An observation once made by author Chaim Potok is relevant to business owners trying to understand the impact of the latest proposed tax reform on their business: “…everything has a past…If you don’t know the past, you can’t understand the present and plan properly for the future.”
The latest Trump administration proposal on tax reform was released September 27 and outlines significant changes to the current tax system. Understanding the impact of the proposed changes to their business continues to be a struggle for many business owners and individual taxpayers, too.
Often, E&P is an afterthought for most business owners, unless and until dividends are about to be paid.
Overall, the plan aims to widen the income tax base, curtail or eliminate certain deductions, and close “loopholes," all of which could allow for a simplified tax code and a lower income tax rate. One of the stated goals of the proposed changes is to make the U.S. corporate income tax rate more competitive in the global marketplace. Some attention has also been given to “offshoring” and reducing incentives for companies to move operations and profits overseas.
While the current proposal remains vague and is highly likely to be changed before it’s enacted (if it’s enacted), there is one key takeaway: Companies must get a handle on their tax attributes in order to plan effectively for the future. For U.S.-based multinational taxpayers, the “earnings and profits” (or “E&P”) of their foreign subsidiaries is a key tax attribute.
Often, E&P is an afterthought for most business owners, unless and until dividends are about to be paid. However, under the proposed changes, understanding E&P will be critical to planning. The latest tax reform proposal features a deemed repatriation of foreign earnings that have accumulated overseas and would have tax earnings held in illiquid assets at a lower rate than earnings held in cash and equivalents. Therefore, understanding a foreign subsidiary’s tax attributes is necessary to accurately forecast the impact of tax reform. In other words, to paraphrase Potok, without knowing our company’s past, we cannot understand the scope of the changes and plan for their impact.