The Wall Street Journal: US Tax Overhaul Raises Alarms Among Foreign Executives

US proposals to cut taxes for corporations and wealthy individuals are troubling executives of foreign firms. The United States is the world’s largest market for many companies and tax changes can affect global profits, explains a team of writers for the Wall Street Journal. Reduced taxes could mean reduced government revenues and increased uncertainty that slow consumer spending. Some provisions could violate World Trade Organization rules. One proposal imposes an excise tax of “as much as 20% on goods or services a foreign company sells in the U.S. via its local subsidiary.” Another proposal: “payments to foreign parents or affiliates could trigger a minimum tax of 10%” and “The excise and base-erosion taxes introduce a border-based taxation system that would be a big new navigational hazard for multinational companies.” Multinationals would be limited on tax deductions for US affiliates’ debt, and some foreign airlines could be subjected to US income taxes. The Senate has yet to approve the tax bill, and then the House and the Senate must also reconcile two varying versions. The United States is the world’s leading destination for foreign direct investment. – YaleGlobal

The Wall Street Journal: US Tax Overhaul Raises Alarms Among Foreign Executives

Multinationals and foreign investors study US tax proposals: Excise and base-erosion taxes create a border-based system with challenges for multinationals
Robert Wall, Nina Trentmann and Natalia Drozdiak
Friday, December 1, 2017

Tax overhaul proposals winding their way through Congress may look great for U.S. corporations. For foreign firms, not so much.

A lot will change between what is currently contained in separate drafts in the House and Senate and whatever ends up on President Donald Trump’s desk—if anything at all. But Republican senators and representatives are coalescing around the broad strokes of a plan that many expect will be a big tax boon to American business. Recent momentum on a deal has fueled successive days of stock-market highs.

The legislative proposals could slash American firms’ headline corporate tax, from 35% to 20%, though the Senate Wednesday considered a more modest reduction. The proposals also simplify rules governing tax provisions and write-offs that are expected to help dozens of industries, including big U.S. multinationals that do lots of cross-border trade and tech firms with piles of cash overseas.

All that is potentially good news for international companies that pay U.S. taxes, too. But a lot of the fine print included in the two bills is also raising alarm among foreign executives.

“I suspect that most foreign groups doing business in the U.S. will be negatively affected,” said Stef van Weeghel, global tax policy leader at accounting firm PricewaterhouseCoopers LLP.

For most foreign multinationals, the U.S. still represents one of the world’s biggest, most important markets—so tax hits there can have outsize impact on global profit. Here’s a rundown of the elements of the tax rewrite being watched most closely by foreign executives:

Excise Tax

The House version would impose an excise tax of as much as 20% on goods or services a foreign company sells in the U.S. via its local subsidiary. Companies would be able to choose to avoid the excise tax on their U.S. unit. But in return all income from U.S. sales would be taxed stateside, in addition to accruing tax, in some cases, in a company’s home jurisdiction.

The measures—if they make it into law—could conflict with bilateral tax agreements and contravene World Trade Organization rules, tax experts say.

Foreign auto makers could take a big hit, said Albert Liguori, a tax expert at law firm Alvarez & Marsal Taxand LLC. Some of that would be mitigated by all the new plants European and Asian firms have built in the U.S.

“It depends on how much import versus export they have,” he said. The German Association of the Automotive Industry notes its members have big plants in the U.S. “If the U.S. introduced import duties or other trade barriers, it would be shooting itself in the foot,” it said in a statement. The lobby group said it would wait until final legislation emerges before passing judgment on how it impacts car makers.

“Base Erosion”

In the Senate version, payments to foreign parents or affiliates could trigger a minimum tax of 10%.  Proponents say that would help raise money from foreign firms that the U.S. is giving away in other tax cuts, and it also helps make domestic suppliers more competitive, they say.

The excise and base-erosion taxes introduce a border-based taxation system that would be a big new navigational hazard for multinational companies. “No other country has something like that,” said Christian Kaeser, global head of tax at German conglomerate Siemens AG and chair of the International Chamber of Commerce Commission on Taxation.

Tax Deductions for U.S. Units

The Senate version includes language that would curb the tax deductions multinationals can now take on debt carried by their U.S. affiliates. That would water down a current incentive to load American units up with debt. U.S. companies wouldn’t face such a constraint on the tax deduction of interest payments.

Foreign Airlines

Sen. Johnny Isakson (R., Ga.) has proposed an amendment to the Senate version that could raise costs from some foreign airlines flying to the U.S. Airlines generally pay tax at home and aren’t subject to U.S. income tax even for their American activities. The amendment, if enacted, would eliminate that exclusion for foreign airlines whose own markets aren’t served by significant flights by U.S. carriers.

Abu Dhabi-based Etihad Airways said the proposed amendment “is widely agreed to be inappropriate under U.S. law and contrary to several international agreements.”

Repatriation Holiday

Both chambers propose a one-time tax break for U.S. companies to repatriate profits earned overseas. Currently, American firms have hoarded cash offshore, eager to avoid the high U.S. corporate tax they would incur if they brought it home. Apple Inc., for instance, has about $252 billion in cash abroad.

The House version proposes a one-time corporate tax rate of 14% for repatriated cash, while the Senate is proposing 10%. The tax would also apply if the cash is kept abroad.

While foreign firms aren’t directly hit by this, they are suddenly at a big—albeit temporary—competitive disadvantage to their American competitors, who will suddenly have unfettered access to an infusion of new funds at low tax rates.

Robert Wall is the senior aerospace and aviation editor of The Wall Street Journal in Europe. Based in London, he writes about aerospace, defense and aviation industries in Europe, the Middle East and Africa. He has been covering the aerospace and defense industry in the U.S. and EMEA since 1995. Nina Trentmann is a news editor at CFO Journal, The Wall Street Journal’s corporate finance group.  Natalia Drozdiak is a reporter at The Wall Street Journal’s Brussels bureau and covers EU antitrust and tech and telecoms regulation. She was previously with the Journal in Frankfurt, writing about German business, utilities and airlines.  

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