GOP Tax Reform Framework and Its Impact on International TaxOctober 02, 2017
William L. Inchoco, J.D., ITP/MPA
International Tax Director
The GOP released the much-awaited installment of the tax reform guidelines a few days ago, dubbed as the unified framework to overhaul and simplify the Internal Revenue Code. While the framework is high on expectations, the 9-page document is low on details and substance on how to achieve its purported goals.
What’s in it for international business transactions and how does the framework affect the international tax aspect of the US federal income tax system? Well, let us scrutinize them.
20% Corporate Income Tax
The framework calls for a significant reduction in corporate income tax, from the current rate of 35% down to 20%. Decreasing the corporate income tax is a high prerogative for drafters and potentially a game-changer in the manner on how multinational enterprises (MNEs) do business.
Dividends from Foreign Subsidiaries
The framework suggests that dividends from foreign subsidiaries (10% or greater owners) of US corporations will be 100 percent exempt from US income tax. This aims to encourage MNEs to distribute income earned outside the US.
Repatriation of Foreign Earnings
Foreign earnings accumulated abroad will be subject to a one-time tax. There will be two tax rates – one which is a higher rate for earnings held in cash or cash-equivalents and another lower tax rate for earnings held in other forms of assets over a period of several years. “How long” we don’t know. When will it be effective? Currently, there is no further information on this point.
Prevention of Profit Shifting
To prevent the shifting of profits to tax havens or low tax jurisdictions, there will be rules made to protect the US tax base. The method suggested is to tax the foreign profits for US MNEs at a reduced rate and on a global basis. Again, there are no details on how this will be implemented but it seems like this will take some form of a “minimum tax.” Note that the OECD and its member countries have made tremendous strides in advancing its BEPS (Base Erosion and Profit Sharing) guidelines. Are these pronouncements an implied capitulation to OECD’s BEPS? Is the US finally aligning with OECD?
Leveling the Playing Field for US Inbound Companies
In tune with the administration’s nationalistic tone, the framework wants to provide rules that will level the playing field between homegrown US companies and foreign companies doing business in the US. The execution of this plan is still unclear but it looks like this is something along the lines of strengthening the thin capitalization rules under Sec. 163(j) and Sec. 385 aimed at protecting the stripping of taxable income subject to US taxation.
It is worth noting that in a span of less than 12 months the GOP went from the obscure Destination-Based Cash Flow Taxation (DBCFT) proposal to this new-look tax framework. Will these new ideas stick? For sure, questions are beginning to surface. What will be the impact on the 68 bilateral income tax treaties the US signed with other countries? Will they be rewritten? What about the Section 482 rules? Since there will be no incentive to park profits abroad, will transfer pricing go away?
The new framework is certainly a step in the right direction and should encourage companies to re-engage in this dialogue. While history seems to suggest that tax reform is a messy and cumbersome process, it is not too late to start discussion with your tax advisors to plan ahead.
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