Following both the US House of Representatives and the Senate passing different versions of proposed US tax reform, the “Tax Cuts and Jobs Act”, a conference committee containing members of both chambers of Congress was formed to reach agreement on a tax reform bill.
On 15 December 2017, the joint House-Senate conference committee unveiled its conference agreement on the Tax Cuts and Jobs Act. This reconciles differences between the versions of the tax reform bill passed by the House and passed by the Senate and is a further significant step forward in the Republicans promise to enact tax reform before the end of the year.
It is anticipated that the House and Senate will vote on the agreement this week, and reports indicate that Republicans have enough votes in the House and Senate to pass the bill. If the conference report is approved by a simple majority in both chambers, it then will be sent to President Trump for his expected signature and enactment. The president has indicated his intent to sign the bill, and as a result it is expected that tax reform will take effect from 1 January 2018.
This would represent the most comprehensive reform to the US tax code in over thirty years and will require careful consideration by all taxpayers. The cornerstone of this bill is a reduction in the headline rate of federal corporate income tax from 35% to 21%, beginning 1 January 2018.
The main corporate income points of interest in the bill are:
Ireland’s 12.5% rate of corporation tax remains attractive when compared with the proposed US combined federal income tax and state rate tax which is likely to see most US businesses taxed at corporate income tax rates of circa. 26%.
A threshold foreign minimum rate of tax of 10.5% applies to profits from exploiting intangible assets before additional US tax applies to these profits. The taxable profits of most businesses in Ireland are taxed at a rate which is close to the Irish corporation tax rate of 12.5% meaning that Irish based business should broadly be subject to tax at a rate that equates to the target US minimum tax rate on such profits. Although it is important to note that the taxable income base and rate test here is calculated under US rules and on a global basis, including other foreign non-Irish affiliates.
Of some concern from an Irish competitive perspective are the proposals to offer a reduced US tax rate on foreign source intangible profits. These measures could see foreign source profits from intangible assets taxed in the US at a federal corporate income tax rate of 13.125% (increasing to 16.4% from 2026).
For Irish based business operating in the US, the proposed restrictions in relation to interest deductions (which are not grandfathered for existing debt) as well as additional taxes applying to payments for services (and goods) purchased from non US group members, could have significant consequences, in particular for those groups which are heavily leveraged and/or rely on sale of goods and services from non-US group companies to US subsidiaries.
Measures which propose a 100% expensing of asset expenditure together with the continuation of the R&D tax credit should improve the US after tax position of their investment in US based business.
Irish groups with US operations will need to carefully monitor the proposals in order to understand their potential impact on existing financing arrangements and business supply chains for US based operations.
Given the effective date of 1 January 2018 for most provisions, immediate action will be required by impacted companies to understand the implications for their business and their financial statements. Please contact any member of your KPMG team if you wish to discuss the US tax reform framework or international tax policy.