U.S. tax reform: The Tax Cuts and Jobs Act passes

22 December 2017

U.S. Congress has passed the Tax Cuts and Jobs Act and sent it to the president for his signature. The Act dramatically reduces the corporate income tax rate to 21%, transitions the U.S. to a territorial tax system, provides for a one-time repatriation of foreign earnings and makes extensive changes to individual taxation rules. Most individual changes will expire after 2025.

While the Act will simplify taxes for many Americans, most businesses operating in the U.S. will find the computation of taxable income even more complex than in the past. Limitations on the deductibility of business interest, special deductions for businesses conducted via pass-through entities, and changes to the rules on expensing and depreciating asset purchases will each complicate this process.

For more details, Baker Tilly in the U.S. provides a high-level outline of the major domestic provisions included in the Act.

What does this mean for the UK?

Successive UK Governments have been advocates of low corporation tax rates, seeking to make the UK an attractive place for multinationals to locate business. This in turn increases the job-pool, which in turn raises further tax revenue in the form of National Insurance contributions and consequently VAT as consumers will have further disposable income to play with. 

To date, the high rates of corporate tax within the US has resulted in US multinationals placing operations within the UK (together with other jurisdictions with low corporate rates, such as the Republic of Ireland) seeking to shelter their overseas profits from the comparatively high US tax rates. The question now is whether the comparatively minor 2% differential in tax rates will result in profits, previously accumulated within the UK instead being remitted to the US and whether this, coupled with uncertainty around Brexit will push the British Government into further reductions in corporation tax rate, in an effort to retain tax competitiveness and retain foreign investment.