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Allison Cheung, Nikki Mullins and Michael Vangenechten PwC Singapore
Allison Cheung is International Tax Partner, Nikki Mullins is Senior Manager and Michael Vangenechten is a Manager at PwC Singapore
The largest overhaul of the tax code since 1986 is the first legislative victory for President Trump since he took office. Singapore, along with the rest of the world, continues to watch the legislative progress and assess the potential impact to its economy. What are the key measures and potential impact on U.S. investments to and from Singapore companies?
The law signed by President Trump on December 22, 2017 reduces the U.S. federal income rate for companies from 35 percent to 21 percent effective for tax years beginning after December 31, 2017. The corporate alternative minimum tax is repealed.
The potential upside of a reduced corporate tax rate for Singapore companies with U.S. operations is obvious provided that their tax base is not broadened too much under the other provisions. However, including state corporate income taxes, the blended tax rate of a U.S. company is still anticipated to be around 25,75 percent, i.e. higher than its Singapore competitor at 17 percent.
Moreover, absent a double tax agreement between the U.S. and Singapore, the 30 percent U.S. domestic withholding tax on Fixed, Determinable, Annual or Periodic income (“FDAP”) related to payments of dividends, interest and royalties, etc., is not addressed under the current law and continues to remain applicable to all profit repatriations and payments to Singapore. As such, there is still a large tax burden for Singapore companies doing business in the U.S. Whilst there is a notable improvement, the cost remains significantly higher than for competitors based in other regional countries such as China or Thailand.
Progressing the efforts to put in place a comprehensive treaty between the U.S. and Singapore should therefore remain a critical agenda for the future.
Similar to Europe, the tax deduction of interest expenses is further limited. The law reduces the current interest expense deductions under IRC section 163(j) of 50 percent of adjusted taxable income (roughly EBIDTA) on related party debt and the safe harbor debt-equity ratio of 1.5:1 to a general limitation of 30 percent of the adjusted taxable income (roughly EBIT). However, for the first four years, depreciation and amortization is added back (roughly coming to an EBITDA base). The law drops the initial proposals of the House and Senate to also impose a proportion test in the global group's total net interest expense.
Another important element may be the temporary allowance of full expensing, as compared to depreciation or amortization of the acquisition costs for new or used assets made in the U.S. for the following five years.
The latter may provide an incentive for U.S. companies to increase capital spending in the U.S. while scaling back investments overseas. In combination with the other provisions, U.S. companies may on-shore certain high-value but also highly mobile activities such as IP, R&D, etc. Also, overseas companies such as those in Singapore looking to the U.S. might be inclined to increase efforts to set-up shops in U.S. markets where there is easier access to cutting edge technology and innovation that fit the companies' business needs.
The law introduces a territorial tax regime which eliminates the tax (i.e. a 100 percent participation exemption for foreign dividends) on certain qualifying (i.e. minimum 10 percent participation for more than 365 days during the 731-day period before) repatriated dividends that U.S. companies receive from their foreign affiliates.
To transit untaxed overseas earnings and profits in low-taxed subsidiaries into this new regime, there is a one-time mandatory toll charge at a reduced rates of 15.5 percent and 8 percent payable over eight years for respective cash and non-cash assets respectively. Foreign tax credits would proportionally be available to offset the tax.
This fundamental shift to tax foreign earnings and profits might lead to U.S. companies investing less in subsidiaries abroad and instead repatriate their overseas earnings and profits to invest in the U.S. (maybe not on itself, as the 2004 Homeland Investment Act with a one-time tax break on repatriating overseas earnings, did not quite achieve the intended result of bringing back investments to and creating jobs in the U.S., but potentially in combination with the other elements of the tax reform). However, it might also be an opportunity for countries such as Singapore, which combines an advanced business infrastructure and competitive tax regime to attract foreign investments in capital expenditure, people and know-how. The shift still encourages U.S. companies to continue to fully exploit potential tax savings abroad to maximise profits after tax as the profits can now be repatriated tax free to the U.S. Congress was conscious about this potential threat and has introduced several anti-abuse to counter this.
In order to fund the tax reform, Congress has included measures to broaden the U.S. tax basis.
The House's proposal included a 20 percent excise tax for certain deductible payments (other than interest), costs of goods sold and payments for depreciable or amortizable assets made by a U.S. company to a related foreign company. The excise tax naturally extracted a fair level of negative attraction just like was the case for the abandoned initial idea of a Border Adjustment Tax.
With a more moderate tone set by the Senate, the law now imposes a minimum corporate tax liability of 10 percent on taxpayers which make a significant level of “base eroding” payments (interest included) to related foreign entities. Payments for costs of goods sold are excluded unless made to a surrogate foreign affiliate.
These measures affect groups with a global supply chain which import parts or manufactured products into the U.S., make available IP to their U.S. manufacturing plants or provide other services to their U.S. affiliates. Whether or not the BEAT is in line with non-discrimination clauses in U.S. tax treaties is obviously irrelevant for Singapore in absence of such an agreement.
The existing CFC regime (also known as subpart F provision) remains. The subpart F regime aims to prevent deferring U.S. tax by use of foreign subsidiaries and requires U.S. companies to include certain profits of its CFC's in its gross income in the U.S. prior to the actual repatriation of those earnings.
The law expands the CFC definition by stipulating that foreign subsidiaries of a foreign group that are not held under a U.S. entity will be treated as CFC if there is at least one U.S. controlled subsidiary. This will lead to greater compliance burden in the U.S. for all foreign CFCs. We believe that some Singapore-based multinational companies with non-U.S. subsidiaries under their U.S. group may be affected by the expanded CFC definition.
The law enacts a new category of intangible low-taxed income (“GILTI”) to the subpart F income. U.S. shareholders of a CFC would be allowed a 50 percent deduction on this income leading to a minimal tax of 10.5 percent . As a result, a U.S. company will be subject to tax on its CFC's net combined income above a deemed routine equity return on tangible assets.
Next to the CFC inclusion, the law encourages IP to remain in the U.S. by providing a 37.5 percent deduction (reduced to 21.875 percent for tax years starting after December 31, 2025) on a U.S. company's foreign-derived intangible income (“FDII”) plus 50 percent of its GILTI (included in the gross income further to subpart F) resulting in a de facto U.S. patent box of 13.125 percent.
The above may provide additional incentive for a U.S. company to keep its IP in the U.S. rather than to offshore it. As IP is highly moveable, U.S. groups might be inclined to move IP from Singapore back to the U.S., especially since Singapore does not have an exit tax like most Western countries.
Singapore is for many U.S. companies the gateway to Asia Pacific.
Many of them have set-up regional headquarters here but also manufacturing plants. Although there may be some scaling back of investment in Singapore in light of the protectionist measures in the U.S., this will likely be driven by commercial decisions and not tax reasons.
Asia Pacific remains to be one of the biggest growth markets for U.S. products and services and there are ample business reasons to set-up substantial presence and operations in Singapore (e.g. geographical consumer/supplier proximity, robust infrastructure, ease of doing business, availability of talents and skilled labor, quality of living, etc.).
Moreover, Singapore is well positioned in levelling the overall tax burden for multinational companies injecting into Singapore their strategic investment, technology and innovation, talents and skills, etc. With a competitive tax regime and many other non-tax attributes, Singapore remains an attractive location to complete a global footprint for many U.S. and non-U.S. companies.
Allison Cheung is International Tax Partner, Nikki Mullins is Senior Manager and Michael Vangenechten is a Manager at PwC Singapore.
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