Will the new US tax law affect your business?
By James Debate, US Tax & Financial Services Group Ltd.
Taxation is consistently described as one of the biggest concerns for businesses that are looking to expand into the US. At 35%, the US used to have a corporate tax rate that was among the highest out of the world’s developed economies. Add to that a complex tandem of federal and state regulation, and a system of global taxation on USdomiciled companies, and the result is that setting up a business in the US can be an onerous process.
This has led to the current environment, where companies doing business in the US are incentivised to characterise themselves to the largest extent possible as a non-US company. The Tax Cuts and Jobs Act of 2017 (TCJA) seeks to reduce the incentive for this type of practice through a series of substantial statutory changes. The headline feature is the reduction of the federal corporate tax rate from 35% to 21%. Of potentially greater consequence is the switch from a global system of taxation to a territorial system for corporate tax purposes. In essence, a US-domiciled company will no longer have to pay a US corporate tax rate of 35% on income generated in other lower-tax jurisdictions, but would instead pay the lower local tax rate on overseas income.
However, taxpayers will need to be aware of certain new limitations imposed by the TCJA. These include a minimum tax on ‘global intangible low-taxed income’ (GILTI) and the new ‘base erosion anti-abuse tax’ (BEAT). Measures such as these could, in theory, increase the effective tax rate of the US Corporation, especially if the US Corporation is the top holding company in the group structure.
The fundamental question remains the same: do the business arguments in favour of being domiciled in the US outweigh the burden of taxation as a US company? Under these new rules, that burden has been reduced, an act that will certainly shift the balance closer to the United States. However, that does not necessarily mean that the answer to this question has changed. As always, contact a tax advisor for guidance.
James DebateUS Tax & Financial Services Group Ltd., London, UK, Zurich, Switzerland
T: +44 20 7357 8220
US Tax & Financial Services specialist team of cross border advisors (based in London, Zurich and Geneva) provides tax advice, guidance, planning and compliance services for individuals, partnerships, corporations, trusts and estates for anyone subjected to the US tax system, wherever they may be in the world.
James Debate is experienced in US tax & compliance services across a range of industries, including private equity & hedge funds. He covers a broad range of topics including FATCA compliance & transfer pricing. He has an LL.B in Law from The College of Law & is a qualified Enrolled Agent, currently advising European businesses.
Published: Autumn 2018 l Photo: ©philipus - stock.adobe.com