Coming Soon US Tax Reform And Its Impact On Multinational Business

On 2 December 2017, the US Senate passed its version of tax reform legislation ("Senate Bill") by 51 votes to 49, while the House passed its own version ("House Bill") on 16 November 2017. The next step is for the House and Senate to reconcile the differences between their respective bills.

Should the reconciliation go fast enough, US tax reform is likely to be enacted by the end of 2017. On top of decreasing the US corporate tax rate from 35% to 20%,1 both the House Bill and the Senate Bill also affect multinationals investing in or from the US. This would be the first major tax reform in the US since 1986.

The Senate Bill also aims to implement the OECD's BEPS action 2 on hybrid mismatches, so contrasts with the House Bill and the country's past policy in this respect.

The purpose of this post is not to provide exhaustive highlights of the bills, but rather to focus on some specific measures that are likely to affect both US inbound and outbound investments, also in the light of a Luxembourg context. For more detailed information on the US tax reform, please refer to KPMG US newsletters.

Although US tax rules are very complex and no final conclusion can be drawn at this stage of the legislative process, it seems that this reform could affect multinationals investing in or from the US as follows:

US outbound: a shift from worldwide taxation with a tax deferral system, to current year taxation of certain foreign income (at reduced rates)2 with participation exemption upon repatriation. As a transition to the new regime, mandatory deemed repatriation of previously untaxed "old earnings" (i.e. post-1986 deferred foreign income)3 would apply.

Such provisions may affect the European financing hubs/treasury centres of US taxable multinationals, the income of which could potentially—depending on their nature and other tax factors pertaining to the foreign subsidiaries of the group—be subject to final US current year taxation (at the above-mentioned reduced rates), with no incremental US tax upon distribution/repatriation to their US corporate shareholder;4 this would therefore contrast with the current tax deferral system.

US inbound: anti-base erosion provisions would be introduced, including but not limited to interest deduction limitations and anti-hybrid measures. The Senate Bill's anti-hybrid rules, which would apply to taxable years beginning after 31 December 2017, target hybrid loans directly granted to US affiliated companies by denying...