Tax reform proposal unveiled by the US House of Representatives includes several provisions that would affect the international trade community.
Under the proposals, outlined by the House Ways and Means Committee yesterday (6 November), the current system of taxing US corporations on the foreign earnings of their foreign subsidiaries when distributed as dividends would be replaced with a “territorial” system. Under this, 100% of the foreign-source portion of dividends paid by a foreign corporation to a US corporate shareholder that owns 10% or more of the foreign corporation would be exempt from US taxation.
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The provision is aimed at levelling the playing field for US companies by eliminating an additional level of tax their foreign competitors do not face, and eliminating a factor that encourages US companies to avoid bringing their foreign earnings back into the US.
Additionally, the tax benefit afforded to multinational companies that make deductible payments between US and foreign affiliates would be eliminated by imposing full US tax on those profits irrespective of where they are booked. The Committee says that, while these payments frequently relate to globalised supply chains and other legitimate business operations, the tax benefit achieved by reducing US taxable income without a corresponding increase in US taxable income elsewhere in the multinational group results in a distorted computation of the overall US tax liability of multinational companies. Current law also incentivises and subsidises the shift of US jobs overseas, the Committee states, because additional functions performed abroad allow for greater deductible payments from US corporations to their foreign affiliates.
The Committee also outlined a one-time 12% tax that would be imposed on previous foreign earnings kept abroad (5% if invested in non-liquid assets) but could be paid over as much as eight years. And the “look-through rule,” under which passive income received by one foreign subsidiary from a related foreign subsidiary generally is not includible in the taxable income of the US parent, would be made permanent.
Also in the proposal is a repeal of the imposition of tax on US corporate shareholders with respect to untaxed foreign subsidiary earnings reinvested in US property, and a lowering of the corporate tax rate from 35% to 20%.
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By GlobalData
