Among the most complex tax systems in the world is that of The United States. For US
multinational corporations, taxation has become even more difficult because of the passage of the
Tax Cuts and Jobs Act in December 2017. Preceding the Tax Cuts and Jobs Act, US multinational
corporations recorded an unusually large amount of earnings in low-tax jurisdictions like the
Netherlands and Ireland. Intangible assets owned by major US corporations that generate
considerable amounts of earnings are being transferred to nations with low or no corporate
income tax rates. The profits are then transferred to nations with no corporate income tax, such as
Bermuda and the Cayman Islands, via a series of complicated transactions. To encourage US
multinational corporations to declare revenues in the United States rather than foreign countries,
the Tax Cuts and Jobs Act (TCJA) decreased the corporate income tax rate from 35 percent to 21
percent beginning January 1, 2017.
However, it did not totally remove the incentive for US firms to relocate earnings from tax havens
to the United States by instituting a new minimum tax on Global Low Tax Intangible Income (GLTI)
in 2018, which would rise to 13.125 percent in 2026 from the current 10.5 percent. Because the
United States defines corporate residence as the place of incorporation rather than the location of
the primary economic activity, multinational corporations based in the United States can simply
relocate their corporate residence to any country (a practice known as inversion) without having to
relocate their primary economic activities. According to the TCJA, future inversions will be subject
to additional penalties. In return for reducing the tax on repatriation profits, the Tax Cuts and Jobs
Act levies a 35 percent transition tax on foreign assets owned by newly inverted corporations prior
to the enactment of the Act.
In comparison to other countries such as France and Germany, the United States has become more
competitive, but it is unable to incentivize corporations to fully report their profits in the United
States because there are tax haven countries such as Bermuda and the Cayman Islands that do not
impose an income tax. Changing the concept of residency for these firms, on the other hand, could
be able to resolve the problem.
This is crucial to the US tax law because to raise money from these major multinational
corporations, the United States must investigate how other nations are luring these corporations to
locate their operations in their own countries. The United States must become more competitive
to maintain or move earnings to the United States, and this may be accomplished by enacting tax
policies that are equivalent to or better than those of other nations, such as the European Union.
Being a tax preparer for a CPA firm, I will have to say that each new tax act brings its own set of
complications. Even the revisions, examples, and explanations to help clarify items within an act
can be complicated. b With each of the opposing sides in congress trying to get what they want into
an act; it is sometimes best to wait until the forms and instructions come out before attempting to
even try to determine what the effect is on a company’s or an individual’s tax situation. b As of tax
season 2023, there were still limited to no instructions on how to fill out the Forms K-2 and K-3,
which are now required for companies with foreign investments or holdings.
The U.S. has become more competitive with other countries but still are lacking in incentives for
companies to do business globally. b According to Pamela Olson’s testimony before the Senate
Committee on Finance, the way to become more competitive with other countries is to update our
foreign tax policies to account for the globalization in today’s economy. b The current policies and
tax incentives were originally formed during a period when there was not a large global
marketplace. b The U.S. was the main country to invest in foreign projects and put in place laws
based on that premise. b Today, many other countries compete in the global marketplace and the
old U.S. foreign tax policies no longer give U.S. companies many benefits. Ms. Olson states that
the current tax rules “appear outmoded, at best, and punitive of U.S. economic interests, at
worst.”
International tax is important to the U.S. tax code because it determines how companies get taxed
on income derived from operations in foreign countries, as well as how that income is taxed when
passed through to individuals. b According to the article, “Key Elements of the U.S. Tax System,” the
location of a firm’s investment, jobs, research and development, and tax revenue matter more
than where its parent company is located. b From my own experience in dealing with companies
who have majority ownership of a foreign company, you also have to deal with the tax laws of the
other countries where the company is located. b There is a lot of research involved in how to
handle these foreign entities owned by U.S. companies. b It’s also very interesting to learn about
how other countries’ tax systems work.
References:
Tax Policy Center. (n.d.). Key Elements of the U.S. Tax System. b Retrieved from
https://www.taxpolicycenter.org/briefing-book/what-are-consequences-new-us-international-tax-
system.
U.S. Senate Finance Committee. (2003). Testimony of Pamela Olson, Assistant Secretary for Tax
Policy, United States Department of the Treasury Before the Senate Committee on Finance on
International Tax Policy and Competitiveness. Retrieved from
https://www.finance.senate.gov/imo/media/doc/071503Olson.pdf
How does the tax system affect US competitiveness?. Tax Policy Center. (2020).
https://www.taxpolicycenter.org/briefing-book/how-does-tax-system-affect-us-competitiveness
What are the consequences of the new US international tax system? Tax Policy Center. (n.d.).
https://www.taxpolicycenter.org/briefing-book/what-are-consequences-newusinternational-tax-
system.
