In the early hours of 2 December 2017, the United States (US) Senate passed its version of tax reform (the Tax Cuts and Jobs Act) which contains proposals to enact wide-sweeping US tax reform measures.
Given the small Republican majority, passing the Senate was seen as one of the highest hurdles to enacting tax reform and therefore some form of tax reform is now seen as increasingly likely.
The Senate’s tax reform bill differs from that passed by the US House of Representatives (the House) on 16 November, and the next step is to get both chambers of Congress to negotiate and agree a uniform approach to tax reform. This could involve a formal House-Senate conference, informal negotiations, or even (although unlikely) the House simply accepting the Senate tax reform bill.
While there is no hard and fast deadline by which to place a bill on the President’s desk for signing, there is significant political pressure on both houses to enact tax reform legislation before the end of this year.
Both bills contain very significant proposed changes to the US federal corporate income tax regime. If enacted as proposed, the measures could make the US significantly more competitive, from a tax perspective, as a location to do business in the future.
The measures the House and Senate tax reform bills have in common include:
The tax measures in both bills are projected to increase the US deficit even after taking into account the effects of the expected boost to US economic activity arising from the tax reduction measures.
In order to pay for some of the tax revenues lost as a result of the above measures, both the House and Senate bills include a series of tax generating measures. If enacted, these could be expected to change the measure of US taxable profits for groups carrying out business in the US. These include:
As can be seen from the above, although there are differences in the details between the House and Senate bills, there is much in common in the proposed measures whether related to personal or business tax reform.
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. 25%.
A threshold foreign minimum rate of tax of 12.5% applies to profits from exploiting intangible assets under both the House and Senate bills 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).
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 the possibility of 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. However, these positive measures are unlikely to effectively counter balance the potential tax costs arising from the above measures.
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.
For US parented groups looking to expand outside the US, the proposals, if enacted, would mean that they would not face additional US tax if their total overseas foreign derived intangible profits were taxed at a rate of at least 12.5% (calculated on an aggregate basis and under US principles). Profits taxed at this minimum tax rate could be repatriated tax free to the US.
Of some concern from an Irish competitive perspective are the proposals contained in the Senate bill to offer a reduced onshore US tax rate on foreign source intangible profits. These measures, which are not contained in the House bill, could see foreign source profits from intangible assets taxed in the US at a federal corporate income tax rate of 12.5% (increasing to 15.625% from 2026).
The development of these measures will be watched with very close interest over the next couple of weeks. There are expected to be intensive negotiations between the House and Senate to reconcile the bills if President Trump’s ambition is to be realised and significant US tax reform measures are enacted by the end of this year.
Please view the diagram below which sets out the pathway to US Tax Reform.