On 16 November 2017 the United States (‘US’) House of Representatives passed a landmark tax reform bill by a vote of 227-205. The passing of the House Tax Bill proposes a sweeping overhaul of the US tax system, the most significant changes since 1986, but is by no means the end of the process. It is now further required that the US Senate pass their own bill, that the House and Senate bills are aligned through negotiation and passed in identical form by both bodies, and that the US President signs the bill into law. Many hurdles lie in the way of making the tax reforms law, but the Trump Administration still aim to do this by Christmas 2017.
From a China perspective, the most relevant changes are those made to the US corporate tax (‘CT’) cross-border provisions. These could have a significant impact both on Chinese investors into the US, and on the competitiveness of Chinese multinational enterprises (MNEs) vis-a-vis their US headquartered counterparts. The planned US CT changes also feed into the wider global discussion on the shape of the future international tax rules applying to all countries, and so also impacts indirectly on China’s own tax policy choices. Highlights of the international tax rule changes are set out in this alert.
The House Tax Bill provisions may be segmented into individual tax, business tax and international tax changes – we note those of potential China interest.
Major changes are made to both how US MNEs are taxed on their foreign operations and how foreign companies are taxed on US activities.
The House Tax Bill contains many innovations which break with historic US tax practices. The changes move the US towards a territorial system, with dividend the participation exemption. However, conversely, they also move the US toward a ‘true’ worldwide system, with the tax on ‘foreign high returns’. The outbound payments rule introduces ‘destination based’ taxing rights, and may impact on the OECD digital economy tax work at global level. This, together with the interest rules, would impact Chinese enterprise operations in the US, and raise tax treaty compatibility issues. Chinese tax policymakers will also be watching developments closely, and may consider policy adjustments to maintain China business competitiveness. The Senate bill differs on many points, with a different base erosion rule and a special IP income rule – close monitoring is needed to see how the bills are reconciled.
KPMG US released detailed analysis on House tax reform bill (H.R. 1). Click here to read the full report.