When the Times Square Ball dropped on New Year’s Eve and the lights at the bottom of the poll illuminated ‘2018,’ it marked the beginning of a whole new tax system for U.S. multinationals.
Our worldwide tax system was instantly replaced with a territorial system. Capital export neutrality was abandoned for capital import neutrality. And the corporate tax rate dropped from 35% to 21% overnight. Literally, overnight.
So, what should we make of these sweeping reforms that have completely rewritten the international tax landscape? The answer is that nobody knows quite yet….
While the reduction in the corporate tax rate and the adoption of a territorial system make our tax system more like that of other OECD countries, policymakers have introduced new taxes that didn’t exist before and create new complexities.
First, we have a new tax on Global Intangible Low-Taxed Income (GILTI). The GILTI tax is imposed on the U.S. shareholders of a CFC (Controlled Foreign Corporation), if such entity is ‘guilty’ of generating low-taxed income.
The GILTI tax is intended to discourage the relocation of CFCs to low or no-tax jurisdictions and could create issues for CFCs with high levels of deductible interest or low book values for depreciable assets, such as companies in the service industry.
Another new tax, called the Base Erosion and Anti-Abuse Tax (BEAT), targets related party transactions that reduce the U.S. tax base. The provision imposes an excise tax on specified amounts paid by a domestic corporation to a foreign corporation, if both entities are members of the same consolidated group.
Both the GILTI tax and the BEAT are imposed at a rate of 10%.
While these new taxes apply to future earnings, keep in mind, the transition to a territorial tax system also requires a one-time transition tax on previously untaxed foreign earnings.
The transition tax will be significant for many U.S. multinationals, which is why the payment of such tax is allowed over an eight-year period.
Thus, the net effect of the new legislation on U.S. multinationals is a bit of a mixed bag. Entities will benefit from the reduction in the statutory corporate tax rate and the fact that they no longer face U.S. residual taxes on repatriations from foreign subsidiaries. Some, however, would argue the effective tax rate of many corporations was already below 21%, and the existing deferral rules allowed companies to avoid U.S. residual taxes through appropriate tax planning.
Now companies have to pay a minimum tax on untaxed foreign earnings to transition to the new system, and face new taxes, such as the GILTI tax and the BEAT, under the new regime. Not to mention the fact that the taxpayer-friendly 863(b) source rules have been repealed, interest expense can no longer be apportioned under the fair market value method, and a new foreign tax credit basket for branches reduces opportunities for cross-crediting.
The seismic shift in our international tax policy and practices will no doubt take some time to analyze and digest. In the meantime, accountants and tax attorneys are ringing in the New Year with a new-found workload that is sure to sustain them beyond 2018—these practitioners are, perhaps, the biggest winners under the new legislation.
ABOUT THE AUTHOR
Tara Fisher is an independent tax consultant. She has been practicing international tax for over 15 years. Her professional background includes working for the U.S. Congress Joint Committee on Taxation, the national tax practice of PricewaterhouseCoopers, the University of Pittsburgh and American University in Washington D.C. Tara is a Certified Public Accountant and holds a Master of Science in Accounting from the University of Virginia.
