US Tax Reform – Challenge and Opportunity
US corporate income tax rates are among the highest in the world. Additionally, the US corporate tax system includes numerous deductions, credits and other tax favored items cherished by different industries, as well as many burdensome provisions accumulated over time to address real or perceived opportunities for tax avoidance. It is almost universally agreed that the complexity and costs of the corporate tax system drive corporations (or at least their profits) away from the US, hinder US economic growth and discourage business investment in the US. When not otherwise engaged in the drama and excitement of current DC politics, both Congress and the White House consistently indicate an interest in reforming the corporate tax system.
From north of the 49th parallel, US corporate tax reform can be hard to distinguish from the regular barrage of “America First” trade rhetoric emanating from the White House. However, these are in fact two distinct, but related, issues. It is important for Canadian businesses to monitor developments on the trade front closely. It is equally important to monitor changes to the corporate tax system. Many of these changes may be opportunities (if well disguised) for Canadian businesses.
Current corporate tax reform plans have three main components. The first is the lowering of corporate tax rates. A corporate tax rate of 20-25% would put the US more in line with other OECD countries. The second is “broadening the base” – political jargon for reducing the number of quirky deductions and credits that companies can use to reduce their taxable income. The third is to address the specific complications of taxing cross border businesses.
The phrase “border adjustment” is frequently heard. The most potent form of a border adjustment would ignore income and deductions from non-US business activities. A US business would not be subject to tax on its foreign source income, and would not be able to claim deductions for foreign expenditures. Taken in this literal form, the costs of products or services procured from a non-US source would not be deductible to US businesses. This would obviously impose a significant incentive for US businesses to source their products and services in the US. At first glance, this seems ominous for Canadian businesses.
However, this harsh application is unlikely to materialize. An economy with a large retail sector would be thrown into disarray if the costs of imported items were not deducted from retailers’ incomes. Similar outcomes can be expected if this mechanism is applied to oil and other resources. To say nothing of the attacks on such a system as violating any one of numerous bilateral or multinational agreements.
Furthermore, such a simplistic system would need to address the subtle issues of transfer pricing, branch operations and other intra-company cross border operations. Many Canadian businesses have already established tax efficient mechanisms for addressing these issues. Canadian businesses with US operations would likely have numerous planning opportunities with respect to both their US operations and third party enterprises entering the US markets.
It is always a good idea to make sure that a business structure provides maximum tax efficiency and opportunity. Proper guidance and analysis can turn the winds of tax change into trade winds.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other tax or business law matter, please do not hesitate to contact one of the lawyers in the tax law group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.