Recently, Harley Davidson announced it may be moving some manufacturing operations to Europe in order to avoid retaliatory tariffs. This is a decision that any business would not take likely, however, a new tax law may have been a helpful factor.
For years a major concern of the U.S. government and IRS was corporations holding profits overseas. To try to encourage this money to come back into the U.S. economy the Tax Cuts and Jobs Act included a provision known as the “participation exemption.” The participation exemption allows for U.S. corporations to receive tax free dividends from certain foreign subsidiaries. The goal was that in the future U.S. multinational corporations would have no reason not to repatriate earnings, which could be used for jobs, growth, or other beneficial factors to the U.S. economy. However, what about the businesses that had not yet expanded aboard?
Imagine a U.S. corporation that wishes to expand into the global market through Country X. If manufacturing and operations are setup in Country X this could lead to double taxation. Country X may impose tax on the earnings and another potential tax in the U.S. when the profits are repatriated as dividends back to the parent corporation. There are certain exceptions and credits that may have helped to mitigate the situation, but it was still a major consideration. Now, with the participation exemption some of these concerns are alleviated. The foreign corporation may be able to pay a tax-free dividend back to the U.S. parent.
The big picture is not this simple. Local country taxation and other U.S. tax laws could be major factors as well. Nevertheless, if retaliatory tariffs cause corporations to consider moving some operations abroad, it is possible that this new U.S. tax law may be a motivating factor for the very scenario it was enacted to prevent.