Staying nimble to benefit from US corporate tax cuts

Expert says many have underestimated the potential impact of Trump's overhaul

Staying nimble to benefit from US corporate tax cuts

A leading tax expert believes some advisors are yet to fully grasp the gravitas of the US corporate tax cuts.

Michael Shumate, director, US Corporate Tax at MNP, believes the Canadian Government has to respond as the advantage of doing business and investing this side of the border ebbs away.

Shumate said the math involved in President Donald Trump’s new rules is “outrageous” and called it a “spreadsheet-based legislative” that even he is still absorbing.

As an American working in US tax in Canada, he is in prime position to assess the new shape-shifting landscape and what it will mean long term. He says two years from now everyone will have worked out a particular path in order to make the most of the cuts, which slashed corporate tax from 35% to 21%. Ontario’s, for example, currently stands at 26.5%.

Other key parts of the equation in the US reform include special rates: the 13.1% Foreign Derived Intangible Income (FDII) and the Qualified Income of 29.6%.

Shumate said: “Most of America flows through entities so now, flow-through at best you’ll get to that 29.6% rate. Well, if you incorporate you can get to that 21%, so how many people want to go and incorporate?

“If you follow the US news, a few of the big boys, particularly the PE funds, are analysing this because they are typically flow-through entities. Would you rather buy a corporate entity? Because if you are in a flow-through and you’re making money, somebody is funding tax at at least 29.6%. You incorporate and that drops to 21%.”

Shumate said that the enterprise value for a private equity firm of that eight-point drop is undeniable and people will work out how to do it. That’s even before the FDII comes into play, which is designed to keep those assets from going offshore.

He said this is a puzzle tax professionals will work out for their clients, which will only accelerate the exodus of capital out of Canada. It’s also a hugely attractive proposition for start-up companies.

He said: “If I can figure out how to get that 13% rate, I’m going to get it. So it’s intriguing because if I can get to that 13% I have to stay nimble. How long is it going to last? I can’t remember which one but one of the world organisations is already saying, you guys are tax cheats and we’re going to shut that down.”

He added: “You’ve got to stay nimble because the simple thing is if you put all your capacity down there, once it’s there you can’t get it out. If I put value into the United States, I can’t get it out without paying tax on whatever appreciation occurs. Inevitably smart people, myself and others, will figure out how to exploit that.

“There’s a lot of math, a lot of details to work through. But it’s a fun time to be a tax man.”