Tax reform isn't the foreign cash magnet that was promised — yet

Tax reform isn't the foreign cash magnet that was promised — yet
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Despite the current U.S. administration’s hopes, foreign corporations thinking about launching or expanding operations in America are neither speeding up nor slowing down their plans because of the Tax Cuts and Jobs Act (TCJA), signed into law late in 2017.

Just as many U.S. multinationals are still trying to unravel the ins and outs of the complex tax reform package, foreign companies are doing the same. As a result, they’re taking a wait-and-see attitude. 

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In particular, there are numerous European and Chinese manufacturing companies considering U.S. investments, but for non-tax, business-related reasons. For them, the rate cut is little more than the proverbial cherry on top of the sundae. It isn’t the reason to make a major move.

Questions abound 

Does it make sense to take advantage of the act’s 100-percent investment depreciation rate? Will a loan to a U.S. subsidiary make sense at a lower U.S. tax rate? Will interest expenses be cut or denied? Can transfer policies be applied? 

An open question for many companies, both foreign and domestic, is whether the sudden and steep drop in the U.S. corporate tax rate to 21 percent from 35 percent is sustainable.

If in a few years the rate survives a change in the White House, foreign companies might be enticed to further develop or start U.S. subsidiaries. But for now, it’s not clear if that is possible, and a future change in the tax structure could impact firms that move now. 

The most significant tax incentives are available for those foreign companies that manufacture or create something — a service, a license or a product — in the U.S. rather than simply sell something. It’s targeted at manufacturers.

But that doesn’t mean companies like that will automatically want to come here. Overseas firms that want to locate in the U.S. or expand here are only going pull the trigger it if it makes business sense for them, even with the nation’s reputation in advanced manufacturing. 

More than just taxes

The truth is, taxes in the U.S., whether at the local, state or federal level, only enhance other reasons — the right location, markets, logistics, etc. — for companies to make the kind of capital investment involved in the international expansion.

That said, a number of European companies have been quietly developing U.S. operations in recent years. For instance, Germany’s Wacker Chemie AG has made significant investments in the U.S. in the past decade, including a $2.6 billion plant in Charleston, Tenn., and we have noticed increased investment in the U.S. by a number of clients, so far largely for non-tax reasons.

The tax changes may have prompted some European manufacturing firms to wonder a little more seriously about whether their U.S. operations can be expanded or developed into export hubs in addition to serving the local market.

If those companies expand in the U.S. and are able to attract foreign clients or foreign customers, the new tax rules would be very favorable for those types of operations. 

At a minimum, the latest tax reform measures won’t dissuade foreign companies such as these from expanding further here and making the U.S. their home away from home.

But it won’t necessarily encourage new action either.

Bill Henson is a partner with the international tax practice at Plante Moran, an accounting firm and consultancy based in Southfield, Mich. He works in the Chicago office.