KNOWING MATTERS

BREXIT

Trade in goods is one of the areas most significantly affected by Brexit. The UK’s departure from the EU will profoundly redefine its trade relations not only with the EU27 but also with the rest of the world.

A huge task lies ahead for the UK - and indeed for the rest of Europe. After 40 years of the UK’s participation in the Single Market, in which markets for goods and services of the UK and the other 27 Member States have been almost completely integrated, the eggs must now be unscrambled and the details of a new relationship must be laid out and agreed upon. As discussed in greater detail in our Brexit White Paper, the timing for doing so is extremely tight. Brexit is to become reality on 29 March 2019, and this fast-approaching deadline has been rendered all the more pressing by the fact that formal negotiations on a future trade relationship have not even started. The EU’s position has always been that these negotiations can only start if “sufficient progress” has first been made on the UK’s “divorce agreement” with the EU. So far, in the opinion of the EU, this has not been the case. The current consensus is that a breakthrough must occur within the next few weeks, in order for trade talks to begin in January.

Brexit however entails much more than a redefinition of the UK's relationship with the EU. On trade matters in particular, it will also affect the UK’s position in the WTO, reshape the way it trades with the rest of the world and require it to adopt a comprehensive domestic trade policy. Finally, Brexit will affect—albeit to a rather limited extent—trade relationships between the EU27 and other third countries.

This paper discusses the impact of Brexit on trade in goods. The first part will examine how trade between the UK and the EU27 is likely to be affected by Brexit. The second part, which will be published shortly, will deal with the impact of Brexit on trade between the UK and third countries and between the EU27 and third countries, respectively.

Click for more information about our European Trade Practice.

Next Story / CLIENT UPDATE

SEC Staff Issues Guidance on New Tax Reform Bill

On December 22, 2017, the SEC’s Office of the Chief Accountant and the Division of Corporation Finance provided critical regulatory guidance for the accounting impacts of the recently enacted tax reform bill (commonly known as the Tax Cuts and Jobs Act or the "Act"). Specifically, the Staff issued two pieces of guidance: 

  • Staff Accounting Bulletin (SAB) No. 118 - views of the Staff regarding the application of U.S. GAAP when preparing an initial accounting of the income tax effects of the Act.
  • Compliance and Disclosure Interpretation 110.02 - views of the Staff regarding the applicability of Item 2.06 (Material Impairments) of Form 8-K with respect to the impact of a change in the tax rate or tax laws pursuant to the Act on the re-measurement of a deferred tax asset. 

SAB 118. A number of registrants have raised questions with the SEC about the application of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 740, Income Taxes ("ASC Topic 740"), which provides accounting and disclosure guidance on accounting for income taxes under U.S. GAAP, where the registrant does not have the necessary information available, prepared or analyzed in reasonable detail to fully comply with ASC Topic 740 for the period in which the Act was enacted. In response, the SEC issued SAB 118 to give guidance in this situation. In essence, the guidance breaks down the reporting into three categories:

  • First, if a registrant has completed the accounting under ASC Topic 740 for certain income tax effects of the Act, it should reflect such income tax effects in its financial statements for the period that includes the December 22, 2017 enactment date.
  • Second, if a registrant has not completed the accounting under ASC Topic 740 but can determine a reasonable estimate for certain income tax effects of the Act, it should include that estimate as a provisional amount in its financial statements until it has obtained, prepared and analyzed the information necessary to complete the accounting requirements (such period, the "measurement period"). The SEC indicated that the measurement period should be completed no later than one year after December 22, 2017, the date on which the Act was enacted.
  • Third, if a registrant cannot make a reasonable estimate of the tax effects of the Act, it should continue to apply ASC Topic 740 in recognizing and measuring current and deferred taxes as under prior law. The registrant would later report provisional amounts in the first reporting period in which a reasonable estimate can be determined.

As further guidance, the SEC stated that a registrant using the measurement period approach should include the financial statement disclosures to provide information about the material financial reporting impacts of the Act for which the accounting under ASC Topic 740 is incomplete, including:

  1. Qualitative disclosures of the income tax effects of the Act for which the accounting is incomplete; 
  2. Disclosures of items reported as provisional amounts;
  3. Disclosures of existing current or deferred tax amounts for which the income tax effects of the Act have not been completed;
  4. The reason why the initial accounting is incomplete;
  5. The additional information that is needed to be obtained, prepared, or analyzed in order to complete the account requirements under ASC Topic 740;
  6. The nature and amount of any measurement period adjustments recognized during the reporting period; 
  7. The effect of measurement period adjustments on the effective tax rate; and 
  8. When the accounting for the income tax effects of the Act has been completed.

Furthermore, registrants should consider other effects of taking advantage of the measurement period, such as disclosure in a securities offering, earnings release, investor presentation and one-on-one meetings with investors; effect on calculations of non-GAAP measures; and compliance with covenants in debt agreements.

C&DI 110.02. The SEC states that the re-measurement of a deferred tax asset to incorporate the effects of newly enacted tax rates and other provisions of the Act does not trigger an obligation to file under Item 2.06 of Form 8-K (which relates to the disclosure of material impairments other than "in connection with the preparation, review or audit of financial statements required to be included in the next periodic report due to be filed under the Exchange Act"). Consistent with the approach taken in SAB 118, a registrant may use the "measurement period" approach of complying with ASC Topic 740, including disclosing "the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report."

Director of the Division of Corporation Finance Bill Hinman stated, "This guidance recognizes that investors demand and deserve high-quality information, while also recognizing that entities may face challenges in accounting for one of the most comprehensive changes to the U.S. federal tax code since 1986."

Chief Accountant Wes Bricker added, "Allowing entities to take a reasonable period to measure and recognize the effects of the Act, while requiring robust disclosures to investors during that period, is a responsible step that promotes the provision of relevant, timely, and decision-useful information to investors."

Next Story / TAX UPDATE

Tax Reform Has Passed – Baker Botts' Explanation of What it Means to You

The Baker Botts tax team has prepared an analysis of the recently enacted tax reform act (formerly known as the Tax Cuts and Jobs Act or the “Act”) from several different angles and from the perspective of several different industries. Please click on the various links below to learn more about the Act’s impact on particular industries. We will also be hosting several webinars in January to provide additional thoughts and analysis on the Act.

Impact on Taxpayers with International Operations

To read the full update, click here.

Impact on Master Limited Partnerships

To read the full update, click here.

Impact on the Energy Sector

To read the full update, click here.

Impact on the Technology Sector

To read the full update, click here.

Impact on Private Equity

To read the full update, click here.

Impact on Renewable Energy

To read the full update, click here.

Impact on Real Estate Industry

To read the full update, click here.

Impact on Highly Leveraged Companies

To read the full update, click here.

Impact on Executive Compensation

To read the full update, click here.

 

Webinar Information

Tax Webinar: Impact of Tax Reform on Private Equity

Tax Webinar: Impact of Tax Reform on MLPs

Tax Webinar: Impact of Tax Reform on Real Estate Industry

Next Story / MEDIA ALERT

The Tax Cuts and Jobs Act Has Passed, How Will this Impact Businesses?

HOUSTON, December 20, 2017 – It has been 31 years since the last “tax overhaul”. This week, after much anticipation and negotiation with a vote of 227-203 in the U.S. House and a vote of 51-48 in the U.S. Senate, the United States Congress has passed their Tax Reform Bill. Now, as promised, this Bill will now go to President Trump’s desk for review and final signature. 

What does this Act mean? Baker Botts’ Tax practice provides expert analysis on key items companies should focus on: 
Next Story / BREXIT

The Impact of Brexit on Trade in Goods (Part 1): Trade Relationship Between the UK and the EU27