The New Tax Law Will Make U.S. Companies More Internationally Competitive -- I know Because Ours Is.

Tax policy is always a divisive topic; even Jesus was confronted with the political question of paying the imperial tax to Caesar. Consequently, your initial reaction to the recent federal tax reform likely reflects your political persuasion. However, regardless of how this legislation will ultimately be viewed and scored politically, US businesses are now more competitive because the US tax scheme is now consistent with the other developed nations, US businesses will have additional resources to invest, and US businesses will be incentivized to reinvest in the US.

Territorial Tax Structure. Our business, Wildcat Oil Tools, expanded internationally in 2017. Like every other business to do so, we spent considerable time and resources on tax planning and addressing questions such as: for overseas income who would we owe taxes to and at what rate?  For us this included the IRS because until recently the US followed a worldwide taxation regime and taxed Wildcat’s income regardless of where it was earned. Our international competitors don’t have to worry about this because almost every other developed country utilizes a territorial tax structure. Their income is only taxed in the country where it is earned. 

Beginning in 2018, the US will also use a territorial tax structure. The income Wildcat earns overseas will only be taxed overseas. There are safeguards in the tax bill to prevent gaming the system but generally, we no longer must consider the impact of US tax laws on our overseas business. We can now spend less time with lawyers and accountants worrying about how to structure a transaction for tax purposes and more time with our customers getting additional business.

Tax Rates. The United States had the highest corporate tax rate amongst developed countries: 35%. That has now been lowered to 21%. This rate applies to C corporations which represent only 5% of all US businesses but account for 40% of all US business income. C corporations include the publicly traded, multi-national businesses with whom everyone is familiar. Those businesses now have considerable additional money to invest in new plant and equipment, improve their balance sheets, and hire additional employees. 

The US Labor Department recently announced that 315,000 jobs were added in the US in February. That obviously is good for the US economy and is an easy metric to observe and measure. But, do not discount the impact of increased investment and improved balance sheets brought about by a lower tax rate. Both make US C corporations healthier and thus more competitive.

Pass Through Taxes. Wildcat Oil Tools, like most US businesses, utilizes a pass through for taxes. The business itself does not pay taxes, the owners report the business’s income on their personal tax returns. Individual tax rates are generally higher than corporate tax rates. Consequently, Wildcat pays higher taxes than most of our international competitors. The new tax bill helps level the playing field. The tax burden on pass through businesses: S-Corps, LLCs, and partnerships, has been lowered with a 20% deduction. Just like the C corporations, this gives us additional money to invest in the business. I appreciate that some will debate whether and to what extent this will happen. In our case I can ensure it that not only will it, it already has. That additional investment makes us more competitive.

Capital Expenditure Expensing. Capital expenditures in the US were formerly required to be expensed over a period of years. They can now be expensed immediately. This not only makes Wildcat more competitive, it encourages additional US expenditures. 

Wildcat is more competitive today because we’re incentivized to reinvest our earnings in the business. New and additional equipment and facilities allow us to offer our customers better products and services. 

Much of this investment will occur in the United States. Because Wildcat operates internationally, we sometimes have an option to purchase new equipment in the US or in one of our international markets. If that equipment purchase can be expensed in the year of its purchase, we have a strong incentive to purchase the equipment in the US.

Repatriation Tax. The new tax bill imposes a one-time repatriation tax for foreign profits. This is designed to incentive US companies doing business abroad to bring their profits home. Citigroup has estimated that US companies have $2.5 trillion of capital overseas. Goldman Sachs estimates that S&P500 companies hold $920 billion of untaxed overseas cash and that $250 billion of this will be repatriated. 

When this cash is repatriated, it will be put to work. Some businesses will reinvest that cash in US plant, equipment, or employees. Others will use it to pay down debt or otherwise improve their balance sheet. Some publicly-traded companies will use it to buy back stock. Each of these actions improve the US economy. That alone makes US businesses more competitive.