The final tax system adopted in the Scarsdale New York
The “reform” introduced by the new
tax system in the United States is not intended to demolish and rebuild
the old system, but rather to redefine existing rules. In other words, for the most part, the basic structure of the “old” American
tax system remains unchanged, despite the major overhaul of certain tax rules. The new
tax system is therefore not an effort to tangibly simplify the US tax rules, even if, on the contrary, in many respects (particularly with regard to cross-border tax collection), the difficult cohabitation of the “old and “new” tax rules add to the already high degree of complexity of the system. In general, the high level of complexity of the scheme relates to outward investment from the United States. That said, the rules of the game have also been altered dramatically in terms of inward foreign investment into the United States, and Canadians operating in the United States will be seriously affected by these changes. In addition, given the extreme disconnectedness of the Canadian and US markets, the tax regime applicable to outgoing or incoming investments in the United States could have serious consequences for Canadian businesses.
Furthermore, because the bill has been submitted to the congress in a rush, the final wording of the law has many flaws and leaves open many important details. It is therefore reasonable to expect that the United States Department of the Treasury will be forced to issue an extraordinary amount of regulatory guidance as support. The publication of these regulatory directives will no doubt cause other earthquakes which will have multiple aftershocks in the coming years. This dynamic will make tax planning even more complex in the coming years and, in our opinion,
Impact of changing US
tax rules on cross-border markets
The main idea of this bulletin is to present the alteration that have brought about cross-border tax collection, but it is important to note that the
new US tax rules significantly reduce the tax burden for many American businesses. This tax relief is expected to profoundly transform competition in the US market (which is by far the most important foreign market for Canadians) and should reduce the enormous systemic benefits enjoyed by multinationals headquartered abroad in relation to their American competitors. Furthermore, Canadian businesses operating on both sides of the border through subsidiaries or branches in the United States will be forced to rethink the way (perhaps completely) how the new US tax rules will govern their decisions about what relates to the distribution of their current business expenses and their capital expenditures, to the examination of their “business opportunities”, instead of the creation of ownership of intellectual property, to the hiring of employees , supply chain management and financing. Knowing this, the most significant changes to U.S. tax rules are:
Lower corporate tax rate: The corporate tax rate in the United States is permanently reduced from 35% to 21% and the alternative minimum tax is eliminated.
Immediate recognition of expenses: all of the expenses related to an eligible asset (generally, a tangible asset with a lifespan of up to 20 years) can be recognized immediately. In addition, this rule of immediate recognition of charges applies to both new goods and goods already “used”, subject to certain exceptions. However, it will be phased out from 2023 to 2026;
Restricted use of net operating losses: Net operating losses incurred in 2018 and beyond, when carried over to subsequent taxation years, may not be used to offset more than 80% of the taxable income of a taxpayer for the year in question. In addition, net operating losses in 2018 and thereafter (I) can no longer be carried over to previous taxation years (previously, net operating losses could be carried back over the previous two tax years); but (ii) can be carried over to subsequent tax years indefinitely (previously, they could be carried over to the twenty subsequent tax years). In addition, net operating losses will not bear interest to account for the time value of money, which means that their “real” value will decrease over time. Net operating losses incurred before 2018 are generally not subject to this new rule;
Limit to the deduction of interest: The new
tax system considerably narrows the scope of paragraph 163 (j) which limits the stripping of earnings. More specifically, new paragraph 163 (j) limits the deduction for annual “business interest” to 30% (compared to 50%) of “adjusted taxable income” (RIA)), without the borrowing / equity refuge rule applying. From 2018 to 2021, the RIA will fundamentally correspond to the EBITDA (like the “old” rule), but, from 2022, the RIA will be adjusted so as to be approximately equivalent to the EBIT, i.e. – say the result before interest and taxes, without taking depreciation into account. Lowering the limit (to 30%) and lowering the RIA (at EBIT, rather than EBITDA) is “doubly harmful” because it considerably restricts access to interest deductions for many companies.
Unlike the “old” paragraph 163 (j), this new limit applies to all business interests, regardless of whether the underlying debt is with (or guaranteed by) a related party.
Interest that is not acceptable as a deduction can be carried forward to subsequent taxation years indefinitely, subject to certain restrictions when the business subject to tax changes ownership.
For partnerships and other intermediary entities, new paragraph 163 (j) applies at the partnership level. Any non-admitted interest carry forward is distributed among the partners. A partner may only deduct his share of the interest carried over to subsequent taxation years from the taxable income allocated to him by the partnership in relation to the activity which gave rise to the carry-forward.
No rights acquired for debts acquired before 2018:
“ Lightening of the intellectual property taxation system”: As explained in more detail below (see the discussion on “foreign income from intangible property” or foreign derived intangible income, in English), the income
that a US business corporation (i) receives from the sale or licensing of IP to persons who are not resident in the United States; or (ii) the provision of services to persons who are not persons resident in the United States, may be qualified for a special reduced corporate tax rate in respect of a portion of that income. As of 2018, U.S. corporations will be able to benefit from an effective tax rate of 13.125% on this income (and at an effective tax rate of 21.875% for taxation years beginning on 1st January 2026 or later);
Rate reduction for intermediary entities: From 2018 (and until 2025), unincorporated owners of intermediary entities and sole proprietorship carrying out certain types of activities will be entitled to a 20% deduction with respect to “ qualified business income ” generated in the country. The ability of taxpayers to claim this deduction is subject to certain restrictions and caps, and does not generally apply to professional service businesses. Taking this 20% deduction into account, this means that the member of a partnership, who is an individual resident in the United States, is subject to United States income tax at the
tax system highest marginal rate, that is to say 37%, will benefit from an effective US tax rate of 29.6% for the eligible business income it derives from the partnership.