The emphasis on the need for a comprehensive tax reform in the USA has grown during the past decade, due to a number of economic and geopolitical factors. The United States still has the highest statutory corporate rate in the OECD: 35% (40% including state taxes) and is one of the only countries to operate a worldwide system of taxation.
After a historic second vote in the House on 20 December 2017, both the House and Senate have now passed the "An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018," previously referred to as the "Tax Cuts and Jobs Act." The bill has been sent to the president, which he is expected to sign before year end.
International tax features
The most important international tax features for companies investing in the US or Belgian subsidiaries of US multinationals can be summarized as follows.
The corporate tax rate will be reduced to 21%.
The US will move from a worldwide tax system for corporations to a territorial system:
- Any element of deferred taxation will be eliminated. Foreign CFC income will continue to be taxed in the US (subpart F rules) or may on certain conditions be permanently exempted (100 % dividend received deduction)
- The dividend received deduction will not be available if the dividend is a hybrid dividend (i.e. payment considered as a tax deductible expense at the level of the payer and exempt income at the level of the recipient) (consistent with the EU anti-hybrid regulations)
- Subpart F rules will also be applicable on a new class of income (taxed at lower rate)
- Foreign tax credits will be repealed (except for Subpart F income).
The bill also includes a transition regime for accumulated previously untaxed foreign earnings by means of a mandatory, one-time 15,5% tax on earnings attributable to liquid assets and 8 % on earnings attributable to illiquid assets (may be paid over an 8- year period). The transitional regime applies irrespective of whether the previously untaxed foreign earnings are effectively repatriated to the US.
The border adjustability provision (exempting exports from tax and subjecting imports to tax) that was initially proposed, has not been retained.
Companies investing in the US
The bill provides for a number of provisions to address Base erosion through the Base Erosion and Anti-abuse Tax or “BEAT”).
The BEAT requires certain corporations to pay a base erosion minimum tax in situations where such corporations have certain base erosion payments (including payments such as royalties and management fees, but excluding costs of goods sold) and certain threshold conditions are satisfied.
This minimum tax is applicable to US subsidiaries that are part of a group with at least $500 million of annual US gross receipts (over a 3 year averaging period) and which have a base erosion percentage of 3% or higher for the tax year.
There will be an additional limitation on the deduction of net business expenses on top of the existing limitations. A net interest deduction limit in excess of 30% of the US business’s adjusted taxable income will apply (with unlimited carry forward) after other interest disallowance and deferral provisions. Small businesses with less than $25 million in annual gross receipts over a three-year period are exempted from the interest limitation
Net operating losses are limited to 80% of taxable income. This limitation is not applicable to losses arising in tax years that begin before 31 December 2017. The existing carry back provision will be repealed (for most taxpayers), but losses can be carried forward indefinitely.
Temporary 100% expensing for certain business assets will be allowed.
US corporations will be able to benefit from a special deduction for foreign-derived intangible income.
Belgian subsidiaries of US corporations
Subpart F income would also include global intangible low taxed income (“GLTI”). GLTI is the excess of a US shareholder’s net CFC tested income over its “net deemed tangible income return” which is defined as 10% of its CFC qualified business asset investment reduced by certain interest expenses.
Specific rules for outbound transfers of intangibles will be adopted.
The deduction of certain related party amounts paid or accrued in hybrid transactions of with hybrid entities will be limited.
Impact for your business
Both under USGAAP and IFRS, companies must reflect the effect of new laws in the quarter they are (substantively) enacted. If enacted before year-end, companies may be required to include the effects of the legislation in their 2017 financial statements.
Additional complexity can be expected for Belgian subsidiaries of US groups, as they will likely also have to consider the incremental effects triggered by the Belgian corporate tax reform.
The US tax reform will most probably have an impact on the way US companies invest in Europe, especially considering the less favorable tax treatment of income from hybrid instruments/entities. Foreign investments into the US on the other hand will have to review their repatriation strategies considering the new BEAT and interest deduction limitations.
More information is available in the news alert issued by our US colleagues