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US tax reform: what does it mean for business?


​By Ian Lavis, on behalf of Praxity 

Something beautiful” is happening to the US tax system according to President Donald Trump. Is he right?

The US stock market hit a record high in December 2017 after President Donald Trump achieved a significant victory in his plans to overhaul the US tax system.

The reaction on the Dow Jones index suggests US businesses welcome the President’s new law to reduce corporate tax rates from 35% to 20%, cut taxes for individuals and change the way multinationals operate.

Tax experts at US firms within Praxity Global Alliance predict it will be good news for the US economy and provide opportunity for inbound investment but they warn of huge tax liabilities for some companies and they voice concerns over the complexity of the reforms.

Good for the economy

Rob Wagner, Managing Partner of BKD’s National Tax Service, says: “Overall, I believe the tax proposals will be very good for the US economy and make the US more competitive for business. Economic growth will largely occur as a result of significantly lower corporate tax rates, implementing tax provisions that reward conducting operations and holding intangible property in the US and which provide lower and middle-class workers with a tax cut to allow these individuals to keep more of their earnings.”

The BKD tax specialist adds: “Lowering the corporate tax rate from 35% to 20% and moving to a territorial system where dividends from foreign corporations are exempt from US tax will significantly change the business landscape in the US. While most countries around the world have been decreasing their corporate tax rate, the US has sat idle resulting in our corporate income tax rate becoming the highest in the world.”

The tax cuts provide a major opportunity, according to Tifphani White-King, head of International Tax Practice at Mazars USA. She says: “There is great opportunity for business entities to invest inbound into the US with a lower and more competitive corporate tax rate – a rate that rivals that of European and Asian countries.”

Due to the previous high tax rates and worldwide tax system, many US companies were becoming foreign companies through a process referred to as an ‘inversion transaction’. The introduction of more competitive statutory rates could lead to companies adopting new, US-focused strategies.

Bill Armstrong, head of International Tax Services at Moss Adams, says: “In recent years the US has lost its tax competitiveness which has resulted in business migration to Asia and Europe. That trend will slow or reverse.”

Huge tax liabilities for some

The reforms will have a major impact on US companies with significant amounts of earnings held in foreign subsidiaries. Until now these earnings would incur significant US tax if repatriated to the US.

Richard Bloom, head of Tax Thought Leadership at Mazars USA, says the new tax code means US shareholders will have “the ability to repatriate offshore earnings back to the US in a tax efficient manner under presumably lower tax rates”.

Rob Wagner points out that the accumulated earnings in foreign subsidiaries will in fact be subject to a one-time tax or ‘toll’ tax in connection with the US moving to a territorial approach with a dividend exemption system. He adds: “Pharmaceutical companies, large financial institutions and technology companies will likely incur huge tax liabilities as companies in these sectors have significant untaxed offshore earnings.”

Companies with relatively high tax rates and mainly US-based revenues, which are not hit by the new charge on overseas assets, will gain the most from the new code, according to the Financial Times. Thus, oil refiners, railroads, airlines and banks are expected to be among the biggest beneficiaries. 

Controversial

One of the more controversial aspects of the tax reform is the ‘anti-base erosion provisions’ designed to protect the US tax base and reward businesses that conduct their operations and hold their intangible assets in the US.

“US headquartered companies that earn high returns in foreign subsidiaries will be subject to a tax on these foreign earnings under a new ‘GILTI’ tax provision,” says Rob Wagner, adding: “Probably the most controversial base erosion measure included in the bill is a new base erosion ‘anti-abuse tax’ or BEAT, which is a new minimum tax resulting from certain payments to foreign related parties. The US will likely need to prepare for challenges in the WTO over the BEAT provision as our trading partners may view this tax as a forbidden charge on importation or discriminatory international taxes. This measure will certainly encourage a global group to manufacture its products and hold its intangible property in the US.”

Beautiful 

President Trump says the tax cuts are aimed at “everyday hardworking Americans”. In an article published in The Guardian shortly after the Senate vote, the President commented: “Now we go on to conference and something beautiful is going to come out of that mixer. People are going to be very, very happy. They’re going to get tremendous, tremendous tax cuts and tax relief, and that’s what this country needs.”

Some people will be a lot happier than others, as Bill Armstrong explains: “The new law is written in such a way as to be fairly beneficial to US based companies while being less beneficial to US resident individuals. The US has a fairly complex state income tax system that works independent of the federal system. The contemplated changes in federal law will have a materially different impact on individual taxpayers depending on the state that they reside in.”

Anything but simple

One thing is certain: the tax changes are anything but simple, at least not for businesses. In this respect Congress has “missed the mark” according to Robert Wagner. While low income individuals who may now be able to file their tax return on a document “the size of a postcard”, the business provisions, especially the international provisions are extremely complex. He adds: “Companies will therefore need to rethink and possibly restructure their supply chains and this will require assistance from international tax and transfer pricing specialists.”

Note that all opinions expressed in the article are the personal viewpoints of the tax professionals quoted and do not necessarily reflect the official policy or position of BKD, Moss Adams, Mazars USA or Praxity.


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