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Tax havens: impact of the TCJA on FDI stocks

The Tax Cuts and Jobs Act (TCJA) of 2017 made several changes to the US tax system to improve competitiveness and discourage profit shifting to low-tax jurisdictions by US multinationals. Among them were a new minimum tax of 10% on companies carrying out large cross-border transactions (BEAT) and new tax rates on deemed intangible income (GILTI and FDII). Foreign profits paid to American relatives in the form of dividends were fully exempt from US taxation, bringing the US tax system closer to “territorial” rather than global tax treatment. Finally, the top marginal corporate tax rate has been reduced from 35% to 21%.

Overall, policymakers expected the changes to have a substantial impact on cross-border capital flows. Collectively, the changes would reduce the incentives to invest in low-tax jurisdictions, as the tax gap between those jurisdictions and higher-tax countries would narrow, and potentially shift some of those offshore investments to the states. -United.

When we look at outward foreign direct investment (FDI), investment that goes from the United States to other countries, we can see that the TCJA seems to have had an impact on where companies invest. The following chart shows trends in FDI stocks for the top 30 US FDI destinations. The countries are classified as “tax havens” based on research on FDI stocks by economist James Hines.

Following the TCJA, US outward FDI stocks fell by $192 billion in tax havens and increased by $251 billion in “normal” or high-tax countries. The group of “tax havens” is made up of 10 countries or territories, including Ireland, Bermuda, Switzerland and the Cayman Islands. This trend reflects changes to profit shifting incentives as a result of the TCJA, as research has shown that companies impacted by GILTI were less likely to invest in low-tax jurisdictions.

When looking at inward FDI from the United States into the same set of countries, investments flowing from foreign countries into the United States, the TCJA does not appear to have caused much of a break in trends. US inward FDI continued to grow at a similar pace from high-tax jurisdictions, while US inward from tax havens continued to grow, but at a slower pace than from 2014 to 2018. research found that the continued upward trend in inward FDI was more likely due to macroeconomic factors other than the TCJA.

The 2017 Tax Cuts and Jobs Act tax reform did not have a significant impact on US FDI

Overall, the data shows that outward FDI shifted from low-tax jurisdictions to other jurisdictions, while inward FDI remained largely unchanged. But as noted in the first and second of our blog series on FDI, increasing foreign activity does not have to come at the expense of labor and manufacturing. Americans. U.S. investments in other countries often generate benefits for the U.S. and help strengthen supply chains, and policymakers should keep this in mind when trying to raise taxes on cross-border investments. .