Will it be protectionism or something more dramatic? International Tax Planners are shifting their client’s tax strategy now getting ready 2018.
Here is what’s happening. First, President Trump is proposing a 15% U.S. business income tax rate. The goal is to keep American businesses from going offshore. The downside is this lower tax rate will apply only to corporations (excluding S-corporations). When a corporate distributes its profits, it is called a dividend. The shareholder pays tax on the dividend income.
Budgets concern are big since Big Business killed the Trump important duty on countries that apply a duty on U.S. goods (which is Europe, the UK, Canada, Australia, China and most of Latin America).
Second, small business will have a five percent higher tax rate . Small business uses S-corporations and LLC’s. They avoid the dividend tax that apply to publicly traded businesses. It will effect my work load because at a 20 percent tax rate, small business owners have little need for tax planning. At last, I get to slow down and smell the roses.
International businesses are starting to re-organize and eliminating cross-border joint production and cost sharing programs.
Currently, the average U.S. tax rate for international publically traded corporations is 14% . They get a unique tax savings with the foreign tax credit law. The IRS reimburses a domestic corporation the taxes paid by it or a subsidiary to a foreign government. With the current high-income tax rate, the full amount of the foreign taxes were reimbursed.
But, with President Trump’s tax plan, the reimbursement will be reduced because the income tax rate is reduced to fifteen percent. For example, if a foreign government tax rate is 30% and the U.S. business has a $1,000 of foreign income, the foreign tax is $300. If the U.S. tax rate is 35% then the U.S. tax of $350 is reduced by the foreign tax of $300. The net amount is paid to the IRS.
With President Trump’s tax law, the U.S. tax will be $150 (15% of $1,000). The foreign tax will reduce only $150 of U.S. taxes. As a result, tax planners will want to avoid having plants, employees and “permanent establishments) in foreign countries unless their tax rate is less than 15%.
Currently, only Ireland and Canada fits a tax rate less than 15% and has the capacity to manufacture. Both countries have good tax treaties with the U.S.
What about tax havens like the Cayman Islands? They are too small for manufacturing or productions.
Tax havens are ideal for the internet business and for firms that stream content. But, where good electricity for big equipment is required, they are not the best choice.
Summarizing 2018 foreign tax planning
Cross-border multi-national businesses are gearing up for all in one production within the U.S. for their American customers. With the British Exit from the Europe, these firms are going to be all in one within the EU or the British colonies. As a result, three separate free trade zones will develop (the U.S., the EU, and the British Colonies, (the U.K., Australia, New Zealand and Canada with its new 9% tax rate).
International tax strategies are now being developed for each of the three free trade zones.
Latin America countries, China and the rest of Asia will find their markets are changing. They will be caught fall out from President’s Trump isolation protective tax laws. American international firms will find the overall tax costs too high in these countries and their market to weak.
Tax planning is not so much about today’s tax laws. Tax planners closely look at the economic and political trends. These trends shape future tax bills and tax planning is only for the future, not the present or the past.
The Wall Street Journal “Think Tank” blog’s headline today is Donald Trump’s Foreign Policy Is ‘America Only,’ Not ‘America First’. The import duty to keep out foreign products and the lower corporate tax rate to keep American businesses in the Country is an “American Only” tax program.
Cross-border tax planners have noted this and are shifting their tax planning into three economic segments- the United States, the European Union and the British Commonwealth.
If you need help with your international tax planning, then please call me, Brian Dooley, CPA, MBT, at 949-939-3414.
We will help you “fight very hard to pay as little tax as possible.”