American Tax Reform and Internationalization
The new tax system in North America represents a true revolution for American corporations and for companies around the world, particularly firms based in nations such as Brazil that want and need to internationalize, but have little knowledge of the new taxation structure and must learn how to follow its rules and regulations as they look toward growth and expansion in the global market.
In the context of economics, internationalization can refer to a company that takes steps to increase its footprint or client base outside of its country of domicile and into international markets. The global corporate trend toward internationalization has helped push the world economy into a state of globalization, where economies throughout the world are highly interconnected due to cross-border commerce. As such, they are greatly impacted by each other’s activities and economic well-being.
Under the previous taxing system, called “worldwide taxation,” used by the US and a number of other countries, governments taxed business concerns based on revenues earned, minus work-related expenses and certain other eligible exemptions.
If I am not mistaken, former President Dilma Rousseff implemented the system during her term as chief executive in Brazil.
This system encourages companies to locate their headquarters in countries that do not tax incomes earned outside of their territory, a practice commonly known as creating “tax havens.”
As a result, the profits obtained from their operations around the world are already taxed at the source and would not be levied again when they reach corporate headquarters.
With the reforms established earlier this year by President Donald Trump and then adopted by Congress, the US government first reduced the percentage of taxes on companies from 35% to 22% in a categorical effort to stimulate company profits and thereby hike revenue and job numbers.
In the process, the tax base switched to a territorial mode, that is, companies that have their headquarters here, regardless of origin, American or even Brazilian, do not have to pay taxes in the USA on the profits obtained outside the United States.
Let’s look at this explanatory table:
American company operating Parent X vs. Headquarters company operating Parent X;
- a) Parent X is operating in the territorial system
- b) Country X’s tax bracket is 20%
- c) US tax bracket is 35%
|Corporation Headquarters USA||Corporation Headquarters Country X|
Foreign subsidiary of a US Corporation
having $100 of revenue in Country X
Corporation in Country X earns
$100 of revenue
|$20 tax paid in the Country X||$20 tax paid in the Country X|
|$80 transferred from the foreign subsidiary to US Corporation. US Corporation should report a total of $100 in revenue on the tax return here.||$80 transferred to the United States. No additional taxation|
|$15 tax paid to the US government to reach 35% of the tax applied here.|
|(20% Country X + 15% US – to arrive at the rate here, 35%)|
|Profit after tax = $ 65||Profit after tax = $80|
|CONCLUSION: Using the current “worldwide” criterion, it would be better to leave the money overseas than bring it into the United States.|
In this situation, Brazilian companies that want to use the internationalization method can do so objectively, entering the largest market in the world and still having the advantage of not paying taxes in the US on profits obtained in countries where the United States has trade agreements.
In the case of Brazil or any other country where it operates or will operate, which does not have the agreement, there are doubts about the form of the tax. In principle, if the distribution is not made and the profit is reapplied into the company, there would be no tax burden, but it is still a subject to be decided in Brazil.
What matters is this. At the moment, there is no better option for the internationalization of the company.