The passage of this bill is a milestone, which is the most significant change in the American tax system since 1986, and will completely reshape the current American tax system. Of course, the passage of the bill does not mean the end of the tax reform process. Next, the US Senate will also pass the Senate Royalty Reform Bill. After that, we will continue to coordinate the bills of the Senate and the House of Representatives, form and pass the same version of the bill, and finally submit it to the President for signature and become law. Although this road to tax reform legislation is full of challenges, the Trump administration still hopes to complete this process before Christmas 20 17.
For China, the most relevant thing about the US tax reform and China lies in the change of cross-border clauses in the US corporate tax, which will profoundly affect the competitiveness of China investors and China multinational enterprises investing in the United States relative to American multinational enterprises. As a part of the future international tax rules that are being widely discussed around the world, the corporate tax reform in the United States will also indirectly affect China's tax policy choice. Next, this paper mainly discusses the changes of international tax rules in this tax reform bill.
Key points of the house tax reform bill
The US House of Representatives tax reform bill can be divided into three parts: personal tax reform, business tax reform and international tax reform. We mainly focus on those contents that have potential impact on China.
Key points of personal income tax and business tax reform
The federal enterprise income tax rate has been reduced from 35% to 20%, which is lower than the average level of OECD countries. The enterprise income tax rate of 20% will take effect from 20 18 1.
Introduce new complex tax rules for "infiltrated" enterprises (i.e. self-employed, S-type companies, limited liability companies and partnerships). According to this regulation, the applicable tax rate of "infiltrated" enterprises' "qualified business income" will be reduced from the current highest personal income tax rate of 39.6% to a very competitive 25%.
100% of the investment cost of assets occurred during the five-year period of 20 17-2022, excluding real estate.
The limit of interest expense is 30% of profit before interest, tax, depreciation and amortization (DBITDA). This rule comes from the fourth action plan of OECD's tax base erosion and profit transfer (BEPS). The current income stripping rule has been abolished, but real estate and small businesses can be exempted.
The annual net operating loss carry-over limit is 90% of the annual taxable income, which can be carried forward indefinitely and basically cancelled.
Introduce a three-year holding period for carried interest's preferential treatment.
The tax rate and grade of personal income tax have been revised, and many special deductions/credits for personal income tax/corporate income tax have been cancelled, as well as the minimum personal replacement tax and inheritance tax.
The focus of the reform of international tax rules
The tax rules for the overseas business of American multinational companies and the activities of foreign companies in the United States have changed.
American companies can enjoy the income tax exemption of 100% for dividends received from their overseas subsidiaries (the shareholding ratio is 10%). The historical accumulated overseas income of overseas subsidiaries will be taxed once as repatriation, with the tax rate of cash and cash equivalents being 65,438+04% and the tax rate of non-current assets being 7%.
The CFC rule is extended to the profits hoarded by overseas subsidiaries of American multinational enterprises (so-called "overseas high returns"), which are taxed at the current tax rate of 10%, and 80% of foreign taxes paid by subsidiaries' profits can be deducted from American taxes. This means that as long as the effective foreign tax rate reaches 12.5%, there is no need to pay US tax.
The tax reform bill puts forward a very novel provision: the amount paid by domestic companies in the United States to overseas related parties is subject to 20% execution tax. This provision applies to the group that prepares consolidated financial statements and pays overseas related parties more than US$ 65,438 billion annually. The amount paid to overseas related parties must be included in the cost of goods sold or the depreciation or amortization basis of assets. Service fees within the group, interest paid at cost (without bonus) and the amount that needs to be fully subject to 30% withholding tax are not subject to execution tax. However, foreign companies can choose to establish a permanent establishment in the United States to avoid paying execution tax. In this case, the tax amount will be determined according to the profit rate of relevant product lines in the Group's consolidated financial statements. 80% of the tax paid abroad can apply for overseas tax credit.
Draw lessons from the fourth action plan of BEPS, and introduce the interest limit rule of global debt ceiling. When the share of American companies in the global net interest expenses of multinational groups exceeds 1 10% of the share of American companies in the group, the deduction of the excess net interest expenses will be restricted.
KPMG observation
The tax reform bill of the House of Representatives contains many innovations, breaking through the previous tax practices in the United States. The introduction of dividend exemption rules has turned the United States into a territorial tax system, while taxing "high overseas returns" has turned the United States into a "substantial" global tax system. The "External Payment Rules" introduces the right of "destination-based" taxation, which may affect the OECD's global digital economy taxation work. The interest rules, together with the above rules, will have an impact on the business of China enterprises in the United States, and cause compatibility problems of tax treaties. China's tax policy makers will also pay close attention to the changing direction of American tax revenue, and may consider adjusting relevant policies to maintain the competitiveness of China enterprises. There are many differences between the tax reform bill of the Senate and the tax reform bill passed by the House of Representatives in many aspects, such as tax base erosion rules and special intellectual property income rules, so it is especially necessary to pay close attention to how to coordinate the tax reform bills of the Senate and the House of Representatives.
Click here to read KPMG's detailed analysis of the House tax reform bill:
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What impact will such tax cuts have on the world?
To be sure, one of the effects is to trigger large-scale tax reduction competition in market economy countries. Because tax determines the cost of enterprises and the competitiveness of goods, it also determines the country's ability to attract capital, technology, talents and enterprises composed of these elements to invest.
The second impact is that it may stifle the economies of some non-market economy countries. Most non-market economy countries do not levy enterprise income tax, but levy turnover tax.
In terms of economics, turnover tax is a rogue tax, which is fatal to enterprises, especially small and medium-sized enterprises and entrepreneurial enterprises. The reason why turnover tax is levied is essentially that the level of tax management can't keep up with the times, and income tax can't be collected at all. Competition in the international market depends not on the strength of enterprises, but on government policies to feed enterprises and subsidize export enterprises with the tax of the whole people.
In the face of such a tax reduction policy in the United States, I am afraid that no matter how subsidized those export enterprises are, they can no longer compete with it. Enterprises do not have their own creativity and competitiveness, and relying on policy blood transfusion is not a long-term solution. Today, this is not a long-term solution. I'm afraid we can only stop here. Large-scale tax cuts in the United States will inevitably cause a fatal blow to the non-market economy. In fact, it is closing the door of the American market by market means, attracting the best enterprises in the world to the United States, and blocking all enterprises that are not truly competitive from the American market.
Enlightenment of Trump's Tax Reduction Plan to China
Compared with China and the United States, China has a heavier tax burden.
The United States and China are the world's first and second largest economies, respectively, and their respective tax burdens have a great impact on industrial competitiveness. It is of great significance to compare the tax burden between China and the United States. China's tax system, which is dominated by indirect taxes, is doomed to have a heavy tax burden on the enterprise sector. After Trump took office, he tried to introduce large-scale tax cuts, which may further push up the relative production costs of China's corporate sector.
1. The tax reduction in China is not as strong as that in the United States.
In recent years, China has taken many measures to reduce taxes and fees. On April 19, the the State Council executive meeting announced six tax reduction measures. It is estimated that the tax burden of various market entities will be reduced by more than 380 billion yuan in 20 17. Coupled with a number of fee reduction measures that have been introduced in the first quarter, the annual tax reduction and fee reduction was 580 billion yuan. Tax reduction and fee reduction have achieved certain results, and the growth rate of national public finance revenue has gradually decreased. In 20 15, the fiscal revenue increased by 5.8%, which was lower than the GDP growth rate 1. 1 percentage point, which was the first time since the beginning of last century. In 20 16, the national public finance revenue 15.96 trillion yuan, the year-on-year growth rate further dropped to 4.5%, which was lower than the GDP growth rate for two consecutive years. In 20 16, the proportion of fiscal revenue to GDP was 2 1.44%, which was the first decline since 1995. Since the beginning of the year, the economy has obviously picked up and the vitality of enterprises has increased, which is not unrelated to the large-scale tax reduction and fee reduction in recent years.
Although China has made some achievements in tax reduction and fee reduction in recent years, compared with the tax reduction plan of the United States, our current tax reform is still insufficient. In addition to the reform of the camp, the rest of the tax reform measures are progressing very slowly. From the specific content, 10 revised the enterprise income tax law for the first time in February this year, providing more tax benefits, but the core enterprise income tax rate has not been reduced, still 25%. The long-awaited tax reform has not been included in the legislative plan of 20 17, and the tax with stronger adjustment ability such as property tax and inheritance tax is far away. At present, it is a critical period for the transformation of kinetic energy of economic growth, and the consumption tax reform has ushered in a window period. However, the slow reform of consumption tax has become one of the reasons that restrict consumption growth and lead to consumption outflow. Judging from the recent reform trend, the next consumption tax reform will not only reduce taxes, but also increase taxes.
2. China's macro tax burden is higher than that of the United States.
There are different ways to measure macro tax burden. If only the proportion of tax revenue to GDP is counted, it is probably 18.5% in China, which doesn't look high. As a large part of China's fiscal revenue is non-tax revenue, the actual value will far exceed this. There is no social security tax in China, and social security is paid. The macro tax burden in the United States includes social security tax. Excluding social security tax, the tax revenue of the United States accounts for about 19% of GDP, which is equivalent to that of China.
According to the IMF Special Data Dissemination Standard (SDDS), the Ministry of Finance announced the total fiscal revenue under the broad fiscal revenue caliber, including general public budget revenue, government fund revenue except the revenue from the transfer of state-owned land use rights, state-owned capital operating revenue and social insurance fund revenue. In 20 15 years, China's total fiscal revenue was19848 billion yuan, accounting for 29.33% of GDP. In 20 16, US fiscal revenue accounted for 26.36% of GDP, slightly higher than that of China.
In 20 15, the land transfer income actually paid into the state treasury was 3,365.773 billion yuan. If we consider the expansion of the broad fiscal revenue from the transfer of state-owned land use rights, the total broad fiscal revenue in 20 15 years will be 232,654.38 billion, accounting for 34.3% of GDP. According to this standard, China's macro tax burden is not only higher than that of the United States, but also higher than the average macro tax burden of OECD.
3. There are many taxes and fees in Chinese enterprises, and the burden is heavy.
Although China's overall tax burden is not heavy compared with other countries, nor much higher than that of the United States, China's indirect tax system determines that most of the tax revenue comes from enterprises, and the part paid by enterprises reaches about 90% of the total tax revenue, which is an important reason for the heavy tax burden of enterprises.
Judging from the main taxes, there are more than 10 types of corporate taxes and fees in China, among which corporate income tax, value-added tax and business tax account for a relatively large proportion. According to the tax data of 20 16, the proportion of enterprise income tax, value-added tax and business tax in the total tax revenue is 22. 1%, 3 1.2% and 8.8% respectively, and the total proportion reaches 62.2%. Indirect taxes account for a small proportion in the American tax system, and the corporate tax burden is mainly corporate tax (similar to corporate income tax) 1, accounting for 16% of the total tax revenue.
From the perspective of corporate taxes and fees, in addition to income tax, value-added tax and consumption tax, Chinese enterprises have to pay about 13% of additional taxes and fees, including about 7% for urban maintenance and construction, 5% for education, and 1% for flood control and security. According to the calculation of the World Bank, the total corporate tax rate in China (the proportion of total corporate tax payment to government fees in corporate profits) is much higher than that in the United States. In 20 16, the total tax rate of Chinese enterprises was 68%, ranking 12 in the world 190 economies. The total tax rate of American enterprises is 44%.
In addition to the burden of taxes and fees, the domestic manufacturing industry also faces the constraints of rising labor and land prices, production capacity and resources. Enterprise costs are rising and investment efficiency is decreasing. The total investment in fixed assets has exceeded 47% of the total real capital, that is, nearly half of the investment expenditure is difficult to form capital. In 20 16, private investment declined precipitously, and nearly 45% of private investment was in manufacturing industry, which indicated that the growth pressure of manufacturing industry was great.
4. The tax system in China is simple and extensive.
Due to the difference of tax system, American personal tax accounts for a large proportion of fiscal revenue, accounting for 45%-50% in most years. China's personal tax contribution is very small, accounting for 6%-8%. Although the tax burden of the United States is higher than that of China in terms of total tax revenue, the social welfare enjoyed by American residents is far better than that of China, which means that the tax declaration is very strong. When determining taxable income, the United States stipulates many detailed income deduction items, mainly including business deduction and personal deduction, such as taxpayer's child support, elderly support over 65 years old, disabled credit and so on. Considering the social welfare effect, China's tax burden may not be lower than that of the United States.
In addition to the social welfare effect, the tax structure of the United States is relatively rich and has a strong "balance between the rich and the poor" effect, while the tax structure of China is too simple. Personal taxes levied in the United States mainly include personal income tax, property tax, inheritance tax and property gift tax. The personal tax levied in China is mainly personal income tax, but there is no capital gains tax, property tax, inheritance tax, property gift tax and other taxes. Comparatively speaking, China's personal income tax is strict on the wage income of the working class, while the investment income tax, property tax, inheritance tax and property gift tax of the rich are lacking, and the system has a big loophole. For the working class, China's tax burden is obviously higher than that of the United States.
5. China's non-tax revenue far exceeds that of the United States.
Although the efforts to clean up various fees have been intensified in recent years, due to the serious diversification of fee subjects, it is difficult to effectively restrain them, and non-tax revenue has grown rapidly. Even if the economic growth rate gradually declines, the annual growth rate of non-tax revenue is double digits, and the proportion of non-tax revenue in fiscal revenue is also increasing year by year, reaching 18.3% in 2065 and 438+06. Non-tax revenue mainly includes special income, administrative fees, confiscation income and other income. Various charges are an important reason why Chinese enterprises and individuals feel heavier tax burden.
Non-tax revenue in the United States mainly includes various expenses, including administrative fees, the use of public facilities such as airports and parks, and all non-tax revenue should be included in budget management. The proportion of non-tax revenue in US fiscal revenue is relatively low, which is relatively stable every year, at a level slightly lower than 5%, and the proportion is lower than that of China 1/3.
Who is the winner of American tax reform?
On 16, the federal government of the United States got the tax reform plan passed by the House of Representatives, which is said to be unprecedented in strength and will have an important impact on the global competitiveness of the United States.
The benefits of tax reform are self-evident. One attracts American companies to take root in the United States. Only by reducing the corporate income tax rate from about 35% to 20%, the tax burden of American enterprises will be far lower than the average level of about 25% in OECD countries, and the reduced part will be converted into corporate profits. According to the tax policy center jointly organized by the Brookings Institution and the Urban Institute, the profits of American enterprises will increase by $654.38+008 billion this year and $265.438+05 billion next year. In addition, the 20% tax rate, coupled with the scale effect brought by the huge size of the US economy, is expected to bring the real economy into a virtuous circle. The American Tax Foundation estimates that in the best case, the tax reform will increase the gross domestic product of the United States by 6.9 to 8.2 percentage points and create 2 million new jobs.
The second is to affect the inflow or return of enterprises to the United States. Although the U.S. government has indicated that it will levy taxes on American enterprises that retain profits overseas, it is revealed that the tax rate in the plan will be a preferential low tax rate. It is estimated that the offshore profits of American companies remain at around $2.6 trillion. As a result, overseas companies such as Apple, which store profits and hold cash, are faced with the heavy burden of extra taxes in the European Union and other places, as well as the preferential low tax rate in the United States. You can imagine where to go.
The third is to win people's hearts. American tax revenue accounts for about 70% of the total national tax revenue. If all the tax reform schemes can be implemented, the tax base will naturally shrink and the tax revenue will also decrease. The American people's support rate for the federal government will also rise, which will help Trump continue to push the New Deal.
The tax reform in the United States, taxpayers earned, who lost? Obviously, the federal governments of the United States and other countries may be affected.