The 2017 Tax Cuts and Jobs Act includes several provisions that impact the business income statistics in the national income and product accounts (NIPAs), including corporate taxes and capital transfers. Major provisions are highlighted below.
One-time Deemed Repatriation Tax on Accumulated Foreign Earnings
A one-time deemed repatriation tax is imposed on foreign earnings accumulated after 1986 until the end of a company's most recent fiscal year. Under this provision, accumulated foreign earnings are deemed repatriated whether or not they are actually repatriated. The tax rate is 15.5 percent on earnings held in cash and cash equivalents and 8.0 percent on earnings held in illiquid assets. Parent corporations may elect to pay this tax in prescribed installments over a period of eight years.
In the NIPAs, the deemed repatriation tax is classified as a capital transfer from business to government and recorded on an accrual basis in the fourth quarter of 2017 (Lines 2 and 35 of NIPA table 5.11U. Capital Transfers Paid and Received, by Sector and by Type.) This tax is classified as a capital transaction because the tax applies to previously accumulated earnings and is not related to current period production. It is effectively a wealth tax in economic accounting terms. The one-time capital transfer affects net lending/borrowing of business and government, resulting in a redistribution of net worth from business to government but not affecting any measures in the current accounts.
BEA's estimate of the one-time repatriation tax is $250 billion at a quarterly rate ($1 trillion at an annual rate) and will be recorded (in its entirety) on an accrual basis in the fourth quarter of 2017. This estimate was based on analysis of data from BEA's international transactions accounts (ITAs), international investment position (IIP), and activities of multinational enterprises (AMNE), as well as estimates from the Joint Committee on Taxation (JCT), and the Treasury Department's Office of Tax Analysis (OTA). This estimate may be updated as source data become available from the IRS Statistics of Income (SOI) reports. The SOI data are available on a two-year lag and will reflect the tax payments on a cash basis.
Decrease in Corporate Tax Rates
The tax law also changes the nominal domestic corporate tax rate from 35 percent to 21 percent beginning with the first quarter of 2018. This will reduce the amount of taxes paid by corporations and received by the government. This will not affect Gross Domestic Income (GDI) because profits before tax is the featured measure included in GDI.
Actual amounts of taxes paid by industry will be available in the SOI data with a two-year lag. Until SOI data are available, estimates of corporate taxes are based on extrapolations that will be adjusted to reflect the new tax rates. Estimates made for taxes will be replaced with SOI source data once they are available.
Taxation of U.S. Multinational Companies
For U.S. multinational companies, the tax law moves the tax system from a worldwide system to a modified territorial tax system. Under the worldwide system, companies were effectively taxed on all profits overseas at the statutory U.S. corporate tax rate. These taxes, however, were deferred until the profits were repatriated and brought back to the United States. In the NIPAs, repatriated profits are classified as dividends from the rest of the world.
Under the new modified territorial system, companies are no longer taxed on funds that are repatriated back to the United States, but they are potentially subject to new taxes. The Global Intangible Low-Taxed Income tax (GILTI) is a minimum tax on the excess income of foreign subsidiaries over a 10 percent rate of return on tangible business assets. The Base Erosion Anti-Abuse Tax (BEAT) is effectively an alternative minimum tax applied to companies with excessive interest or services payments to related parties.
These new taxes will be recorded in the NIPA's as taxes on corporate income beginning with the first quarter of 2018. The amounts of the taxes will be captured in the source data for corporate taxes from SOI reports. For time periods before SOI data are available, BEA will estimate these news taxes based on estimates from the JCT.
Estimates of taxes on corporate income can be found on line 16 of NIPA table 1.10. Gross Domestic Income by Type of Income.