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U.S. House Ways and Means Committee releases tax reform bill

U.S. tax reform bill

The Ways and Means Committee of the U.S. House of Representatives today released text and descriptions of a tax reform bill.

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The Ways and Means Committee of the US House of Representatives today released the text and descriptions of a proposed tax reform bill.

The chairman of the House Ways and Means Committee, Kevin Brady, initiated the tax reform process with the release of a “Chairman’s mark” of the tax reform bill. The Chairman’s mark generally represents the Ways and Means Chairman’s - and by proxy, the committee staff’s - proposal for tax reform. It does not necessarily include the input and priorities of the full committee.

It is important to keep in mind that the road to tax reform is still a long one – as summarised in the diagram below. There remains considerable uncertainty surrounding the final shape of any reform measures which may be enacted.

Overview

The key component of the proposal is to reduce the US federal corporate tax rate from 35% to 20%.

Under the proposals, Irish parented groups with operations in the US could see significant changes in the measure of their US taxable profits. Measures of relevance include:

  • A new regime for the tax deductibility of interest. The proposed regime limits the available tax deduction for net interest expense to 30% of EBITDA. A further limitation may apply where the US corporation’s share of the group’s net interest expense exceeds 110% of the US corporation’s share of the group’s EBITDA.
  • A new ‘Excise Tax’ of 20% on payments (excluding interest) to related non US parties, which effectively results in such payments becoming non-deductible. The Excise Tax applies to payments for services, cost of goods sold and capital assets. The Excise Tax will not apply if the taxpayer elects to treat the income from the payment as ‘Effectively Connected Income’ and subjects the net profit to US corporate income tax at 20%. This regime is proposed to apply to groups where the annual amount of deductible payments to related parties exceeds $100m. It is unclear if an Excise Tax (or the substitute corporate income tax) would be creditable in the country of the payment recipient.
  • Immediate expensing of investment in capital assets (excluding real estate property trades).
  • Anti-treaty shopping measures on US source payments including interest and royalties, through the imposition of either a US withholding rate of 30% or the withholding rate under the US tax treaty with the foreign parent. 
  • Limit the use of net operating losses

The combined effect of these measures, if enacted, could be significant for the supply chains of goods and services to the US market.

Additional measures of relevance to US parented multinational groups with operations in Ireland include:

  • A tax on the deemed repatriation of overseas profits at a rate of 12% for earnings held in cash or cash equivalent and 5% for non-cash earnings. The tax can be paid in equal instalments over 8 years.
  • A new measure to introduce what is essentially a 10% minimum tax on ‘High Return Profits’ from foreign subsidiaries. This seeks to immediately tax 50% of the ‘High Return Profits’ of foreign subsidiaries at the new proposed corporate income tax rate of 20%. A deemed credit is available, capped at 80% of the foreign taxes paid on the High Return Profits. When the profits are subsequently repatriated to the US, no further US tax should arise. US groups which derive a large proportion of their overseas profits from intangible assets could see part of these profits immediately subject to US tax under this regime; however the 80% credit for foreign tax paid will be available.
  • A participation exemption from US tax on dividends from foreign subsidiaries where the US parent owns at least 10%, thereby adopting a territorial system.
  • The controlled foreign corporation (Subpart F) regime continues to apply, such that passive income of foreign subsidiaries remains subject to immediate US tax.

Impact for Ireland

What ultimately emerges and what it might mean to Ireland is difficult to say. The proposal to reduce the US federal corporate tax rate to 20% will, if implemented, undoubtedly reduce the difference between the US rate and Ireland’s corporate tax rate of 12.5%. However, adding State Taxes of circa 5%, would mean a US tax rate of double the Irish rate – so there would remain a compelling difference between the two.

The proposed one-time tax on overseas earnings is unlikely to have a significant impact on the Irish operations of US companies.

The measures above are only part of a US tax reform package which also proposes fundamental reform for the taxation of individuals and US domestic businesses. There are many variables which will continue to be debated by US taxpayers before the final shape of US tax reform is determined. As such, it will undoubtedly be very important for companies to monitor and assess the implications of what is ultimately agreed, as the proposals develop.

KPMG Ireland is hosting a webinar on Monday, 6 November 2017 at 5pm GMT to present an overview of the proposals and their potential impact on businesses based in Ireland.

Click here to view legislative text of H.R. 1 and a section-by-section summary prepared by the Ways and Means Committee.

If you have any questions relating to US tax reform, please do not hesitate to contact us.

 

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