A comprehensive tax reform has been in force in the USA since the beginning of the year. The core element is the significant reduction in corporation tax, which also has an impact on the Austrian economy.
The USA is an important trading and economic partner of Austria. According to the WKO, 670 subsidiaries of Austrian companies are represented in the USA. Austrian-held companies in the United States generate 50,000 jobs and have a total turnover of EUR 33 billion. Changes in the US tax system therefore also have an impact on the domestic economy.
The Tax Cuts and Jobs Act (TCJA), which came into force on 1 January 2018, represents the largest US tax reform since 1986. There were major changes especially in the area of corporate taxes.
Reduction of the corporation tax rate to 21 percent
The core element of the US tax reform is the reduction of the corporation tax rate from 35 percent to 21 percent on 1 January 2018. The previously progressive corporation tax was replaced by a flat tax. This relates to taxes at the federal level.
At the level of the individual states, additional taxes of 5 to 6 percent are levied. The previous minimum corporation tax (alternative minimum tax) has been abolished, but remains creditable or will be refunded.
Incentive to invest created
As an investment incentive, capital investments between 27 September 2017 and 1 January 2023 (used and new assets) may now be fully deducted. After this time, the deductibility will be gradually reduced again until 2026.
Loss carryforwards can be carried forward without restriction
Loss carryforwards arising in fiscal years from January 1, 2018 will, in future, be eligible for carryforward for an unlimited period (previously 20 years). However, comparable to the Austrian regulation, loss carryforwards may only be offset up to a maximum of 80 percent of current profits. Given to the reduced corporation tax rate, the balance sheet value of loss carryforwards (deferred taxes) decreases.
Territorial taxation and exemption from investment income for foreign dividends
Previously, US corporations were subject to worldwide tax liability, but with a tax deferral for profits not transferred to the USA. It was not until the actual transfer that taxation of 35 percent was levied, taking into account the income tax or withholding tax charged on it.
This is where a major change has been made:
- Profits “hoarded” abroad now have to be taxed once at 15.5 percent (profits available in cash) or 8 percent (profits tied up in investments).
- Dividend income from US corporations – previously taxable – will be tax-free as of 1 January 2018. A shareholding of 10 percent and a holding period of 365 days within the last 731 days are required. There is an exception for foreign passive companies and an abuse regulation governs cases in which the dividends were deductible at the distributing company. Foreign taxes may no longer be credited.
This changes makes it advisable to review and possibly restructure foreign holding structures or the financing structure (e.g. equity instead of debt capital).
New anti-abuse provisions and countermeasures
The following measures are designed to prevent profit shifts abroad and strengthen the US economy:
- GILTI (Global Intangible Low Taxed Income) is a provision for the direct taxation of global low-taxed income from intangible assets of controlled subsidiaries. Half of the profits of controlled foreign corporations (CFCs) are taxed directly by the US company as soon as a standard return of 10 percent on tangible assets is exceeded. The effective tax rate in the United States is 10.5 percent for fiscal years beginning in 2018 (or 13.125 percent for fiscal years beginning on or after 1 January 2026). 80 percent of the foreign tax on profits can be offset (however, no credit carryforward or credit carryback is possible).
- FDII (Foreign Derived Intangible Income), on the other hand, represents a benefit for US companies in outbound cases: it means that income of a US company from the foreign exploitation (sale or rental) of intangible assets (e.g. patents, trademarks) until 2025 is subject to a preferential tax rate of 13.125 percent if a standard yield of 10 percent is exceeded and a tax rate of 16.406 percent for fiscal years from 2026 onwards.
With regard to GILTI and the optimisation of FDII, the group structure (avoidance of US intermediate companies) should be reviewed. It should also be examined to what extent a transfer of intangible assets to US companies for the use of FDII is possible.
- The Base Erosion Anti-Abuse Tax (BEAT) adds a US company’s payments to controlled foreign corporations to the taxable profit. Base Erosion Payments (BEPs) include, for example, royalties, interest or payments for group services such as management fees:
- BEAT is only applicable to companies with group-wide US sales of at least USD 500 million. In addition, the BEPs must amount to at least 3 percent of total expenditure.
- This does not apply to payments that lead to a reduction in sales (COGS, cost of sales) or payments for services that are passed on “at cost” (cost allocations).
- The BEAT tax is calculated in such a way that the regular taxation of profit at 21 percent (before addition of BEPs) is contrasted with a calculated tax of 5 percent (in 2018, from 2019 10 percent, from 2026 12.5 percent) of the amount after adding the BEPs. If the settlement amount is higher than the regular tax burden, an additional tax is levied.
As a countermeasure to BEAT, it is recommended to review the transfer pricing system in the group so as to clarify whether adjustments are possible. This could, for example, lead to a relative reduction in payments to below three percent of total expenses or services could be partially charged “at cost”.
- Restriction to the tax interest deduction
Comparable to the interest deduction restriction of the EU Anti Tax Avoidance Directive, the net interest expense of group companies for fiscal years starting from 1 January 2018 is only deductible in the amount of 30 percent of EBITDA. From 2022, this will be restricted to 30 percent of EBIT.
This restriction applies to all interest payments, including payments to non-affiliated companies. Non-deductible interest expenses can be carried forward. Smaller companies with three-year average sales of less than USD 25 million are exempt from the deduction restriction.
With regard to this new restriction, it certainly makes sense to analyse the financial structure to determine whether adjustments are possible in order to minimise the non-deductible interest rates.
- Hybrid mismatch rule: This relates to a limited possibility to deduct interest payments or license fees in connection with related foreign persons, to the extent that these are not recorded for tax purposes at the recipient or a related person can also deduct the payments. The prerequisite is that the transaction is a hybrid transaction (qualification conflict) or a hybrid company is included (company that is treated as transparent under either US law or foreign law, but not vice versa).
New benefit for “pass through firms”
Since the US tax reform, so-called pass through firms (e.g. sole proprietorships and partnerships, foundations and real estate companies) have benefited significantly. These represent a considerable proportion of US companies (approx. 95%).
Pass through firms are taxed according to the transparency principle at the level of the individuals behind them.
Since 1 January 2018, 20 percent of the business unit’s income tax profit can be deducted from these individuals as an exemption. However, certain occupational groups, such as freelancers, are exempt from the benefit from a certain level of income. The benefit is to expire in 2025.