Trump Tax Reform - Considerations for Multinational Companies
President Trump’s April 26 tax proposal provided several key principles that the Administration plans to work with Congress to enact, including proposals impacting multinational companies. These principles include: 1) lowering the corporate tax rate; 2) establishing a territorial tax system; and 3) creating a one-time opportunity to repatriate money earned, but still residing overseas. Each of these principles is analyzed in detail below.
1. Reducing the Corporate Income Tax to 15%
Under the White House’s proposed tax plan, the corporate income tax rate would be reduced from 35% to 15% for corporations (and for pass-through businesses currently taxed at 39.6%). A proposed tax reduction of this magnitude will have a significant impact on multinationals operating both inside and outside of the U.S.
For example, U.S.-based multinational corporations will have less incentive to shift profits overseas to avoid higher U.S. taxes. Similarly, foreign-based multinationals previously apprehensive about forming subsidiaries in the U.S. are likely to be less hesitant if the tax rate is 15%. Also, it would not be surprising to see U.S. companies repatriating existing foreign operations and assets to the U.S. In short, with lower taxes at the corporate level, the U.S. should become increasingly competitive with other nations as a place to both establish and operate global businesses.
2. Establishing a Territorial Tax System
Under a territorial tax system, only income sourced domestically (in the U.S.) will be taxable to corporations. Foreign-earned income would be excluded from U.S. taxation. To illustrate, an automobile manufacturer would only be taxed by the U.S. on vehicles sold in the U.S. Any automobiles sold outside of the U.S. would not be subject to U.S. tax. Under this system, a U.S. based multinational would only have to consider foreign tax impacts if it was to expand overseas. U.S. taxation on overseas income would not be a factor in deciding to expand overseas.
3. A One-Time Opportunity to Repatriate Trillions of Dollars Held Overseas
U.S. multinational corporations currently have approximately $2.6 trillion dollars overseas that have not been repatriated to the U.S. because any amounts repatriated would generally be subject to a 35% corporate tax. President Trump has proposed a one-time ”tax holiday” to return these overseas funds to the U.S. at a reduced corporate tax rate to incentivize repatriation. The president has not yet stipulated the reduced rate (the rate used when former President George W. Bush provided a similar incentive in 2004 was 5.25%). The Administration views the tax revenues generated under this proposal as a windfall for the U.S. government that could help stimulate the economy and drive the growth objectives underlying the president’s proposal. Conceptually, the repatriated dollars would be available to fund various domestic job creation initiatives and infrastructure projects.
What a Multinational Firm Should Do Ahead of Tax Reform?
Each company should focus on the following:
- Identify cash available that can be repatriated.
- Determine the earnings and profits of each foreign affiliate as defined within the U.S. tax code in order to determine what is taxable.
- Consider the overall tax impact of the tax reform proposals currently under consideration.
Finally, each multinational company should follow tax reform developments closely and supplement their strategies with “what-if” planning scenarios, as appropriate, to position themselves to react in a timely and effective manner.
Business Tax Quarterly – Spring 2017