The Tax Cuts and Jobs Act enacted by the US on December 22, 2017, is the most significant direct tax reform in the world in recent past. The dramatic reduction in the federal corporate tax, abolition of Corporate Alternative Minimum Tax (AMT), territorial taxation, tax exemption of specified foreign dividends and other reforms will impact a number of Indian companies having US operations and vice-versa.
The US economy is the largest in the world and it is India’s biggest trading partner. A large number of Indian companies have US operations, as either subsidiaries, joint ventures or branches. The US also has a huge segment of non-resident Indians—estimated to be 2.4 million. Tax reforms on individual fronts, including raising of standard deductions, changes in tax slabs and rates, and raising the limit of inheritance tax would have a direct impact on the tax outgo.
Reduction in corporate tax rates: The reduction in the federal corporate tax rate from 35% to 21% and the abolition of Corporate AMT will increase investment by Indian businesses in the US. In view of the significant reduction in corporate tax rate, the federal tax outflow will reduce for Indian businesses having US operations. This will particularly benefit the IT, BPO, pharmaceuticals and textiles sectors. It may not be out of place to mention that, in the US, income tax is levied at the federal (central) level, state level and city level (unlike India, which only has a central income tax in case of non-agricultural income).
Base Erosion and Anti-Abuse Tax: BEAT is an additional tax introduced on outbound payments to related parties abroad that meet certain criteria. To prevent erosion of US corporate tax base, the Act imposes a 10% tax (5% for 2018) on US corporations that make excessive tax-deductible payments to related foreign persons. The rules apply only to corporate taxpayers with average annual gross receipt of at least $500 million, and only if they have a ‘base erosion percentage’ of 3% or higher.
Introduction of territorial taxation regime to have implication on repatriation of dividends by Indian subsidiaries of US corporations: The move allowing 100% deduction of dividends received by a US shareholder from foreign corporations (including India) may result in several Indian subsidiaries of US corporations remitting dividends to the parent. But the Dividend Distribution Tax in India of over 20% is likely to be a deterrent.
Limitation on deduction of interest expense: This provision provides for limits on interest deductibility for businesses, subject to certain exceptions based on 30% limit of EBITDA for first four years and thereafter 30% limit of EBIT.This limit is not applicable in case of certain taxpayers, such as those having average gross receipts of $25 million or less in the past three years preceding the effective date of legislation. As such, small businesses will not be impacted by this new thin capitalisation regulation.
Temporary 100% expensing allowed in capital expenditure investments: The property in which investment is made can be new or old—a one-time tax on repatriation of overseas profit at around 15.5% for liquid assets and 8% for other assets.
Impact on NRIs: Non-resident Indians who are tax residents in the US will benefit from liberalisation of the personal tax regime in terms of higher slab thresholds, lowering of tax rates and increase in the limit of estate taxes. The estate tax limit has been increased to $11.2 million per individual. This enhanced exclusion will apply to estates of decedents dying, generation-skipping transfers, and gifts made after 2017, but would sunset after December 31, 2025.
The Author is Founder, RSM Astute Consulting Group