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FINANCE: Outlook for the Proposed US Tax Reform
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Outlook for the Proposed US Tax Reform
The US government releases new tax reform framework
By Kelvin Lee, PwC Tianjin

BT 201711 FINANCE 01      继 4 月美国财政部长和白宫国家经济委员会发布了税改纲要以及7 月美国政府和共和党领导人发布了关于全面税改原则性内容和目标的联合声明之后,美国税改进程如何推进一直备受关注。美国当地时间 9 月 27 日,美国政府、众议院筹款委员会与参议院财政委员会发布了税制改革方案的框架性文件(以下简称“税改框架”),旨在建立有利于美国本国经济发展、降低美国中产家庭负担,保护本国就业机会的税收制度。框架对企业所得税、个人所得税、跨境税制都做了调整。

      首先,税改框架拟将企业所得税降至 20%,以低于世界工业国家的平均企业所得税率 22.5%。同时,拟对中小型穿透实体的经营所得征税,最高税率不超过25%。税改框架还拟取消企业的替代性最低限额税,并考虑采取措施减少对企业所得的双重征税。

      在跨境税制方面,税改框架宣布将属地征税取代目前的全球征税体制。当美国母公司对境外子公司的控股达到 10%,其从该境外子公司取得的股息红利可以免征企业所得税。此举旨在鼓励境外利润回归美国。

      最后,税改框架拟将现行的 7 级个人所得税税率简并为3级,分别为12%、25%和35%,并保留对于高收入纳税人增加一级税率的可能性以保证税负公平。同时,还拟取消个人的替代性最低限额税和遗产税。

BT 201711 FINANCE 10In brief

After the release of administrative principles of the tax reform by the US Treasury Secretary and White House National Economic Council (NEC) in April this year (hereinafter referred to as “the Principles”) and the release of joint statement outlining the key principles and goals for comprehensive tax reform by the US government and Congressional Republican leaders later in July (hereinafter referred to as “the Joint Statement”), how the US is going to push forward the tax reform has attracted a lot of attention. On September 27th, the US government, House Ways and Means Committee and Senate Finance Committee jointly released a unified framework for tax reform (hereinafter referred to as “the Framework”), aiming to build a taxation regime that could promote the economic growth of the US, reduce the tax burden of middle-class families and protect jobs in the US.

In detail

Highlights of the Framework include (please refer to Appendix for the detailed comparison between current tax regime and the Framework):

BT 201711 FINANCE 02Corporate income tax reform

• The Framework proposes to reduce the current corporate income tax (CIT) rate to 20%, which is below the 22.5% average of the industrialized world. Meanwhile, it calls for a maximum CIT rate of 25% for certain pass-through business income. It also plans to eliminate the corporate alternative minimum tax (AMT) and consider methods to reduce double taxation of corporate earnings.

• Regarding expenses items, the Framework proposes to allow immediate write off (or expense) of cost of new investments in depreciable assets other than structures made after September 27th, 2017, for at least five years. Moreover, deduction for net interest expense incurred by C corporations is proposed to be partially limited, while no relevant details are disclosed.

Cross-border taxation

• The Framework states that the current US worldwide tax system will be replaced by the territorial tax system. In such a case, dividends received by a US company from foreign subsidiaries (in which the US parent owns at least a 10% stake) will be exempted from CIT. This aims to encourage US companies to repatriate foreign earnings.

• As part of the transition to this new dividend exemption system, the Framework proposes to treat foreign earnings that have already accumulated under the old system as repatriated, and subject that to a one-off repatriation tax. Different tax rates will apply to accumulated foreign earnings held in liquid assets and accumulated earnings held in cash or cash equivalent.

• Border Adjustment Tax (BAT) is not included in the Framework this time, which is consistent with the declaration in the Joint Statement that BAT would not be considered in the tax reform.

BT 201711 44Individual income tax reform

• The Framework proposes to reduce the current seven individual income tax (IIT) brackets to three, with the rates set at 12%, 25% and 35%, while leaving open the possibility of providing a fourth higher tax bracket for upper-income individuals to keep tax fairness. The Framework also calls for repealing the individual AMT and estate tax.

• Regarding deduction items and tax breaks, the Framework plans to double the annual standard deduction and increase child tax credit. While the Framework considers repealing most itemized deductions, tax incentives for mortgage interest and charitable donations generally will be preserved.

• As for carried interest which is currently taxed at capital gains rates, it was once proposed to be taxed at ordinary rates in a previous tax reform plan but it is not mentioned in the Framework this time.

The Framework basically extends the main proposals in the Principles and Joint Statement and offers a number of detailed guidelines for tax reform. It is worth noting that the Framework serves as a template for the House and Senate Tax Writing Committees to develop legislation, which needs to be negotiated by House Ways and Means Committee and Senate Finance Committee and then voted by the Senate, and finally signed into law by the President. Therefore, attention needs to be paid on whether the details of the tax reforms may change. Nevertheless, every step of the US tax reform will affect all economics in the world, including China.

BT 201711 FINANCE 11The takeaway

Currently, a lot of countries other than the US have moved their own tax reform forward. China has also reconsidered and improved its own tax system, as well as its tax administration environment, with the following objectives:

• Attracting continuous foreign investments to China;
• Promotion of growth and business activities in China; and
• Improving competiveness of “Made in China” products and services overseas.

BT 201711 FINANCE 12In recent years, China has been steadily advancing and improving its tax system. The Business Tax to Value Added Tax (VAT) reform has been completely implemented in 2016 to reduce the tax burden of enterprises and China is now moving onto IIT reform and updating the Tax Collection and Administration Law; in addition, amendments to other tax legislation are also in the pipeline. Meanwhile, the Chinese government has also issued a series of incentives to attract foreign investments and make administration environment friendly. In particular, the recently released 22 Measures proposes a tax deferral treatment for the direct reinvestment of profits derived within China by foreign investors in the State’s encouraged projects provided that certain conditions are met. It also extends the scope of Service Outsourcing Demonstration Cities. We believe that, besides short term measures to deal with the impact of US tax reform, the Chinese government would keep moving forward at its own pace to achieve its own established goals and strategies.

From the perspective of multinational enterprises (MNEs), enterprises trading with or having investments in the US need to assess what challenges and opportunities the US tax reform may bring, especially during the process of deciding the place of markets, location of production and R&D centre, investment mode, capital structure and repatriation of capital, etc. In this regard, they may need to restructure or adjust their business models to adapt to the new tax environment in the US.

We will share our observations on the tax impact on MNEs brought about by the changes of the US tax rules and how they should react in our future News Flash. Meanwhile, our US Individual Tax team will introduce the details of IIT reform in the Framework and its potential impact in a separate News Flash. Please stay tuned.


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