the one with the most obvious and direct international impact will be the change in the taxation of US corporations’ foreign subsidiaries.
The current US rule is unique among all major advanced economies. Consider the example of a subsidiary of a US corporation that earns profits in Ireland. That subsidiary pays the Irish corporate tax at Ireland’s low 12% 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 to invest or distribute to its shareholders, it must pay the current US corporate tax rate of 35% on its original pre-tax Irish profits, with a credit for the 12% that it has already paid.
Because of this 23% penalty on repatriation, US companies generally choose not to repatriate the profits of their foreign subsidiaries. The Treasury Department estimates that these subsidiaries have accumulated $2.5 trillion of offshore profits.
Thanks for posting this reality.
Those don’t understand percentages will not grasp the full impact of this:
The current US rule is unique among all major advanced economies. Consider the example of a subsidiary of a US corporation that earns profits in Ireland. That subsidiary pays the Irish corporate tax at Ireland’s low 12% 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 to invest or distribute to its shareholders, it must pay the current US corporate tax rate of 35% on its original pre-tax Irish profits, with a credit for the 12% that it has already paid.
Because of this 23% penalty on repatriation, US companies generally choose not to repatriate the profits of their foreign subsidiaries. The Treasury Department estimates that these subsidiaries have accumulated $2.5 trillion of offshore profits.
Thanks for breaking it down.
I never knew it was that bad. Like most people I just assumed the tax was on the amount transferred to the US, not the whole kit ‘n kaboodle.
Which is why they really hate the new 20% excise tax, levied on payments made when an American company buys goods or services from a foreign subsidiary or “affiliate” — unless the subsidiary elects to treat the payments as income in the US. Hell, they may fire the US lobbyists and congresscritters who were supposed to kill the Trump tax bill.