The reforms and changes introduced in the Tax Cuts and Jobs Act (“TCJA”) signed by President Trump on 22 December 2017 have meant that US-parented multinational companies are now reviewing and considering substantially changing their global tax strategies, with specific focus on transfer pricing.
Strategies are being reviewed for three key reasons - the reduction in the US federal rate of tax rate to 21 per cent (previously 35 per cent), the move to a territorial system of taxation and a US tax charge on assets held overseas.
Under the old regime, US-parented groups often structured their affairs so that profits earned by overseas subsidiaries were deferred from being subject to US tax at 35 per cent until a dividend was paid to the US. As a result, many US groups never repatriated cash and instead reinvested in lower tax jurisdictions, to start the cycle again.
The key changes under TCJA have incentivised US multinationals to repatriate cash and invest and grow their business in the US, as the tax rate applicable is now far lower than before (and it may also be lower than where the profits rolled up offshore). Transfer pricing is therefore the key to any restructuring, as this is the mechanism which sets the price of goods and services sold between related parties.
The transfer pricing review could be as simple as kicking the tyres on the interquartile range of pricing that has been prepared to benchmark the price of product sold intra-group from a lower tax jurisdiction. US groups for example will be looking at whether it is possible to substantiate an increase in the price at which product is sold to the US, as the offshore rate of corporate tax is now higher than the US rate.
More complex, the transfer pricing teams could be key in providing advice on seismic supply chain transformations. For example, very few US MNCs would have located their group’s intellectual property, fully fledged manufacturing facility or fully-fledged distribution arm in the US, as these key functions and assets are typically entitled to a comparatively high reward for the risks they take. It is commonplace to have these located in an entity tax resident in a low tax jurisdiction, hence the call by the G20 for the OECD to step into action in 2012.
Groups may now consider whether to transfer and own all new IP created from the US. This in turn may lead to overseas fully-fledged manufacturers becoming contract or toll manufacturers and consideration may be given to the US distribution arm becoming full-value resellers.
It should also be noted that if going forward, a greater share of a MNC’s profits are attributable to the US, this could have a significant impact on the offshore country. We know the EU voiced its concerns before the TCJA was signed, but it will be interesting to see how governments react legislatively, when they more fully understand the cash impact of TCJA.
Let’s not also forget the flipside – non-US parented groups with substantial US subsidiaries will also be reviewing their supply chains. They may look to the US for building out some of their group’s higher-risk functions. This may be especially relevant to UK MNCs, many of whom are concerned over the uncertainty of Brexit.
It’s a wait-and-see for some of the above but one thing is for sure, transfer pricing departments of groups and transfer pricing advisers won’t see any slowdown in work in 2018!
For more information please comment below or get in touch with Suze McDonald.