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US Tax Reform – agreement reached on Tax Reform bill

US Tax Reform

Following both the US House of Representatives and the Senate passing different versions of proposed US tax reform, the “Tax Cuts and Jobs Act”, a conference committee containing members of both chambers of Congress was formed to reach agreement on a tax reform bill.


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Tom Woods

Head of Tax & Legal

KPMG in Ireland


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On 15 December 2017, the joint House-Senate conference committee unveiled its conference agreement on the Tax Cuts and Jobs Act. This reconciles differences between the versions of the tax reform bill passed by the House and passed by the Senate and is a further significant step forward in the Republicans promise to enact tax reform before the end of the year.

It is anticipated that the House and Senate will vote on the agreement this week, and reports indicate that Republicans have enough votes in the House and Senate to pass the bill. If the conference report is approved by a simple majority in both chambers, it then will be sent to President Trump for his expected signature and enactment. The president has indicated his intent to sign the bill, and as a result it is expected that tax reform will take effect from 1 January 2018.

This would represent the most comprehensive reform to the US tax code in over thirty years and will require careful consideration by all taxpayers. The cornerstone of this bill is a reduction in the headline rate of federal corporate income tax from 35% to 21%, beginning 1 January 2018.

Changes to corporate income tax

The main corporate income points of interest in the bill are:

  • 21% rate of corporate income tax to commence in 2018.
  • Repeal of the current alternative minimum tax (AMT) (which can allow taxpayers to take full advantage of the measures to allow a 100% deduction for expenditure on capital items).
  • 100% expense deduction on capital asset expenditure for old and new business assets for 5 years (does not apply to the real estate sector).
  • Limit the use of tax losses carried forward to 80% of current period taxable income and eliminate the carry-back
  • 30% limitation on interest deductions by reference to EBITDA up to 1 January 2022 and by reference to EBIT for tax years beginning thereafter. The additional proposed limitation to further restrict interest deductions which exceeded the US share of deductions by reference to the worldwide group’s external indebtedness has been dropped. Excess limitation can be carried forward.
  • A base erosion anti-abuse tax (BEAT). This applies to certain large taxpayers (with worldwide revenues in excess of a defined threshold) and will generally impose a minimum tax on certain deductible payments made to a foreign affiliate, including payments such as royalties and management fees, but excluding cost of goods sold.
  • R&D tax credits are preserved.
  • Anti-hybrid measures apply to deny deductions for expense where the income is not subject to tax in the counterparty jurisdiction. More detailed regulations are to follow and to include anti-branch mismatch and hybrid entity mismatch measures.

For US parented groups

  • A mandatory repatriation tax – 15.5% rate on overseas profits computed under US tax principles represented by cash and liquid assets and 8% on profits represented by illiquid assets. Taxpayers can elect to pay in instalments over 8 years (back ended profile).
  • Fundamental changes to the taxation of multinational entities – shift from the current system of worldwide taxation with deferral, to a participation exemption regime with current taxation of certain foreign income.
  • 100% exemption on certain dividends from foreign 10% subsidiaries.
  • Minimum tax on “global intangible low-taxed income” (GILTI) – this is broadly the excess income of foreign subsidiaries over a 10% rate of routine return on tangible business assets. The US taxable GILTI amount is subject to a 50% GILTI deduction allowance (up to the end of 2025, thereafter the GILTI deduction reduces to 37.5%) and is subject to tax at 21%. If nil tax is paid on the foreign pool of GILTI profits, the GILTI US effective tax rate in 2018 is 10.5%.
  • Double tax relief is available for 80% of the pool of foreign tax credits attributed to the GILTI income. This means that if the GILTI foreign profits are subject to non-US tax at a minimum rate of 13.125%, no further US tax will be paid under the GILTI provisions (i.e. 13.125% @80% = the 10.5% effective US tax rate after taking into account the 50% GILTI deduction from the income taxed at 21%). For 2026 onwards, the GILTI effective tax rate increases to 13.125% and the rate of foreign taxes required to pay no additional US tax under the GILTI regime increases accordingly to 16.406%.
  • Foreign-derived intangible income (“FDII”) regime – 13.125% effective tax rate (increase to 16.4% starting in 2026) on excess returns earned directly by a US company from foreign sales (including licenses and leases) or services
  • Anti-hybrid mismatch measures apply to deny a dividend received deduction where the non US payer has received a deduction for the dividend payment.

What do the proposals mean for Irish based business?

Ireland’s 12.5% rate of corporation tax remains attractive when compared with the proposed US combined federal income tax and state rate tax which is likely to see most US businesses taxed at corporate income tax rates of circa. 26%.

A threshold foreign minimum rate of tax of 10.5% applies to profits from exploiting intangible assets before additional US tax applies to these profits. The taxable profits of most businesses in Ireland are taxed at a rate which is close to the Irish corporation tax rate of 12.5% meaning that Irish based business should broadly be subject to tax at a rate that equates to the target US minimum tax rate on such profits. Although it is important to note that the taxable income base and rate test here is calculated under US rules and on a global basis, including other foreign non-Irish affiliates.

Of some concern from an Irish competitive perspective are the proposals to offer a reduced US tax rate on foreign source intangible profits. These measures could see foreign source profits from intangible assets taxed in the US at a federal corporate income tax rate of 13.125% (increasing to 16.4% from 2026).

Irish based business operating in the US

For Irish based business operating in the US, the proposed restrictions in relation to interest deductions (which are not grandfathered for existing debt) as well as additional taxes applying to payments for services (and goods) purchased from non US group members, could have significant consequences, in particular for those groups which are heavily leveraged and/or rely on sale of goods and services from non-US group companies to US subsidiaries.

Measures which propose a 100% expensing of asset expenditure together with the continuation of the R&D tax credit should improve the US after tax position of their investment in US based business.

Irish groups with US operations will need to carefully monitor the proposals in order to understand their potential impact on existing financing arrangements and business supply chains for US based operations.


Given the effective date of 1 January 2018 for most provisions, immediate action will be required by impacted companies to understand the implications for their business and their financial statements. Please contact any member of your KPMG team if you wish to discuss the US tax reform framework or international tax policy.

Please click here for a detailed summary of the tax reform bill.

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