U.S. 2018 Tax Bill to Introduce 20% Excise Tax on Most Foreign Intra-Group Payments
According to early versions of the 2018 U.S. budget that in November 2017 is making its way through the legislative process, a new 20% excise tax is to be introduced. The tax shall apply to almost all payments made by U.S. companies to non-U.S. affiliates of the same group (an “international financial reporting group”: subsidiaries, parents companies, and sister companies). The tax will not be deductible from U.S. corporate income.
Common business transactions including royalties paid to and inventory acquired from foreign affiliates will be affected, thereby having an adverse impact on all multinationals that have a presence in the U.S.
As far as insurance is concerned, some examples that are subject to the new, proposed excise tax include:
- reinsurance premiums paid to captives located outside of the U.S.;
- expatriates working in the U.S. but on home payroll;
- corporate risk management services;
- HR centers-of-excellence such as global payroll; global mobility; global compensation & benefits services;
- centralized payroll services;
- management fees;
- shared costs such as for centrally acquired third-party software.
The purpose of the bill is clear: repatriate jobs to the U.S. by punishing U.S. firms that purchase goods and services from affiliate companies abroad. It is likely that attempts to circumvent the law by artificially sandwiching in a third-party inside the transaction will be challenged by the I.R.S. As an example, one could think of having a U.S.-based, non-affiliated firm purchasing services from headquarters, then reselling the same services after adding a small (less than 20%) fee to the U.S. affiliate of the group. But perhaps if substantial value were added in between …
The case of non-U.S.-domiciled captives is interesting. Premiums payments are typically made to a third-party U.S. insurance firm. The U.S. insurer then reinsures (cedes) 100% of the risk and almost 100% of the premium as it deducts a fronting fee, typically 1 to 3% of premiums. The third-party sandwiched-in is actually required by U.S. regulations in order to comply with state licensing requirements. So, no problem? Well, the I.R.S. might decide that the fronting insurer adds no value and ignore its presence.
The excise tax should apply to all payments that are deductible; included in costs of goods sold, or; includible based on a depreciable or amortizable asset. It should not apply, however, when a payer elects to use a ‘services cost method’ if the amount is the total services cost with no markup.
The House Ways and Means Committee is actively considering modifications to the Bill and we will report on any further developments.