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.
