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Tax Reform Proposal Includes Provisions on Cross-Border Business

Monday, November 06, 2017
Sandler, Travis & Rosenberg Trade Report

A tax reform proposal unveiled by the House of Representatives Nov. 2 includes several provisions that would affect the international trade community. The following details on these provisions were made available by the House Ways and Means Committee.

- The current system of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when distributed as dividends would be replaced with a “territorial” system under which 100 percent of the foreign-source portion of dividends paid by a foreign corporation to a U.S corporate shareholder that owns 10 percent or more of the foreign corporation would be exempt from U.S. taxation. This provision would (a) level the playing field for U.S. companies by eliminating an additional level of tax their foreign competitors do not face and (b) eliminate a factor that encourages U.S. companies to avoid bringing their foreign earnings back into the U.S.

- The tax benefit afforded to multinational companies that make deductible payments between U.S. and foreign affiliates would be eliminated by imposing full U.S. tax on those profits irrespective of where they are booked. The committee notes that while these payments frequently relate to globalized supply chains and other legitimate business operations, the tax benefit achieved by reducing U.S. taxable income without a corresponding increase in U.S. taxable income elsewhere in the multinational group results in a distorted computation of the overall U.S. tax liability of multinational companies. Current law also incentivizes and subsidizes the shift of U.S. jobs overseas, the committee states, because additional functions performed abroad allow for greater deductible payments from U.S. corporations to their foreign affiliates.

- A one-time 12 percent tax would be imposed on previous foreign earnings kept abroad (five percent if invested in non-liquid assets) but could be paid over as much as eight years.

- The “look-through rule,” under which passive income received by one foreign subsidiary from a related foreign subsidiary generally is not includible in the taxable income of the U.S. parent, would be made permanent.

- The imposition of tax on U.S. corporate shareholders with respect to untaxed foreign subsidiary earnings reinvested in U.S. property would be repealed.

- The corporate tax rate would be lowered from 35 percent to 20 percent.

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