2018 Tax Reform in the USA: Optimization Opportunities for Non-US Companies

2018 Tax Reform in the USA: Optimization Opportunities for Non-US Companies

The US tax reform that came into effect in 2018 under the Trump administration is the biggest tax overhaul ever seen in the last 30 years. “Making America great again” interestingly results in attractive tax incentives for non-US companies that develop their business in the USA.

Let’s have a look at the impact of the 2018 tax reform for your business as you target the US market.

2018 Tax Reform in the USA

The new 21% tax rate is reshaping intercompany transactions

Before the tax reform, the USA had one of the highest corporate income tax rates (federal & state combined) among developed countries. The average tax rate was indeed 35% as shown in the table below:

Corporate Tax Rate Schedule Before The 2018 US Tax Reform

(Source : IRS)

Given such high tax rates, non-US companies having operations in the USA and generating a tax income above $50,000 used to organize their intercompany transactions so as to repatriate profits earned in the USA to their home country.

The 2018 tax reform turned the old tax brackets into one single tax rate = 21%. This is a great incentive for non-US parent companies that can now maintain a higher source of income in the USA if, for instance, tax rates in their home countries are higher than the new 21% US tax rate.

Many non-US companies are thus restructuring intercompany transactions to take advantage of the reform.

New tax incentives support ambitious investments made in the USA

  • Net Operating Losses (NOL): NOL are cumulated losses generated by your US entities over the years. Before the 2018 tax reform, companies were allowed to apply NOL to their taxable income for 20 years only. With the reform, NOL can be applied to taxable income throughout the company’s life, with no limit in time, which is a great incentive for businesses that require a major initial investment. Note that only 80% of the NOL can be applied each year though (versus 100% before the tax reform).

  • Production, machinery & equipment investments: if your US entity makes investment in new production lines or equipment, it can now benefit from new rules such as a write-off up to $1,000,000 the first year (versus $500,000 before 2018) and a 100% bonus tax depreciation (versus 50% before 2018) that will lower your US taxable income. Section 179 has been improved: instead of applying a yearly write-off amounting to your total investment divided by your equipment’s lifespan, the total amount of your investment can now be included in your taxable income.

Tax planning is now a must-have

In order to be as efficient as possible, a tax strategy must be implemented that will cover 4 main transaction types:

  • Royalties, IPs

  • Loans and interest rates

  • Management fees

  • Transfer pricing

According to your global tax strategy, you may want to lower these transactions (usually invoiced by the parent company to the US entity) to increase the taxable income generated in the USA while lowering your parent company’s taxable income.

However, do not forget that contracts pertaining to intercompany transactions must comply with both your home country’s tax regulations and the US tax regulations. Official documents must be issued to track and justify such transactions and be prepared by certified tax advisors.

As you prepare your annual budget and cash flow forecast, make sure that you include intercompany transactions but also the estimated tax that must be paid to the US tax administration on a quarterly basis [see Lost in the US Business Tax Woods? Build a Tax Calendar for Your US Entity].


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Disclaimer: The materials provided in this US Toolbox are for general information purposes only and are not intended to constitute comprehensive or specific legal, accounting, tax, marketing, or other advice. These materials may not reflect recent developments in the law, may not be complete, and may not pertain to your specific situation and circumstances.TradeSherpa, Inc. assumes no responsibility for errors or omissions in the materials, or for any losses that may arise from reliance upon the information contained these materials. Because these materials are intended to provide only general advice, specific advice should be taken from qualified professionals when dealing with specific situations and circumstances.