New tax laws ending global taxation of American companies have been proposed by the Trump administration. This new tax law would greatly benefit multinational American companies, and would especially benefit those who have used certain accounting maneuvers to avoid paying foreign taxes right away.
To understand how this tax plan would affect American companies, there are several things you need to know: what the current US tax laws are, what the proposed new tax laws are, and how it would affect corporations who have used different foreign accounting strategies.
First, let’s look at the current tax regulations for US-based multinational corporations. In United States tax law, US Companies must pay the standard 35% corporate tax rate on both domestic and foreign earnings. This is a law that is unique to the US, as few other countries require taxes on foreign earnings. Now, let’s move on to the proposed change to this law.
In the Trump administration’s April tax outline, they proposed ending the global taxation of American corporations. Simply put, this would mean that US companies would no longer have to pay the 35% tax on their foreign earnings, and would only pay it on domestic earnings. The Trump administration also proposed that, as a part of the transition to this new tax law, corporations would have a reduced rate on their deferred tax liabilities.
But what exactly are deferred tax liabilities? This is one of the accounting strategies used by multinational corporations. A deferred tax liability allows a company to put their estimated foreign earnings tax aside and not pay it right away. So, many companies have not paid these foreign taxes in some time. According to a Bloomberg report, US companies as a whole have amassed more than 2.6 trillion in untaxed profits overseas.
The other major accounting strategy that multinational companies use for their foreign taxes is to “permanently reinvest” some of these funds. This means that they can claim some of their foreign income as permanently reinvested in a new country and state that they will not be paying US tax on it.
So, how does the new law affect different multinational companies? In the long term, it would benefit all of these companies equally, as none of them would have to pay the 35% standard tax on foreign income in the future. But, in the short term, the new law would enormously benefit corporations who have been using the deferred tax liability strategy. This is because of the Trump administration’s transition plan of allowing companies to pay a lower tax on deferred tax liabilities.
The April tax outline given by the Trump administration does not give a specific number for the proposed lower tax rate. But Trump said in his campaign speeches that he would change it to 10%. This would be a huge benefit for those who have been stockpiling deferred tax liabilities. They would be paying 10% instead of the 35% standard rate, allowing the much of what they set aside in estimated tax to return to them, gaining them profits in the billions of dollars.
Some US companies, namely Apple and Pfizer Inc., have relied heavily on the deferred tax liability strategy and would stand to make one-time profits in the billions of dollars under this tax plan. Other companies, like Microsoft and Exxon Mobile, would take a hit from this tax plan in the short term because they have relied more heavily on permanently reinvesting. Under the proposed new tax plan, all foreign earnings would be subject to deemed repatriation. This simply means that whether or not foreign earnings already are or will ever be returned to the US, they will be taxed like they were. So, for companies that used permanent reinvesting and planned to not have to pay some taxes, they would have to now pay that tax.
So, this tax plan would enormously benefit some American companies like Apple and Pfizer Inc. in the short term. And overall, this tax law would hugely benefit multinational corporations in the long term.
This proposed foreign income tax overhaul would certainly bring huge tax relief to major corporations who have been holding onto deferred tax liabilities. Because tax relief is our business at Vanguard, we will be keeping a close watch on these new tax plan developments. Making sure we know every detail of tax law is a what helps our experts at Vanguard Tax Relief excel at providing our customers with expert tax relief. Visit our home page to learn more about what tax relief can do for you, and browse our Tax Solutions section to learn more about current tax relief strategies.