The U.S. Tax Cuts and Jobs Act of 2017 and its impact on multinational companies

Details

Supervisors

Marcel Gérard

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

In December 2017, President Trump won its first legislative victory through the enactment of the Tax Cuts and Jobs Act (‘TCJA’). Despite the numerous critiques due to the lack of transparency that surrounded its vote and the significant estimated tax benefits for some Republican members of the Congress including President Trump, the TCJA is still considered as the most significant tax reform since the Act passed by the Reagan administration in 1986. The notoriety of this reform can be explained by the fact that it comprises tax rate cuts for individuals but especially for corporations since the U.S. corporate tax rate decreased from 35% to 21%. Even though those tax rate cuts are welcome by most American citizens, it also created a vigorous debate among economists over the cost of this reform which is expected to increase the U.S. debt by an extra $1.6 trillion over the next decade while the benefits are rather uncertain since those depend on the willingness of corporations to reinvest those tax gains. However, the TCJA also comprises other measures such as the shift from a global tax system to a territorial tax system which eliminates the obligation for U.S. corporations to pay taxes on incomes generated abroad. Even though those aspects are less known from the general public, they constitute a major disruption for multinational companies which deserved to be analyzed into more detail, especially within a context of increasing tax competition between countries. This thesis thus aims to determine the impact of the TCJA on multinational companies by focusing on the angle of corporate effective taxation rates. To that end, this research calculated effective taxation rates for the 143 largest corporations of 15 sectors of the U.S. economy. The results that were obtained highlighted a global diminution of the effective tax rate for all those sectors. However, it turns out that some sectors experienced some more significant diminutions which might be explained by the relation between the particularities of those specific sectors and the provisions contained in the Tax Cuts and Jobs Act. When it comes to the direct impact of those results on multinational companies, it would appear that this diminution might impact the decisions made by those corporations. To begin, it could first increase the level of corporate investments in the U.S.A. as well as decrease base erosion and profit shifting practices but the impact on foreign profit repatriation remains uncertain. However, it also underlined that decisions of this importance turn out to be influenced by other factors than the corporate effective tax rate. Furthermore, the potential violation threats of WTO rules that the TCJA constitutes further prevents us from affirming with certitude its accurate impact on multinational companies but also on the international fiscal framework.