What does US tax reform mean for foreign-owned companies?
The US Tax Cuts and JobsAct, which was passed at the end of 2017, offers several rate cuts and improved expensing treatment for pass-through and corporate inbound businesses.
Most provisions under the new US Tax Cuts and Jobs Act generally applicable from 1 January 2018, and many will only be effective for seven to ten years before reverting to the previous rules – unless there is further legislation. Foreign-owned companies should be aware of the following changes.
Corporate tax reduction
The corporate rate has been reduced from 35% to 21%. Companies structured as C Corporations stand to save a considerable sum. But it’s important to bear in mind that net deferred tax assets and liabilities will need to be revalued under the new enacted rate for financial statement purposes.
Corporate net operating loss limitations
Beginning with losses generated during the 2018 tax year, net operating losses (NOLs) for C Corporations will be limited to 80% of (pre-NOL) taxable income. While NOLs will be eligible for unlimited carry-forward, most carry-backs will no longer be permitted.However, the cultural shift that this recent tax procedural legislation has instigated should promote improved recordkeeping across the value chain and encourage businesses to take advantage of technological innovations to fuel business growth.
Increased Section 179 expensing
Section 179 of the Act provides one of the elective provisions allowing the deduction of capital asset costs. In 2017, up to US$510,000 of property additions can qualify for deduction under Section 179. For tax years beginning in 2018, the new law raises the maximum amount deductible to US$1m for taxpayers with total qualifying additions below US$2.5m, after which qualification phases out.
A US C Corporation making interest or royalty payments to a foreign related party is denied a deduction if there is not a local country income inclusion or if there is a deduction against this type of income in the local country. This provision also denies a deduction if the interest or royalty payments are made to a hybrid entity, i.e., an entity treated as fiscally transparent for US tax purposes and a regarded entity for local country purposes, or vice versa.
Interest expense limits
Interest expenses continues to be fully deductible for taxpayers with three-year trailing average annual gross receipts of less than US$25m. Above the US$25m threshold, the disallowance is for net interest expense (interest expense less interest income) in excess of 30% of the business’s adjusted taxable income. Excess interest will carry forward indefinitely.
Sale of US partnership interest by a non resident person
Historically, the IRS has taken the position that the sale of a US partnership interest by a non-resident person was subject to US taxation, to the extent the sale of the underlying assets constituted US effectively connected income. This position has now been codified in the new law. In addition, the purchaser of the partnership interest is required to withhold 10% on the gross sales price.
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