President Donald Trump signed the GOP tax bill into law before the end of 2017. The bill changes a number of areas of tax law. This piece will discuss the shift to a more territorial system of taxation and how this will impact multinational businesses and international tax issues.
How did the previous tax system apply to multinational business? The previous system essentially taxed companies based on their worldwide income. A tax would apply to the income that was gained throughout the world when it was brought back into the United States.
How is the new system different? A recent publication in the Harvard Business Review (HBR) explains that the current system shifts to a territorial system. The most immediate change is that corporations can bring their money back to the United States with a one-time repatriation tax. This tax is about 15 percent for cash transactions and 8 percent for other assets.
The piece in HBR, an interview with a professor of finance at Harvard Business School, explains that the motive behind the law was to move away from taxing income made abroad. However, there are a number of additional regulations that are designed to ensure that some tax is paid on the earnings somewhere in the world in an attempt to avoid a mass exodus to zero-tax jurisdictions. "[W]e don't care where you paid in the world," the author explains, "but we really want you to pay a 10 percent tax on your profits somewhere."
The base erosion and avoidance tax (BEAT) will also play a role in these transactions. It basically results in a ten percent tax on transactions within the firm designed to move profits out of the United States.