What the New Tax Law Means for Operations
Major U.S. tax reform – the Tax Cuts and Jobs Act (TCJA) – was approved by Congress in December 2017. The new law will have significant global implications on foreign direct investment and corporate operations.
According to a recent fDi Magazine article, “U.S. companies will be making major changes, such as the repatriation of cash back into the U.S. and the restructuring of their global intellectual property operations. Everything is fair game for change, from physical operations to IT to the movement of people.”
The main impact on operations will be that there is no longer a significant incentive to hold foreign profits as cash outside of the U.S. since these profits will now be taxed and no longer will be deferred until the funds are remitted back to the U.S. via dividends or other means. Therefore, companies will most likely need to make a decision on whether to repatriate excess cash back to the U.S. rather than accumulating it offshore or spend it in the foreign country to build tangible assets which are taxed at a lower rate.
On a go forward basis, the new tax law will allow more transfers of cash to the U.S. from foreign countries as the dividends can be exempted from taxation. Furthermore, the tax law will incentivize companies to deploy capital that otherwise has been sitting on the balance sheet.
Another impact on operations is that sales income from inventory is now determined based on where the inventory is produced rather than just a 50/50 split between foreign and U.S. sales. This could impact the decision for manufacturers on where to make their goods since there can be tax benefits/penalties based on where a product is made.
The lower corporate tax rate of 21% will make the U.S. more competitive with some foreign countries (especially in Europe); however it will still not level the playing field with countries that have cheaper labor forces.