This publication argues that it will be positive for other types of hoped-for tax reform if the changes to how corporations' foreign earnings really happen.

When the US administration of Donald Trump got its tax plan through Congress just before the New Year and encouraged corporations to repatriate foreign profits in exchange for a one-time tax, some figures hoped that the move might encourage Uncle Sam to be just as radical about how individuals pay tax.

At present, US citizens are under the Internal Revenue Service net regardless of where they live, in contrast with the practice of most jurisdictions, which tax citizens on a territorial, or residency-based, system. This causes problems: American Citizens Abroad, which represents expats, has lobbied for a change, arguing that Americans struggle to open bank accounts and get financial services abroad. With the passing in 2010 of the Foreign Account Tax Compliance Act (FATCA) under the Obama administration, this problem has gotten far worse. The approach is seen as discouraging American businesses from pushing into foreign markets because their staff and executives might struggle to take care of their private financial affairs.

It was hoped that the Republicans’ tax re-write for corporations, if it proved a success in bringing trillions of dollars back home, might inspire similar radicalism on the individual taxation side. Also, for high net worth individuals, there is often little boundary between their personal and business wealth. This is why firms have so far have been cautious of repatriating money.

According to the Wall Street Journal, (Sept 16), its analysis of securities filings from 108 publicly traded companies shows that so far the repatriation of money has not been rapid. 

The new tax law imposes a one-time tax on old foreign earnings regardless of whether the money has been repatriated. It also removes federal taxes on subsequent repatriations and makes future foreign profits generally free from US taxes – a big shift. The US Tax Cuts and Jobs Act also cuts the corporate tax rate from 35 per cent – one of the highest in the developed world – to 21 per cent, more in line with countries such as the UK. 

The WSJ noted that President Trump said in August that the government expected to pull in more than $4 trillion “very shortly”. When it examined company filings, the WSJ found that companies have repatriated about $143 billion so far this year.

In discussions with ACA, this publication has been told that there has been more optimism about getting genuine reforms through at some point. A difficulty is that there is not a widespread demand for change to the US worldwide tax system because relatively few voters live outside the US. If the Republicans lose control of the House of Representatives in November, this may complicate the issue further.

Of course, it may be that the cautious initial approach of firms is simply good sense by corporate bosses. Changing tax practices for a big corporation is like turning the wheel on an oil tanker – there is an unavoidable delay before the bow of the vessel moves one way or the other. But given that the corporate tax change was a sign of hopeful radicalism by lawmakers, it is to be hoped that the facts do, for once, match the White House hype. Any process that might encourage reform of the US tax code for individuals as well will be welcome.