How the U.S. Presidential Election May Impact Taxation of Offshore Earnings
Under current U.S. tax law, U.S. companies are taxed on their worldwide income. However, certain types of income earned by their foreign subsidiaries are not taxable in the United States until the income is brought back to the United States. In other words, the tax on this income is deferred until it is repatriated to the U.S. Upon repatriation, the income is subject to tax at a rate of up to 35%.
Therefore, to manage their effective tax rate, many U.S. multinational corporations accumulate cash in foreign jurisdictions rather than making distributions to their respective U.S. parent company. According to a 2015 report by Citizens for Tax Justice and U.S. PIRG Education Fund, U.S. companies have amassed an estimated $2.1 trillion of cash offshore. In fact, the top 50 companies hold $1.4 trillion offshore according to a 2016 report by Oxfam America.
Prior Repatriation Program
This has gained the attention of many politicians who would prefer to have this cash reinvested in the U.S. economy. In 2004, the American Jobs Creation Act created a temporary incentive for U.S. companies to bring their offshore cash back to the United States. Under this program, a one-time tax of 5.25% was imposed on repatriated profits. It is estimated that $362 billion was repatriated at that rate. Critics of this program claim that it rewarded companies who chose to defer their U.S. tax over those that repatriated more timely and incurred the U.S. tax.
Since the expiration of this incentive, U.S. multinational companies have again been faced with U.S. taxation upon distributions from foreign subsidiaries at full rates. As the presidential election nears, U.S. companies that have been deferring U.S. tax by keeping foreign earnings offshore should pay particular attention to the tax policies of the candidates.
Proposals of Presidential Candidates
Under Donald Trump’s tax policy, the deferral of income tax on foreign earnings would be eliminated. Instead, all foreign earnings will be deemed distributed to the United States, whether the cash is repatriated or not. However, the tax on these distributions would be lowered to a 10% tax rate. His plan would also preserve the foreign tax credit.
Hillary Clinton’s tax policy, on the other hand, does not directly address the repatriation tax. Instead, her policy focuses on U.S. companies that are relocating their parent companies to foreign jurisdictions (i.e., inverting). She would strengthen the rules that were enacted to prevent inversions, and add an “exit tax” on unrepatriated earnings of inverting companies.
Regardless of the outcome of the election Moore Stephens Doeren Mayhew is here to help you with your international tax needs, including earnings repatriation planning, global tax minimization, transfer pricing, and more. Contact us today!
Carrie Koshkin, JD
With nearly 15 years of experience in international tax law, Carrie’s international tax services background includes implementing tax-efficient organizations and helping clients enter new jurisdictions. Additionally, she focuses on inbound/outbound tax issues, U.S. tax implications of international restructuring, and more. Contact her at firstname.lastname@example.org or +1.713.860.0219.