1. Game Changing US Federal Tax Reform and Implication for Canadian Business
Canadian Petroleum Tax Society
Dan Lundenberg
Gilbert Lederhos
Hetal Kotecha
7 June 2017

2. The Difficulties of US Tax Reform
Dan Lundenberg

3. THE DIFFICULTIES OF TAX REFORM
Although there is a Republican Congress, will the President & Congress come together on comprehensive meaningful Tax Reform?
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

4. THE DIFFICULTIES OF TAX REFORM
In recent months, the alignment of policy, politics and personalities has proven to be challenging.
Policy
Personalities
Politics
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

5. THE DIFFICULTIES OF TAX REFORM
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

6. The Case of US Tax Reform
Dan Lundenberg

7. THE CASE FOR TAX REFORM The Challenge of High Corporate Tax Rates
Source: Forbes -
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

8. THE CASE FOR TAX REFORM The Challenge of High Corporate Tax Rates
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

9. THE CASE FOR TAX REFORM The Challenge of Keep Business in the U. S
THE CASE FOR TAX REFORM The Challenge of Keep Business in the U.S. (“Inversion”)
Source: A better way – our vision for a confident America, by GOP, 2016
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

10. THE CASE FOR TAX REFORM The Challenge of Our Broken Tax Code
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

11. THE CASE FOR TAX REFORM The Challenge of Our Broken Tax Collector
The Current Code Enables a Broken Tax Collector
IRS has expanded over the years to create a duplicative, inefficient, and complex bureaucracy with approximately 80,000 employees across the country
Customer service at the IRS has reached abysmal levels
The IRS has repeatedly abused law-abiding citizens through its use of civil asset forfeiture policies
Information Technology (IT) systems at the IRS are extremely outdated, but the IRS has been unsuccessful in modernizing them despite appending billions of dollars
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

12. Major Themes in Tax Reform
Dan Lundenberg

13. MAJOR THEMES IN TAX REFORM The Different Plans
The House Blueprint – A Better Way
The President Trump April Plan
The President Trump Campaign Plan
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

14. MAJOR THEMES IN TAX REFORM The House Blueprint – A Better Way
Reduce Corporate Rate to 20%
Write off the full cost of new investment in the first year, other than land
Non-deductibility of net interest expense
Allows Net Operating Losses (‘NOLs’) to be carried forward indefinitely (no carry back) with adjustments for inflation; NOL carryforwards limited to 90% of net taxable income for such year
Repeal AMT
Switch to a Territorial Tax Regime
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

15. MAJOR THEMES IN TAX REFORM The House Blueprint – Border Adjustments (“BAT”)
Destination-basis approach – the tax jurisdiction of income follows the location of consumption rather than the location of production
Products, services and intangibles that are exported outside the U.S. will not be subject to U.S. tax regardless of where they are produced
Products, services and intangibles that are imported into the U.S. will be subject to U.S. tax regardless of where they are produced
Impact of BAT
Increase the tax base and decrease the tax rate
Prevent distortion that occurred by companies shifting profits offshore
Integrate a VAT like component to put America on equal footing
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

16. MAJOR THEMES IN TAX REFORM The Trump “Plan” – April 26 2017
Lower corporate rate to 15%
Pass-through business owners would have incomes from operations taxed at 15%
Switch to a Territorial Tax Regime
The Trump April Plan is silent on multiple matters discussed on the campaign trail:
Repeal most business tax expenditures/credit
Repeal corporate Alternative Minimum Tax
Companies engaged in US manufacturing may elect to deduct the full cost of capital investment in year one; option revocable within first 36 months
Businesses that elect full expensing of capex in year one will lose their ability to deduct net interest expense
Provides for a business credit to encourage R&D
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

17. Impact on Canadian Parent Oil & Gas Company – Case Study
Gilbert Lederhos

18. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Canadian Parent owns U.S. Subsidiary with Oil & Gas Production
Facts & Assumptions –
CanCo forms U.S. subsidiary
CanCo capitalizes U.S. subsidiary
$10M Equity
$15M Debt
U.S. subsidiary acquires $25M U.S.
exploration and production property
Canadian Parent Co.
Canada
U.S.
U.S. Subsidiary
$15M Debt
$10M Equity
Acquisition
$25M of Assets
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

19. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Canadian Parent with U.S. Subsidiary with Oil & Gas Production
Facts & Assumptions –
Nature of U.S. assets acquired is split 80%/20% between intangible/tangible
$15M of Intercompany financing with 5% interest rate
Current year activities
$5M of Capex (qualified for IDC and elected to expense IDC)
Capex financed under similar terms as acquisition
All revenues is earned and costs are incurred domestically
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

20. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Canadian Parent with U.S. Subsidiary with Oil & Gas Production
Year 1
In ‘000
Current Law
Trump Plan*
House Blueprint
Domestic Revenue
10,000
Operating Expenses
4,600
Income
5,400
Interest Expense on Debt
900 -
Depreciation – 7 yrs
715
Cost Depletion - 10%
2,000
Full Expensing of Capex
5,000
IDC (Expense)
Taxable Income
(3,215)
(2,315)
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

21. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Canadian Parent with U.S. Subsidiary with Oil & Gas Production (Cont’d)
In ‘000
Current Law
Trump Plan*
House Blueprint
Taxable Income
(3,215)
(2,315)
Tax Rate
35%
15%
20%
Tax -
* As the Trump April Plan is silent on multiple matters, we assumed the silent matters will follow the current law.
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

22. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Canadian Parent with U.S. Subsidiary with Oil & Gas Production (Cont’d)
Facts & Assumptions –
The Company is going into Year 2 of their operation
Revenue and operating expenses increased by 50% from Year 1
No Capex in Year 2
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

23. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Canadian Parent with U.S. Subsidiary with Oil & Gas Production (Cont’d)
Year 2
In ‘000
Current Law
Trump Plan*
House Blueprint
Domestic Revenue
15,000
Operating Expenses
6,900
Income
8,100
Interest Expense on Debt
900 -
Depreciation – 7 yrs
1,225
Cost Depletion - 10%
2,000
Full Expensing of Capex
IDC (Expense)
Taxable Income
3,975
4,875
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

24. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Canadian Parent with U.S. Subsidiary with Oil & Gas Production (Cont’d)
In ‘000
Current Law
Trump Plan*
House Blueprint
Taxable Income
3,975
4,875
NOL from Year 1
(3,215)
(2,315)
Taxable Income After NOL
760
2,560
Tax Rate
35%
15%
20%
Tax
266
114
512
Changes from current law
(152)
246
* As the Trump April Plan is silent on multiple matters, we assumed the silent matters will follow the current law.
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

25. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 1.1 – Some Canadian Observations
Smaller operating loss carry forward arising from denied interest deductions
Under the Trump Plan the impact of the higher U.S. corporate tax base is partly offset with the reduction in the corporate tax rate
The above is not the case under the House Blue Print
Tax cost could further increase if goods are imported from Canada
Canadian corporations must evaluate capital structures for U.S. subsidiaries
Does it makes sense to have cross-border loans where interest deduction is denied
Can any production be shifted to the U.S.?
Repatriation of Future Profits
To evaluate tax cost on future profit repatriation
Simplicity on repayment of debt versus dividends
Impact on foreign surplus pools and impact on U.S. earnings and profit pools
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

26. Impact on Canadian Manufacturer – Case Study
Gilbert Lederhos

27. IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 2
IMPACT ON CANADIAN PARENT OIL & GAS COMPANY Case Study 2.1 – Canadian Manufacturer with U.S. Subsidiary that assembles product in U.S.
Facts & Assumptions –
CanCo owns U.S. Subsidiary
U.S. Subsidiary is an existing operation
CanCo has a $15M intercompany financing to U.S. Subsidiary
Debt Equity Ratio is 1.5 to 1
Canadian Parent Co.
Canada
U.S.
U.S. Subsidiary
$15M Debt
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

28. IMPACT ON CANADIAN MANUFACTURER Case Study 2
IMPACT ON CANADIAN MANUFACTURER Case Study 2.1 – Canadian Manufacturer with U.S. Subsidiary that assembles product in U.S. (Cont’d)
Facts & Assumptions –
All parts and components are imported from outside the U.S.
U.S. subsidiary sells products 50% in the U.S. and 50% globally
Current year plant expansion – purchase of new equipment $10M
$15M Intercompany financing with 5% interest rate
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

29. IMPACT ON CANADIAN MANUFACTURER Case Study 2
IMPACT ON CANADIAN MANUFACTURER Case Study 2.1 – Canadian Manufacturer with U.S. Subsidiary that assembles product in U.S.
In ‘000
Current Law
Trump Plan*
House Blueprint
Revenue – Domestic
25,000
Revenue - Export -
COGS - Imported
31,000
Net Income
19,000
Salaries & Wages
4,000
Interest (Debt)
750
Depreciation – 7 yrs
1,429
Full Expensing of Capex
10,000
Section 199
1,199
Taxable Income
11,622
11,000
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

30. IMPACT ON CANADIAN MANUFACTURER Case Study 2
IMPACT ON CANADIAN MANUFACTURER Case Study 2.1 – Canadian Manufacturer with U.S. Subsidiary that assembles product in U.S. (Cont’d)
In ‘000
Current Law
Trump Plan*
House Blueprint
Taxable Income
11,622
11,000
Tax Rate
35%
15%
20%
Tax
4,068
1,743
2,200
Changes from current law -
(2,325)
(1,868)
* As the Trump April Plan is silent on multiple matters. We assumed items from Trump’s Campaign Plan still apply.
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

31. IMPACT ON CANADIAN MANUFACTURER Case Study 2
IMPACT ON CANADIAN MANUFACTURER Case Study 2.1 – Canadian Manufacturer with U.S. Subsidiary – Some Canadian Observations
The inability to deduct imported COGS and full expensing of capital expenditures result in similar tax base in Year 1 – however, the result could be materially different in future years if no significant capital expenditures
This example and the next example illustrate the potential advantage for Canadian exporters to invest more heavily in U.S. machinery and equipment and keep intangibles located in the United States rather than production activities in Canada (assumes inputs can be sourced in the U.S.)
Location of investment decision driven by many factors
Costs of financing and repatriation are equally applicable
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

32. IMPACT ON CANADIAN MANUFACTURER Case Study 2
IMPACT ON CANADIAN MANUFACTURER Case Study 2.2 – Differing Results Under The House Blueprint Plan
Facts & Assumptions –
Similar facts to Case Study 2.1
Total revenue $50M and COGS $31M
Revenue and COGS are considered imported/exported based on the following options
Option 1 – Import goods and sells products 50% in the U.S. and 50% globally
Option 2 – Import goods and sells products 100% outside of the U.S.
Option 3 – Import goods and sells products 100% in the U.S.
Option 4 – Purchase goods domestically and sells products 100% in the U.S.
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

33. IMPACT ON CANADIAN MANUFACTURER Case Study 2
IMPACT ON CANADIAN MANUFACTURER Case Study 2.2 – Differing Results Under The House Blueprint Plan
In ‘000
Option 1
Option 2
Option 3
Option 4
Revenue – Domestic
25,000 -
50,000
Revenue - Export
COGS – Domestic
31,000
COGS - Import
Net Income
19,000
Salaries & Wages
4,000
Full Expensing of Capex
10,000
Taxable Income
11,000
(14,000)
36,000
5,000
Tax Rate
20%
Tax
2,200
7,200
1,000
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

34. IMPACT ON CANADIAN MANUFACTURER Canadian Manufacturer export Good to U
IMPACT ON CANADIAN MANUFACTURER Canadian Manufacturer export Good to U.S. Customers
Facts & Assumptions –
Export goods from Canada to the U.S.
Assume Canadian Manufacturer does not have a U.S. Permanent Establishment (“PE”).
Impacts –
Canadian entity is not subject to U.S. income tax under the Treaty if the entity does not have Permanent Establishment in the U.S.
The Treaty implications on the Border Adjustment Tax is unknown and the impact has not yet been determined.
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

35. IMPACT ON CANADIAN MANUFACTURER Border Adjustment Tax (“BAT”)
Border adjustments mean that it does not matter where a company is incorporated; sales to U.S. customers are taxed and sales to foreign customers are exempt. Regardless of whether the taxpayer is foreign or domestic.
Most provisions of U.S. tax treaties apply only to so-called “covered taxes”
But some provisions –specifically the non-discrimination article –apply broadly to all taxes
4. If the BAT is not a “covered tax” what are the consequences?
The U.S. would not need to find that a foreign enterprise has a PE in the U.S. under Article 5 before imposing the BAT on B to C sales into the U.S.
The other Contracting State likely can refuse to grant a credit or exemption for BAT taxes paid by their residents in the U.S.
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

36. Where do we see this heading?
Dan Lundenberg
Gilbert Lederhos
Hetal Kotecha

37. WHERE DO WE SEE THIS HEADING TO? Predications
Likelihood of Enactment – 2017 or 2018?
The last major US Tax Reform – TRA of 1986 took 4 years to pass from introduction to law during the Reagan era.
Is a low corporate tax rate of 15 – 20% realistic?
Risk in USD – how will that manifest in Canada/US cross-border activity?
Will Canadian companies shift their focus to the U.S.?
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

38. WHERE DO WE SEE THIS HEADING TO? Canadian Predications
Canadian Government Response
Federal and Provincial governments response, if any, to U.S. tax reform
Canada and U.S. have fundamentally different views on trade, immigration, environment and tax policy
In some cases, Canada is taking a tougher tone on trade (i.e., softwood lumber dispute – will this translate to other files?)
Although tremendous uncertainty, it is clear tax reform is coming
There will be uncertainty in making business decisions
Transactions may favor asset purchases
Canadian companies must be pro-active and forecast how potential changes could impact their business model and what changes are required
Tax function needs to be part of the decision making process on potential transactions and changes to the current business model
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

39. WHERE DO WE SEE THIS HEADING TO? Canadian Predications – Cont’d
How will Canadian companies respond?
Review of supply chains and forecast how any proposed tax reform could impact your business (i.e., impact of destination based cash flow tax)
Financing and capital structures for U.S. subsidiaries could significantly change (already impacted by new section 385 regulations)
Changes to global transfer pricing policy and keeping more profits in the U.S.
Future location of investment decisions – impact of BAT, U.S. as choice of exporter and incentive to “buy American” for supply chain inputs
Economists are predicting the U.S. dollar will significantly appreciate relative to other global currencies
What opportunities does it create for Canadian exporters in global markets and how will this impact cost of inputs for Canadian companies importing goods
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society

40. QUESTIONS?
Game Changing US Federal Tax Reform and Implication for Canadian Business- Canadian Petroleum Tax Society