How will the new law affect your business?

The Tax Cuts and Jobs Act of 2017 (TCJA) has recently been signed into law and will enact significant changes to the US tax code. For businesses looking to expand into the United States, the prospect of navigating a new regulatory landscape can present a daunting challenge. In this blog, we will lay out the key points that you need to know, and the impact this will have on your company.

Taxation is consistently described as one of the biggest concerns of businesses that are looking to expand into the United States. 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 separate federal and state regulation, and a system of global taxation on US-domiciled companies, and the result is that setting up a business in the United States can be an onerous process.

This has led to the current environment, where companies doing business in the United States are incentivised to characterise themselves to the largest extent possible as a non-US company. For US businesses with large overseas markets, this has meant corporate inversion to jurisdictions with a more favourable tax policy. For businesses expanding into the US this has meant adopting structures either with no US entity (where protected by treaty), or a US entity established as a subsidiary to the non-US parent company.

The 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%. This, combined with the total repeal of the corporate Alternative Minimum Tax, will result in a significantly reduced tax burden on a company’s US operations. 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.

For a business expanding into the United States, this potentially means less downside to keeping your business within the country, and therefore within the US tax net. In practice, whether this actually has an impact on a company’s plan for expansion depends on the specific circumstances of that company. Critics will argue that many businesses are structured in such a way that their effective tax rate is already reduced from the 35% rate, asking the question of whether this really adds any incentive to change. While the new rules will reduce taxation on US-domiciled companies, in many cases the burden will still be greater than on companies allocating income overseas.

It must also be considered that as Federal law, these new reforms will not mitigate the issues of state and local taxation. This still remains a significant onus, particularly for overseas businesses unfamiliar with the unique quirks of this multi-layered tax system.

The fundamental question remains the same: do the business arguments in favour of being domiciled in the United States 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 US. However, that does not necessarily mean that the answer to this question has changed or that we plan on advising our US Expansion clients differently. We think it’s important to remember that the goal of the legislation wasn’t to encourage non-US companies to invest in the US, but to encourage US companies to “stay” in the US.

Contact us with any US tax questions.