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House Approves New Tax Reform Legislation

The House of Representatives on 16 November approved what the Ways and Means Committee Republican majority is describing as “historic legislation” to reform the U.S. tax code. According to a Ways and Means Committee press release, the Tax Cuts and Jobs Act (H.R. 1) would, among other things, lower the corporate tax rate from 35 percent to 20 percent, allow U.S. multinational corporations to repatriate foreign earnings at one-time low rates, move the United States to a territorial tax system to prevent double taxation on U.S. companies’ foreign earnings, allow businesses to immediately write off the full cost of new equipment to improve operations and enhance the skills of their workers, protect the ability of small businesses to write off the interest on loans, and end incentives that reward companies for shifting jobs, profits and manufacturing headquarters overseas. This bill was revised during committee mark-up with respect to the treatment of deferred foreign income and excise taxes on payments from domestic corporations to related foreign corporations.

The committee claims that under this legislation a typical middle-income family will receive a US$1,182 tax cut, in addition to creating nearly one million new jobs, increasing annual after-tax income for middle-income households by an average of US$2,598, and growing the U.S. economy by more than 3.5 percent.

A parallel Senate bill, which the Finance Committee approved on 16 November, appears to be largely similar on these issues. A committee fact sheet states that this bill would lower the corporate tax rate to 20 percent, shift the United States to a territorial tax system with base erosion protections to eliminate double taxation, make it “simpler and less onerous” for U.S. multinationals to repatriate foreign earnings, and create incentives for companies to locate and operate in the United States. Committee Chairman Orrin Hatch (Republican-Utah) has signalled his intention to bring the legislation to the floor of the Senate for further debate and open consideration when that body returns to work after the Thanksgiving break.

While it is a bit too early to speculate on the likely impact of the tax reform legislation, shifting the United States to a territorial tax system and allowing U.S. multinational corporations to repatriate foreign earnings at one-time low rates, together with a substantial reduction in the corporate tax rate, could persuade a number of U.S. corporations to repatriate past and future profits from foreign operations, potentially reducing overall U.S. investment in Asia (including Hong Kong) as well as in other regions. Some foreign companies may also be encouraged to shift their headquarters to the United States to take advantage of a more friendly tax regime. Moreover, overall investment flows into the United States could potentially increase under the Republican tax reform plan, although the U.S. fiscal deficit would likely increase significantly.

Content provided by Picture: HKTDC Research
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