In December 2017 the U.S. passed a comprehensive tax reform package focused on supporting U.S. investments and the repatriation of foreign profits. The Tax Cuts and Jobs Act of 2017 (TCJA) lowered the corporate federal tax rate from 35 to 21 percent and made significant changes as to how foreign generated income would be taxed going forward. The TCJA enacted a “territorial” tax system and at the same time introduced provisions aimed to prevent U.S. companies from shifting profits to low-tax jurisdictions. From an international tax perspective, the TCJA favors C corporations over alternative business entity types and because of this we have seen some non-corporate shareholders restructuring their foreign investments in order to benefit from these new provisions. While tax structuring in response to the TCJA is not unexpected, subsequent, taxpayer-friendly regulations issued or proposed by the Treasury Department has made this process unnecessary in certain circumstances.
Despite the expectation that U.S. companies would shift business locations in response to the new enacted lower federal tax rate, we have not seen our U.S. clients slowing down foreign business expansion. On the contrary, we see U.S. companies continuing to expand their foreign business operations in order to increase their customer base and diversify their products and services. The country where our clients seem to have invested the most recently is the United Kingdom. This observation seems to be consistent with the Thomson Reuters M&A data, which shows that in 2018 the United Kingdom consisted of approximately 26% of U.S. cross border activity.
Mary Vasilescu, CPA, is a partner in Tax Services at Wiss & Company LLP and an international tax expert. Reach her at (973) 994-9400 or mvasilescu@wiss.visioncreativegroup.com.