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Beware of the US 'tax amnesty'
Taxation of US companies with subsidiaries abroad will be the one with the most obvious and most direct international impact.
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Taxation of US companies with subsidiaries abroad will be the one with the most obvious and most direct international impact. (Shutterstock/File)
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ometime during the upcoming semester, the United States Congress is most likely to enact a major tax reform that is similar to Indonesia’s 2016 tax amnesty. While the latest rulings will be applicable only to American taxpayers, they will have significant effects for corporations and financial markets that operate globally.
The most significant changes will be applicable to corporate taxpayers, rather than individual taxpayers. Of these changes, taxation of US companies with subsidiaries abroad will be the one with the most obvious and most direct international impact.
Among advanced countries, the current US tax ruling is peculiar. For example, a subsidiary of a US company operating in Ireland makes profits. That subsidiary is supposed to pay a 12 percent tax on its profits to Ireland, a far lower rate than the US tax rate.
The after-tax profits are then free to be reinvested in businesses operating anywhere in the world or in financial securities, except in the US. However, if the foreign subsidiary’s parent corporation transfers the aftertax profits to the US to distribute to its shareholders or to invest in the US, it must pay the current US corporate tax rate of 35 percent on its pre-tax Irish profits — with credit for the 12 percent it has already paid.
US companies mostly opt not to transfer their foreign subsidiaries’ profits because of a 23 percent repatriation penalty. Based on the US Treasury Department’s estimates, such subsidiaries have made around US$2.5 trillion in offshore profits.
Congress is most likely to pass the territorial system for taxing US companies’ profits made from foreign operations. Under the latest taxation system, which is generally used in other advanced countries, US companies will be able to transfer their after-tax profits from foreign subsidiaries with little to no additional tax.
The US government is also most likely to impose a kind of perceived repatriation tax on the $2.5 trillion profits that foreign subsidiaries have accumulated, but have never been subject to US tax. Although the details of this ruling have not been determined, the fundamental logic would be to levy a tax of about 10 percent on foreign subsidiaries’ untaxed profits.
