Why in news?
US is likely to enact a new corporate tax reform.
What is the present US corporate taxation rule?
- The current US rule is unique among all major advanced economies.
- For instance a subsidiary of a US corporation that earns profits in Ireland and it pays the Irish corporate tax at 12 per cent rate.
- It is then free to reinvest the after-tax profits in Ireland, in financial securities, or in operating businesses anywhere in the world except the US.
- If the foreign subsidiary’s parent company brings the after-tax profits back to the US, it must pay the current US corporate tax rate of 35 per cent.
- The tax is collected on its original pre-tax Irish profits, with a credit for the 12 per cent that it has already paid.
- US companies generally choose not to repatriate the profits of their foreign subsidiaries as there is 23 per cent penalty on repatriation.
What is US new tax reform?
- US is likely to adopt the “territorial” method of taxing the profits of US corporations’ foreign subsidiaries.
- This will reduce the present a 35 per cent statutory tax rate on corporate profits to 15- 20 per cent.
- Under the territorial method, US corporations will be able to repatriate their foreign subsidiaries’ after-tax profits with little or no extra tax.
- It is also likely to enact a “deemed repatriation tax” on the $2.5 trillion of profits that have been accumulated abroad but never subject to US tax.
- The basic idea of deemed repatriation tax would be to levy a tax of about 10 per cent on the untaxed overseas profits, to be paid over a period of years.
- Companies in abroad will have an incentive to shift their headquarters to the US, without incurring the current tax penalty.
What will be the impacts of this new taxation?
- US corporations will no longer have an incentive to shift their country of incorporation to other countries.
- A large share of foreign subsidiaries’ profits in abroad is likely to be returned to the US, reducing investment in Europe and Asia.
- A portion of the $2.5 trillion of past profits now held abroad would be repatriated as well.
- This would raise US productivity and GDP, leading to increases in tax revenue that would partly offset the direct effect of the corporate rate reduction.
- The reduction of the US rate will cause other developed countries to reduce their corporate tax rates to improve their relative attractiveness to internationally mobile capital.
Source: Business Standard
