TaxHow GOP tax reforms will affect multinationals and foreign earnings

How GOP tax reforms will affect multinationals and foreign earnings

Touted as the tax reform for businesses, the bills tackle corporation tax, repatriating foreign earnings and excise tax for multinationals

Hailed by the Trump administration as the most transformative tax reforms since Reagan, the hotly anticipated GOP tax plans promise a shake-up of the tax system that widely benefits multinational corporations. The Senate and House tax bills are currently under review, with the government aiming to have the final harmonised bill on the president’s desk by Christmas.

Although the two bills do diverge on several points, there is a lot of common-ground reflecting traditional GOP goals to cut taxes and help businesses thrive. Touted by many as the tax bill for businesses, here are some of the key proposals likely to impact multinationals and their UK operations.

Corporation tax

The centrepiece of both bills is the proposition to reduce corporation tax from 35% to 20%, although the Senate bill proposes introducing the rate in 2019, while the House bill proposes 2018. The current US corporate tax is the third highest in the world, compared with a global average of 22.5%.

This is likely to somewhat negatively impact the UK as multinationals previously headquartering in the UK to escape gargantuan tax rates will no longer have that problem, now only having a rate difference of 3%. It is unclear whether this will incentivise the UK to reconsider further corporation tax reductions.

Experts widely predict that these changes will balloon the deficit, adding $1.5 trillion in national debt over the next decade. This raises concerns over the bill’s survival due to the Byrd Rule, which permits Senators to block legislation that is expected to increase the federal deficit beyond a decade. Overturning this would require 60 senate votes rather than a simple majority of 51, and Republicans currently have 52 senators.

Speaker of the House Paul Ryan labelled these “pro-growth” reforms, with Steve Mnuchin, Secretary of the Treasury similarly previously stating “the economic plan under Trump will grow the economy and will create massive amounts of revenues, trillions of dollars in additional revenues.”

Territorial tax system

The US is the only G7 nation to abide by a worldwide tax system, under which American multinationals must pay US tax on all their profits, even if earned abroad. This has led to internal frustrations that US companies are unfairly disadvantaged against foreign competitors.

A central proponent of both tax plans is to shift to a ‘territorial’ tax system, which would see American businesses only paying the tax in the countries where their profits are earned.

However, to prevent companies from shifting their profits to countries with extremely low tax rates, the bill comes with a minimum tax on foreign profits of 10%.

Under the new system US corporate shareholders who own 10% or more of a foreign corporation would receive a 100% exemption on the foreign-sourced dividends.

Repatriation tax

To facilitate the new system, both bills support a transitional one time only tax on existing overseas earnings, although diverge on the rate – with the Senate suggesting 10% on cash assets and 5% on non-cash assets and the House suggesting 14% and 7% respectively.

KPMG explains: “Whilst this measure directly impacts US shareholders, there will clearly be wider repercussions and impacts on financing decisions for multinational groups.”

It is estimated that US multinationals keep $3tn abroad, so Republicans are generally supportive of a low tax on repatriated earnings to bring money back into the USA.

Excise tax

One of the potentially more disruptive measures in the bill is that of a 20% excise tax on payments made by domestic companies to foreign affiliates, essentially affecting cross-border transactions that are routine for multinationals. Experts suggest the proposal aims to undercut abusive behaviours such as transfer-pricing, where multinationals set their own prices for goods and services to move between national affiliates.

KPMG explained: “This measure appears to be targeting certain business models where there is a perception of diverting profits offshore, and as currently drafted, would make items subject to the excise tax non-deductible in the US.”

“This could have a significant impact on global supply chains for any multinationals with significant US activity,” the firm adds.

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