The US tax system recently received the biggest overhaul of a generation. The reforms proposed by the Republican Party were passed by the Senate and enacted into legislation in December 2017. The key headlines in the $1.5 trillion Trump tax plan were a reduction in the rate of corporate tax from 35 per cent to 21 per cent from 1 January 2018, and a significant change to the way the US will tax US companies that do business internationally.
The reduction in the rate of corporate tax rate will benefit many US businesses, particularly those whose main revenue stream is US-based and who do not have significant assets offshore. Some US businesses will however be affected by other measures introduced, such as restrictions on the amount of interest a business can deduct, coupled with a restriction on the utilisation of carried-forward losses.
The reform may also trigger a change to multinationals’ trading structures, with the much smaller tax-rate differential between the UK and the US - meaning that more profits may become attributable to the US than ever before. This could have a significant impact on the UK Exchequer, forcing the UK government to consider a further reduction to the rate of corporate tax, below the 17 per cent rate already announced for the financial year beginning on 1 April 2020.
The reforms will impose major changes on US multinational businesses, particularly those with significant assets held offshore, as the reform has introduced a tax charge on profits parked overseas that have not yet been repatriated to the US, at a rate of either 15.5 per cent or 8 per cent, depending upon the asset. Because of the reform, many large global multinational corporations, such as Microsoft, Cisco and Oracle, have announced they will be repatriating cash to the US or have stated publicly that they are reviewing their arrangements.
In the UK, many US-parented groups are also reviewing their accumulated earnings and profits, and putting measures in place to allow them to repatriate cash back to their US parent. This may force UK subsidiaries to borrow more in order to support their operations. There may also be consequences for the UK and European M&A market, in favour of US investment.
The knock-on effect of the US tax reform will have a far-reaching impact on UK subsidiaries. As the changes trigger possibly, the biggest cash move the world has ever seen, it will be interesting to see how the UK responds.
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