US tax reform is the most significant change to US corporate and international tax in a generation. The corporate aspects of the reform are aimed primarily at US companies and how they are taxed globally, but it could affect any UK company with a US footprint.

Jesper Solgaard

Two main pieces of the reform could have an operational business impact: the effect on taxes of US operations, and the impact on cross-border activities between US operations and the rest of the world. The first, which could be seen as an opportunity, is the drop in the corporate tax rate from 35% to 21%.

This is a significant drop and, including state tax, brings the US more in line with many European countries. Any UK business with a US operation should benefit, and it could see more companies move operations to the US. The reform provides significant incentives to move manufacturing to the US.

The reform has also established a beneficial export regime (FDII) where any export of goods and services will be taxed at a rate of 13.5%. With this new regime a number of European retailers are looking to establish regional HQs for the Americas in the US and take advantage of this very low tax rate.

The second major change is Base Erosion Anti-Abuse Tax (BEAT), which could be seen as a challenge. BEAT is a way for the US government to reduce the ability of large multinational companies (with a minimum of $500m in revenue in the US) to use cross-border payments to move income to their affiliates in lower-taxed countries.

Examples in the retail and consumer sector include paying HQ or services fees, royalties, franchise fees, or paying for procurement services to overseas companies. This type of payment can now lead to a much higher tax rate in the US.

These extra costs and opportunities could result in changes to how organisations are set up, and where key people, functions and assets are located. UK companies may have to respond to changes in how their customer and suppliers wish to do business. Apart from supply chain changes, contracting, transaction flows, and foreign exchange could be impacted.

Jesper Solgaard is transfer pricing leader and partner at EY