parent,” said Matthew A. Stevens, a principal at Ernst & Young LLP in Washington.

International changes that will have the greatest impact on financial institutions include a requirement that U.S. shareholders of controlled foreign corporations pay tax on their global intangible low-taxed income (GILTI) and a new base erosion anti-abuse tax (BEAT) on U.S. multinationals making “excessive” deductible payments to their foreign affiliates.

See interview here:

Prior to this law, the tax rules that dealt with banks “tended to be relatively simple,” Stevens said, speaking Feb. 8 at the American Bar Association Section of Taxation’s meeting in San Diego. “If a bank earned what was referred to as active financing income outside the United States through a subsidiary, it generally got to avoid paying taxes on that until it brought it back,” at which point it was subject to the normal 35 percent corporate tax rate, he told Bloomberg Tax. “Well, we’re in a whole different world now.”

Under the new law, even if the bank qualifies its income as active financing income, it’s subject to the GILTI tax, which is imposed at a lower rate but has to be paid immediately, Stevens said.

There are also changes outside of the international space that may impact financial institutions. Changes to interest deductibility, for example, may cause those entities to recharacterize some fees as interest, or prompt them to raise their interest rates and reduce fees, he said.

In addition to considering the business implications of the new law, financial institutions are looking to the Treasury Department and the Internal Revenue Service to answer some questions, especially on BEAT. “We have not had anything like it before in the tax code,” Stevens said.

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