Driving US investment
Tax is only one of many factors businesses consider when analyzing their structure, strategy or M&A. Major M&A initiatives and corporate development decisions, such as where to manufacture, distribute or locate management or intellectual property, are driven by sound economic fundamentals, according to Jeff Greene, EY Global Transactions Leader for the Life Sciences Sector.
Nevertheless, the decline in the US corporate tax rate from 35% — higher than the G7 average for nearly two decades — to 21%, along with other favorable provisions such as accelerated depreciation for many assets, could “tip the scales in favor of US investment,” says Greene.
Another key change is that US-based businesses will have far less incentive to hold and invest cash offshore. Under the new law, businesses must pay a one-time tax of 8% for illiquid assets and 15.5% for cash reflecting pre-tax reform earnings held by foreign subsidiaries. Going forward, these earnings will be subject to the global intangible low taxed income (GILTI) but not the US corporate income tax.
“Since offshore cash will have already been taxed, businesses will now be unconstrained by the tax rules to bring offshore cash back to the US,” says Torsdon Poon, EY Americas Transaction Tax Leader. “This cash would need to be deployed by US-based companies, which could also drive more deals in the market.”
In an article on the US Chamber of Commerce website, Chief Economist J.D. Foster writes that owing to the sweeping rate reduction and reform, “US and foreign companies are no longer trying to reduce their US business footprint. Instead, they’re looking for ways to shift more of their operations to the United States.”