Tax reform could pass before the end of 2017, with the legislation mainly effective as of January 2018.
The international aspect of the legislation has focused on adopting a territorial tax system similar to other tax jurisdictions, but the legislation could be viewed as just a small step toward a territorial system. The territorial application for dividend treatment only applies to corporations, and new anti-base erosion tax measures for U.S. corporations are being added, which dilute true territorial tax treatment.
The bills also impose current tax on the accumulated foreign earnings of a U.S. corporation’s foreign subsidiaries as part of a toll charge to the new system, albeit at lower rates. And not only is the current onerous U.S. Subpart F regime retained, it is significantly expanded upon in both bills.
The bills also tax income of foreign subsidiaries of U.S. companies generated from the use of foreign intangibles at minimum tax rates. Other similar provisions, such as the ability to repatriate intangibles to the U.S. tax-free, effectively incentivize U.S. multinational corporations to move or to keep group intangibles onshore.
Payments to foreign-related parties also are subject to increased U.S. tax, especially for larger foreign-owned companies. Although the feared border adjustment tax was dropped from consideration earlier, similar provisions appear in the current legislation.
U.S. companies with foreign subsidiaries and foreign inbound companies will need to carefully re-evaluate their existing global supply chain and capital structures if the lower U.S. tax rate and other proposed changes take effect.
Prepared by: Crowe – US Office