US tax reform and its likely impacts on HK-US trade and investment

Tempo de leitura: 2 minutos

On 22 December 2017, America’s President Trump signed into law the biggest overhaul of the US tax system in more than 30 years. Widely regarded as the President’s first major legislative triumph, the newly-enacted Tax Cuts and Jobs Act of 2017 will give about 80% of US households a tax cut over the next decade. Furthermore, most US corporations will enjoy a lower after-tax cost of capital thanks to the new law. However, it is being criticised for widening the US government’s fiscal deficit by adding a projected US$1.5tn (HK$11.7tn) to America’s current national debt of US$20tn in the coming 10-year budget window.

The negative effect on the US government’s finances is likely to be somewhat offset, however, by an expected boost to the economy from the tax reforms. According to the US Congress’s Joint Committee on Taxation, the reduction in effective marginal tax rates on wages will lead to an increase in labour supply, while the reduction in the after-tax cost of capital will potentially cause an increase in the after-tax rate of return on business investment, and thus an increase in investment. These two factors are projected to boost US GDP by 0.7 percent annually on average, even though many of the personal tax cut provisions expire or are phased out towards the end of the budget window.

Another feature of the tax bill concerns foreign and domestically-controlled multinational entities receiving foreign-source earnings from subsidiaries in which they own or control at least 10 percent of the stock for a minimum of one year. The bill makes significant changes to the taxation of these multinational entities, allowing them to receive these earnings without incurring US tax on the income, effectively turning the US corporate tax regime from a worldwide system, which often results in double taxation, to a territorial one.

The new tax law also makes it easier for American businesses to bring home their eligible foreign earnings and assets by creating one-time, ultra-low repatriation tax rates. The relevant earnings may be accounted for over an 8-year period in back-loaded increments, while all future eligible earnings can be held overseas or repatriated to the US free of tax.

It could also encourage some foreign companies to relocate their headquarters to the US to take advantage of the friendlier tax regime, potentially reducing overall US investment in Asia, including Hong Kong and mainland China, as well as in other regions. Foreign tax jurisdictions, including those of Hong Kong and mainland China, may also come under pressure to provide more favourable tax conditions so as to be able to retain and attract investment from American and multinational companies.

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