Treasury Today Country Profiles in association with Citi

Thomson Reuters

Have Trump’s tax reforms caused you to rethink your US dollar repatriation strategy?

Dan Burns, Financial Markets Editor, Thomson Reuters

US tax policy shifts are having a significant influence on how multi-national corporations are allocating capital. What does this mean for your business?

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Dan Burns

Financial Markets Editor

With potential for the repatriation of US$2trn of overseas investment, Dan Burns took the opportunity at a recent Treasury Today webinar to explain the main changes to US tax. Here are his key takeaways:

Corporate alternative minimum tax

Repeals the 20% corporate alternative minimum tax, set up to ensure profitable corporations pay at least some tax.

Territorial system

Exempts US corporations from US taxes on most future foreign profits, ending the present worldwide system of taxing profits of all US-based corporations, no matter where they are earned. This would align the US tax code with most other industrialised nations, undercut many offshore tax-dodging strategies and deliver to multinationals a goal they have pursued for years.

Repatriation

Sets a one-time mandatory tax of 8% on illiquid assets and 15.5% on cash and cash equivalents for about US$2.6trn in US business profits now held overseas. This foreign cash pile was created by a rule making foreign profits tax-deferred if they are not brought into the United States, or repatriated. That rule would be rendered obsolete by the territorial system.

Base erosion and anti-abuse tax (BEAT)

Prevents companies from shifting profits out of the United States to lower-tax jurisdictions abroad. Sets an alternative minimum tax on payments between US corporations and foreign affiliates, and limits on shifting corporate income through transfers of intangible property, including patents. In combination, these measures with the repatriation and territorial system provisions, represent a dramatic overhaul of the US tax system for multinationals.

Poll 1: How informed are you about the new US Tax Reforms?
Poll 1: How informed are you about the new US Tax Reforms?

Here is how BEAT is designed to work: If a company generates more than US$500m in annual revenue in the US, and its American units make above a specified level of tax-deductible payments to related companies overseas, those units must pay a minimum tax on their US profit after adding back in certain types of deductions. The minimum rate is 5% in 2018 but rises to 10% in 2019 and 12.5% in 2026.

Capital expensing

Allows businesses to immediately write off, or expense, the full value of investments in new plant and equipment for five years, then gradually eliminates this 100% expensing over five years beginning in year six. Also makes changes to permit for more expensing by small businesses.

Interest deduction limit

Caps business deductions for debt interest payments at 30% of taxable income, regardless of deductions for depreciation, amortisation or depletion.

Clean energy

Preserves tax credits for producing electricity from wind, biomass, geothermal, solar, municipal waste and hydropower.

Carried interest

Leaves in place ‘carried interest’ loophole for private equity fund managers and some hedge fund managers, despite pledges by Republicans including President Donald Trump to close it. These financiers can now claim a lower capital gains tax rate on much of their income from investments held more than a year. A new rule would extend that holding period to three years, putting the loophole out of reach for some fund managers but preserving its availability for many.

Companies are benefitting when gains in profits attributable to reductions in effective tax rates are shown to the tune of US$56.4bn in the case of the big technology companies.

The current situation is also having a major impact on exchange rates against the greenback with only the currencies of Mexico (although this is probably a correction of earlier weakening following President Trump’s policy on Mexico), Ukraine, Colombia, Kenya, Japan and Nigeria showing gains.

Poll 2: Has the dollar’s strength this year made your currency hedging programmes more challenging than before?
Poll 2: Has the dollar’s strength this year made your currency hedging programmes more challenging than before?

If you missed the webinar and would like to hear the full recording:

Watch webinar now