The US 2017 tax reform Act (the Act) continues to have a substantial impact on multinational companies, whether headquartered in the United States or elsewhere. In some instances, the provisions of the Act are causing unintended consequences for non-US headquartered companies (US inbound companies) as they interact with provisions of their home countries’ tax laws. Even a positive aspect of US tax reform – such as the reduction of the corporate income tax rate – may negatively impact certain business operations of US inbound companies.
Specifically, some countries have laws similar to the US laws governing controlled foreign corporations (CFCs), which may require companies to pay tax in their home country on income earned from CFCs located in low-tax jurisdictions. With the lower US corporate income tax rate and the ‘foreign-derived intangible income’ (FDII) rate, some countries’ tax laws possibly may view the United States as a low-tax jurisdiction.
While the reduction in the US corporate income tax rate generally is considered beneficial, US inbound companies whose home jurisdictions’ CFC rules are impacted, in part, by the effective tax rate paid in foreign jurisdictions, will need to analyze how the lower US rate may impact the overall US taxation of their US CFCs. These companies will need to evaluate how all the provisions of the Act impact their effective tax rate to determine whether any of their earnings may be included in the parent company’s income or otherwise taxed in their home jurisdictions. These companies also should be aware that calculating various states’ effective tax rates may be complex as some states adopt certain provisions of the Act while others do not.