Is now the time to expand into the United States?

Final regulations for ‘Made in America’ tax break

As Canadian businesses emerge from the COVID-19 pandemic that halted the global economy and shut down the international supply chain, many are now thinking about the future. In planning for the “new normal”, businesses need to consider whether it’s advantageous to bring jobs and manufacturing back home to North America, particularly in the event that the world sees another mass pandemic. On July 9, 2020, the US Treasury released final regulations with respect to a tax break for companies bringing business to American soil that could be favourable for Canadian businesses thinking about expansion into the United States.

In 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA), introducing the most extensive overhaul of the US tax system in over 30 years. The TCJA included many provisions focused on making good on the President’s promise to bring business and jobs back to American soil. These provisions include a decrease in the corporate tax rate from 35 percent to 21 percent, favourable capital asset expensing provisions and a commonly-overlooked incentive—the tax deduction available for a taxpayer’s ‘foreign derived intangible income’. This incentive provides a US taxpayer with a deduction to reduce its overall tax rate on foreign revenues from 21 percent to 13.125 percent (16.4 percent for 2025 and future years).

Contrary to its name, the deduction is not only relevant for businesses that derive intangible income, but is available for all revenues of a US corporation earned by a foreign person for a foreign use. As such, businesses that generate income from foreign persons for the following activities should be able to take advantage of this deduction for an overall lower tax rate:

• Sales/exports of tangible property outside of the United States, even if sold for resale outside of the United States
• Sales of property for further manufacturing outside of the United States
• Sales or licenses of intangible property outside of the United States
• Services provided for foreign recipients

The final regulations apply for taxation years beginning on or after January 1, 2021 and modify some of the guidance provided earlier by the IRS in its proposed regulations, including substantiation requirements and eligibility of certain income for this tax break. As with any US laws, there are a lot of nuances to work through to determine which income is eligible for this deduction and which does not qualify. You can learn more about the final regulations here.

At a time when Canadian businesses are starting to make critical decisions about their future, an expansion to the United States may be appealing. With the ability to reduce your effective tax rate to 13 percent on sales to foreign persons, there could be overall global tax savings from shifting operations into the United States. Favourable provisions will also allow taxpayers to write off their costs of expansion and take advantage of the “Buy America” mentality that often prevails in the US markets. Our team at Grant Thornton are subject matter experts on structuring expansion of businesses south of the border and can assist you in your expansion plans.