US tax reform: Implications for foreign investors in US businesses
The new administration has signaled some policy initiatives to incentivize U.S. domestic manufacturing, which may encourage foreign-owned companies to expand their manufacturing activities in the U.S. in order to both reduce their tariff exposure and take advantage of any new U.S. tax incentives. For companies looking to expand or establish operations in the U.S., modeling how those policies would affect their cash flow, tax obligations, and operations can equip them to make smart decisions when policy outcomes become clear.
Those policy initiatives, buoyed by narrow Republican majorities in both chambers of the U.S. Congress, include reducing corporate taxes, extending Tax Cuts and Jobs Act of 2017 (TCJA) provisions scheduled to expire at the end of this year, eliminating bureaucratic hurdles and fostering domestic manufacturing.
With more than 30 provisions of the TCJA scheduled to expire at the end of 2025, the U.S. government has an impetus to enact significant tax legislation before the calendar year ends. As Congress redraws the tax landscape while the Trump administration exerts influence, everything is on the table—not just the expiring TCJA provisions.
Corporate tax rate
One of the hallmarks of the TCJA from Trump’s first term was the permanent reduction of the corporate tax rate to 21% from 35%. Building on TCJA, Trump has made additional tax cuts part of his second-term agenda. During his campaign, he proposed reducing the corporate tax rate to 20%, with a more favorable 15% rate for U.S. manufacturers.
Take action: Businesses may have an opportunity to apply more favorable rates by accelerating deductions in advance of potential rate changes and reevaluating their supply chain to identify opportunities for U.S. manufacturing expansion.
Capital expenditures and bonus depreciation
The TCJA allowed businesses to claim an immediate 100% bonus deduction on assets placed in service after the law’s enactment. However, this provision included a sunset clause that effectively phases out the deduction beginning in tax year 2023, when the allowable bonus depreciation percentage was reduced to 80%. There are additional reductions of 20 percentage points scheduled each year until 2027. Trump not only supports a return to immediate 100% bonus depreciation, he also wants it effective retroactive to Jan. 20, 2025.
Take action: Businesses should consider reviewing planned capital expenditure budgets and determine which projects have the most flexibility for acceleration, deferral or continuing current course. Quickly identifying such projects and associated placed-in-service considerations will likely strengthen tax results in any legislative scenario. When analyzing the effect of any proposed bonus depreciation changes, take care to model the broad impact of the reduction in taxable income.
Research & development (R&D)
Effective in 2022, per the TCJA, U.S. businesses are required to capitalize R&D expenses and amortize them over five years if the expenses were incurred within the U.S. or 15 years if incurred internationally.
There is bipartisan support for reinstating immediate R&D expensing to incentivize U.S.-based R&D activities. But there is uncertainty as to how much it would cost the government to implement more favorable R&D expensing rules and how that cost would factor into a broader tax package.
Take action: Businesses that have significant R&D expenditures should review their spending plans with a focus on how their approach to innovation might change with a more favorable expensing. Specifically, focus on:
- Whether it makes financial sense to outsource R&D
- Differences between conducting R&D domestically or internationally
- The interplay between the R&D credit and the R&D expense deduction.
Debt and the business interest limitation
The ability of businesses, including foreign-owned U.S. companies, to deduct business-related interest expenses became less favorable in 2022 under the TCJA. Businesses can only deduct interest expense up to 30% of their earnings before interest and taxes. Generally, this limitation challenges companies that traditionally rely on debt financing.
Such companies may also face other complex issues associated with debt refinancings, modifications and restructuring, which could trigger numerous tax issues, such as potential cancellation of debt income.
For foreign-owned companies, this limitation on interest is a good opportunity to explore alternative funding mechanisms (perhaps involving intercompany pricing).
Elevated interest rates increase the burden on taxpayers under the current regime. Furthermore, prior to 2022, taxpayers were allowed to add back depreciation, amortization, and depletion which increased their interest limitation. The loss of these addbacks places additional pressure on taxpayers in fixed asset-intensive industries.
There is Republican support for a more favorable deduction limit, but this has not been a top priority for either party in prior negotiations. The cost of more favorable tax treatment will factor heavily in what Congress does in 2025.
Take action: Businesses may consider reviewing existing debt structures, including the need for potential refinancing based on debt maturity. Intercompany debt agreements could be reviewed, as well as intercompany transfer pricing, to accurately capture debt and interest at the correct entity. Additionally, current strategies to capitalize interest to inventory and other assets can allow for some recovery, supporting strategies to minimize tax impacts under current law.
Corporate alternative minimum tax (CAMT)
The Inflation Reduction Act of 2022, enacted under the Biden administration, introduced the CAMT—a 15% minimum tax imposed on corporations, with a few exceptions, based on adjusted financial statement income and subject to income thresholds.
Proposed regulations offer certain safe harbor thresholds to eliminate filing obligations. Foreign direct investment (FDI) firms should be aware that foreign-parented corporations are subject to lower thresholds in qualifying for the safe harbor treatment. If the safe harbor thresholds are not met, corporations will need to perform more in-depth calculations and include related documentation with their annual income tax return.
US international taxation and tariffs
The new administration’s push to prioritize domestic manufacturing and improve the U.S. trade balance takes shape in certain tax and tariff policy approaches. Certain policy outcomes could affect businesses’ cash flows and tax obligations as part of their global structure, footprint and supply chain.
Foreign-derived intangible income (FDII)
The FDII regime in the U.S. tax code is an export incentive that allows a U.S. corporation to deduct certain qualifying export sales revenue exceeding a 10% return on tangible depreciable assets that constitute a qualified business asset investment.
The deduction is currently 37.5% of a corporation’s FDII and will decrease to 21.875% beginning in 2026 unless it is repealed or amended. The deduction amount is limited to a corporation’s taxable income, and it cannot create or extend a net operating loss. The Trump administration has indicated it prefers to extend the 37.5% deduction beyond 2025.
GILTI tax planning (global intangible low-taxed income)
If a foreign-owned U.S. company itself has ownership in other foreign companies, it could be subject to U.S. tax on earnings of those foreign subsidiaries through the U.S. global intangible low-taxed income (GILTI) rules, even if the earnings are not distributed to the U.S. company in the year earned.
The GILTI regime subjects the earnings of controlled foreign corporations (CFCs) to current U.S. tax if those earnings are not already taxed under IRC subpart F. A CFC’s U.S. shareholders may exclude high-taxed earnings (income subject to an effective tax rate of 18.9%) from GILTI if the controlling domestic shareholders elect to allow the exclusion.
The GILTI deduction will remain at 50% for 2025 but is scheduled to be reduced to 37.5% starting in 2026. Again, the Trump administration has indicated it would extend the 50% deduction beyond 2025.
Base erosion and anti-abuse tax (BEAT)
BEAT is imposed on corporations making significant deductible payments to related foreign parties, which could be relevant to foreign-owned companies that may make payments to foreign parent companies or other related foreign companies for goods provided or services performed.
The tax applies to U.S. corporations and foreign corporations earning effectively connected income (ECI) with average gross receipts of $500 million (determined at the aggregate group level) and a base erosion percentage (base erosion payments as a percentage of total deductions) exceeding 3%.
BEAT applies in addition to a corporation’s regular income tax and functions similarly to an alternative minimum tax. The current BEAT rate is 10% but is scheduled to increase to 12.5% starting in 2026. The tax generally cannot be reduced by foreign tax credits or an applicable tax treaty. The Trump administration is expected to extend the 10% BEAT rate for years after 2025.
The Organisation of for Economic Co-operation and Development’s (OECD) two-pillar framework
The OECD two-pillar global tax plan to combat tax avoidance, ensure consistency in international tax rules, and ultimately provide a more transparent tax environment is being implemented by countries around the world. Certain aspects of the legislative framework are in force in almost 30 jurisdictions.
However, the United States has not enacted any Pillar Two legislation. Additionally, President Trump on Jan. 20, 2025, issued a memorandum to the Secretary of the Treasury asserting the United States’ sovereignty and economic competitiveness by clarifying that the “Global Tax Deal,” as the memorandum called it, has no force or effect in the United States.
While the administration may not support the OECD’s Pillar Two initiative, multinational enterprise (MNE) groups operating in implementing jurisdictions are already subject to these rules and must comply with the additional global compliance requirements.
Pillar One
Pillar One consists of two main elements: Amount A and Amount B, also known as the simplified and streamlined approach.
Amount A aims to reallocate a portion of the profits of the largest and most profitable MNEs—those with revenue of more than 20 billion euros and a profit margin of more than 10%—to the jurisdictions where they have significant consumer-facing activities, regardless of physical presence. Rights to tax profits would shift in part from countries of production (or development) to countries of consumption, based on a drafted formulaic approach.
Amount B aims to simplify and streamline the application of the arm’s-length principle to baseline marketing and distribution activities, which particularly benefits low-capacity jurisdictions. Unlike Amount A, Amount B applies to a broader range of MNEs engaged in in-country baseline marketing and distribution activities, without a specific revenue threshold.
Pillar Two
The central component of Pillar Two is the Global Anti-Base Erosion (GloBE) rules, which seek to ensure large MNE groups pay a minimum effective tax rate (ETR) of 15% on income arising in each of the jurisdictions where they operate. The GloBE rules are generally applicable to MNE groups with consolidated revenues of 750 million euros or more in its consolidated financial statements in at least two of the prior four years.
GloBE rules and safe harbors
The U.S. imposes a corporate income tax rate of 21%, plus state and local income taxes. Consequently, U.S. MNE groups may be able to take advantage of the transitional undertaxed profits rule (UTPR) safe harbor should they choose.
However, since the transitional UTPR safe harbor is only available in the ultimate parent entity (UPE) jurisdiction, U.S. constituent entities of foreign MNE groups will need to rely on transitional country-by-country report (CbCR) safe harbors during the immediate years (fiscal years beginning on or before Dec. 31, 2026, but not including a fiscal year that ends after June 30, 2028). Although the U.S. general corporate income tax rate exceeds 15%, U.S. taxpayers may have certain tax benefits—such as U.S. R&D tax credits or FDII deductions—that could result in a GloBE ETR less than 15%.
Where U.S. constituent entities are directly or indirectly owned either by a foreign UPE or an intermediate parent entity (IPE) located in an implementing jurisdiction, any potential top-up tax arising from the U.S. constituent entities can be collected by the foreign UPE (or IPE) under their income inclusion rule (IIR).
Certain U.S. tax provisions (e.g., GILTI, CAMT, and BEAT) do not fully align with the GloBE rules, which may result in additional top-up taxes being imposed on U.S. entities by other jurisdictions that have adopted the GloBE framework.
With other jurisdictions implementing the UTPR effective in 2025, the absence of a qualified domestic minimum top-up tax (QDMTT) or IIR in the United States, as noted in the Inclusive Framework’s recent central record of qualified status, may give other MNE group entities located in implementing jurisdictions (not just a foreign UPE or IPE) the ability to collect any top-up tax arising from United States entities.
Take action: Implementation and compliance with GloBE rules will be a significant administrative burden to MNE groups even if no additional tax liability is incurred. Given that significant U.S. tax legislation is likely in 2025, foreign-owned U.S. businesses must navigate the overall Pillar Two impacts and the evolving U.S. tax landscape at the same time. These businesses should collaborate closely with their stakeholders to understand and address Pillar Two implications on the MNE group and may benefit from consulting a tax advisor to navigate the implications of U.S. tax principles as they apply to Pillar Two.
Tariffs
Trump favors the use of tariffs to deal with a variety of policy issues, and his administration has signaled aggressive trade and tariff policy stances.
Increased tariffs have profound implications for U.S. importers in the form of increased costs and compressed margins. To prepare for tariff increases, importers may be able to capitalize on several well-established customs and trade programs and other mitigation strategies.
Take action: Businesses should evaluate how scheduled U.S. international tax rate increases and new tariffs could affect their global footprint, supply chain and economic presence in foreign jurisdictions. A review of corresponding international tax strategies, including transfer pricing and profit allocation, could help businesses identify additional tax savings.
While the goal is optimization, these analyses also bring out areas of tax leakage in a global legal structure which could increase a business’ overall global ETR.
The takeaway: Tax reform readiness
The Trump administration has introduced several policy initiatives aimed at incentivizing U.S. domestic manufacturing, which may encourage foreign-owned companies to expand their manufacturing activities in the U.S. to reduce tariff exposure and take advantage of U.S. tax incentives.
Companies looking to expand or establish operations in the U.S. should model how these policies might affect their operational and compliance costs, supply chains, global tax efficiency and risk profiles so they can make smart, timely decisions once policy outcomes become clear.
