On December 22, 2017, President Trump signed into law the U.S. tax reform legislation, also known as the Tax Cuts and Jobs Act. This new legislation includes major changes to the previously existing tax system and will affect both businesses as well as individuals.
Reduction of corporate tax rate
Under prior law, a company’s corporate tax liability was determined depending on the applicable tax brackets ranging from 15% (for taxable income not exceeding $50,000) up to a marginal federal rate of 35% (for taxable income exceeding $18,333,333). Increased with state taxes, this resulted in a combined federal and state marginal tax rate of approximately 35% to 40%.
Flat corporate tax rate of 21%
For tax years beginning after December 31, 2017, the tax brackets have been eliminated by the 2017 U.S. tax reform Act and a flat corporate tax rate of 21% is applicable. This corporate tax rate reduction will lead to a combined federal and state tax rate of approximately 25% to 28%.
Corporate taxpayers with a fiscal year including January 1, 2018 should take the existing IRC section 15 into account. This rule requires taxpayers to apply a “blended” tax rate in case a tax rate change becomes effective during the taxable year. Tentative corporate income taxes should first be computed on the total income for the taxable year by applying the old and new rates and afterwards prorated based on the number of days in each period.
Careful attention in case of review transfer pricing policy
Foreign parent companies with U.S. subsidiaries may view the corporate tax rate reduction as an interesting opportunity to review their existing transfer pricing policy. However, careful attention should be given to intercompany transactions pricing requirements given the increasing interest of tax authorities.
The Act also introduces a new set of provisions which intend to provide more equality between pass-through entities and corporations. This includes amongst others a 20% deduction for domestic “qualified business income” but is subject to certain limitations.
However, the introduction of this new 20% deduction should not be a decisive element in the determination of using a partnership status over a C corporation for setting up your new US subsidiary.
Advantage of setting up your US subsidiary as an agent on a cost-plus basis
Together with the new rules regarding net operating losses (NOL), it will most likely be more advantageous of setting up your US subsidiary as an agent on a cost-plus basis.
Chicago January 31st 2018
This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.