The California Senate Bill 37 (the “Bill”), which may potentially increase Corporate tax rate from current 8.84% to a range of 10.84% to 14.84, has been proposed.  The Bill will be enacted if approved by a 2/3 vote in each house of the California Legislature.

The Bill, if enacted, would subject the corporations with taxable income of $10,000,000 or more for taxable years beginning on or after January 1, 2020 to an increased rate ranging from 8.84% to 10.84%.  The tax increase would be based on the corporation’s compensation ratio, which is determined by taking the greater of the compensation of the CEO, COO, or highest paid employee divided by the median compensation of all employees of the corporation.  Note that for combined reporting filers, the compensation ratio would be determined as if the taxpayers were a single taxpayer.

The higher the disparity between the highest paid individual and the median work is, the higher corporate tax rate the corporation would be subject to.   The applicable tax rate would be determined as follows:

Furthermore, the Bill would increase those new applicable tax rates by a factor of 1.5 for those taxpayers that have a more than 10% decrease in full-time employees employed in the United States as compared to an increase in contracted employees or foreign full-time employees.

To view the actual text of the Bill, please click the link below.

https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB37

FASB issued Accounting Standard Update 2020-1 (“ASU”) which clarifies the interaction between accounting standards for equity securities (under Topics 321) and equity method investment (under Topics 323).  The guidance is effective for fiscal years beginning after December 15, 2020 for public entities and for the fiscal years beginning after December 15, 2021 for all other entities.

ASC 321 provides a measurement alternative that allows equity securities without a readily determinable fair value to be measured at cost, less any impairment, unless an observable transaction for an identical or similar security occurred.  When the observable transaction occurs, the equity security would be measured at fair value at the date of that transaction.

The ASU clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

For example, if an ownership change occurs that results in a company’s applying or discontinuing the equity method, the carrying amount of the investment would be adjusted to its fair value immediately before applying or discontinuing the equity method.

Please click the link below to view the text of ASU 2020-1.  https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176174044348&acceptedDisclaimer=true

For a diagram illustrating the new guidance (prepared by Stout), please click here. The original article by Stout can be reached here.

The US-Mexico-Canada Agreement (USMCA) which replaces the North America Free Trade Agreement (NAFTA) has been approved by the Senate on January 16, 2020 and the President Trump is expected to sign it shortly.

The USMCA retains most of the preferential tariff provisions in NAFTA, except for non-tariff measures in the areas of intellectual property rights and enforcement, automotive, logistics, and pharmaceuticals.  Once the USMCA is signed, enterprises can expect an stability going forward in the trades between the three countries, at least for the next 16 years (USMCA contains a sunset provision that takes effect in 16 years).

The text of the USMCA can be found at https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between.