At the end of 2017, the U.S. tax reform was approved. The main goal of this reform is to strengthen the activities of American companies and encourage companies from abroad to operate throughout the United States. The reform includes a long line of benefits designed to improve competition, such as an effective reduction of U.S. corporate tax rates.
In light of the fact that the tax rates are about to be reduced, the U.S. Internal Revenue Service has begun stepping up collection efforts. Mainly in the field of transactions carried out in corporations between Israel and the United States.
What is U.S. tax reform?
On December 22, 2017, the U.S. Federal Tax Reform was approved. The reform deals with the taxation of various cycles of financial conduct from individual conduct, through corporate conduct to conduct in the face of the international tax system. The reform is considered the most comprehensive since 1986.
The reform is conducted using a balanced method. In other words, it includes reducing taxes and imposing additional obligations and limiting the deduction of various types of expenses. All this is done in order to simplify the tax rules, increase the economic capacity of the banks and encourage growth in order to improve the activity of the American economy.
What are the characteristics of U.S. tax reform?
In terms of corporate taxation
Tax reduction
Reduces the federal tax rate for companies from 35% to 21%.
Abolish minimum tax
Abolishing the Alternative Minimum Tax (Minimum Tax for Companies).
One-time taxation
Aggregated profits of foreign companies will be required to pay a one-time tax of 15.5% on cash gains and 8% on other assets.
A 10% surcharge for companies incorporated in tax regimes whose turnover exceeds $500 million a year on average calculated over a period of three years.
In terms of taxation for individuals
The Federal tax rate for individuals
Lowering the federal tax rate for individuals from 39.6% to 37%. In addition to spacing the tax brackets.
Municipal tax and state tax
City and state taxes will be recognized for deduction and federal tax calculation up to the sum of $10,000.
Personal deduction
Eliminating the personal deduction and doubling the standard deductions.
Decrease total revenue
Reduction of total taxable income by giving a deduction of 20% of the income that will be distributed to an individual from transparent entities such as partnerships, subject to certain conditions.
In terms of international tax
Companies that receive an exemption
U.S. companies will be exempted from tax when they distribute dividends to foreign companies.
Limitation of expenses
Limiting royalty and interest expenses that are not recognized as income abroad and are paid to a party related to the financial activity of the company or individual.
Tax method and tax incentive
Imposing a minimum tax rate for a foreign company of exceptional scope (GILTI); and encouraging IP income taxation by reducing the tax to 13.1%.
How does the United States tax reform take place?
From an economic point of view
As mentioned above, the goal of the reform is to make American companies pay the smallest amount of tax that is possible. For example, an American company distributes products of an Israeli company throughout the United States. According to the reform, the Israeli company will refer to the American company as a “low-risk distributor”. That is, one that leaves a relatively low profit in the US economy.
In terms of expense classification
The U.S. Tax Authority can determine that an expense paid by an American company to an Israeli company is classified differently. For example, using a particular service includes knowledge, so it should include payment of royalties. Therefore, the Israeli company may be obligated to pay additional tax debts to the U.S. Tax Authority.
Impact on banks
Reducing the tax rate imposed on banks may help them recover economically and thus aid growth and development in the economy. In this way, the banks could raise minimum wages and grant special bonuses.
Impact of tax reform on deferring income recognition
According to the reform, as of December 31, 2017, it is not possible to postpone recognition of income beyond the tax year in which revenues are taken into account in the main or secondary financial report. In other words, the taxpayer in the accrual method must include the income details in an applicable financial statement.
Implications of the reform on inheritance taxation
The exemption for U.S. citizens, whether they live in Israel or not, is now $11 million for an individual and $22 million for a couple.
Base Erosion Anti-Abuse Tax (BEAT)
The United States Tax Authority Act imposes a tax on the payer when paid is tied to a particular party outside the country. The revenues of American companies are also subject to a minimal tax.
This law takes effect under two conditions:
Tax erosion
The tax erosion rate exceeded 3% in relation to the total amount of expenses.
Who the law refers to
The law refers to companies with turnover exceeding $500 million over a three-year period.
According to the BEAT, tax rates have increased over the years. That is, for 2018 the tax volume will be 5%, for the period 2019-2025 the tax volume will be 10%, and from 2026 the tax volume will be 12.5%.
Changes in refundable expenses
The reform also included changes to refundable spending such as limiting federal real estate taxes to just $10,000. This cut harms residents of states with high local tax regulations like New York and California.
In addition, the Personal Exemptions tax credits was also revoked. It was well known among most of the non-residents who submitted Form NR1040 for $ 4,500
Taxation of partnerships income
The law grants individuals holding partnerships a 20% tax reduction. This benefit is provided under the condition of awarding a refundable expense of 20% of all business income issued in the United States.
In addition, self employed professionals, except architects and engineers, are entitled to an income benefit of up to $157,000 as individuals or $315,000 in joint reporting.
Cash-based reporting benefits
The new law extends the cash-based reporting benefit for business owners with a turnover of up to $25 million, regardless of inventory in the business. In addition, the recognition of expenditure on employee meals has been reduced to 50% and from 2026 will be considered as 0%. On top of that, the exception to a ban on leisure expenses has been abolished. Now such expenses will be allowed up to 50% of the expense.
Losses
It is necessary to recognize the financial condition of the company or corporation before December 31, 2017 as a transitional provision for losses. That is, the losses generated by this day will be recognized up to two years back and 20 years ahead. This is without income limit that requires offset by transferred losses.
In this section, it is important to exclude the limit for the purpose of calculating AMT of 90%.
Calculation of executive pay
As of 2018, the law limits the deduction of executive payroll expenses in public companies except for certain employees. The law makes an exception for commissions and performance-based compensation. In addition, the law establishes and expands the definition of employees subject to this limitation, which are called “senior executives”, including the CEO, CFO and the three officials who earn the highest amount in the company.
In conclusion, the United States tax reform requires a re-examination of the transfer prices of Israeli companies in order to reduce the risk of paying double tax. It is also necessary to adapt the structure of the company or corporation and financial planning to the new regulations in order to gain as many benefits as possible when entering the financial world in the U.S. We offer tax planning services to minimize this risk.
You are welcome to contact us for preliminary advice and to adapt your financial conduct to the reform.
This should not be seen as legal advice. It is recommended to consult with Masamerica’s team before any action. The service is provided by a professional team, who are fluent in English and Hebrew, and includes lawyers and accountants with American licensees.
