Just moments after being named Donald Trump’s Treasury Secretary, Steven Mnuchin took to the airwaves of CNBC to explain that his “number one priority is tax reform.”
Mincing no words, he quickly reaffirmed Trump’s campaign promise by saying: “We’re going to get to 15% and we’re going to bring a lot of cash back into the U.S.”
The comment rings true to a September 2015 Wall Street Journal op-ed penned by Trump, in which he explained:
“My plan states that any business of any size will pay no more than 15% of its business income in taxes. This low rate will make corporate inversions unnecessary and will make America one of the most competitive markets in the world. This plan will also require companies with capital offshore to bring that money back to the U.S. at a repatriation rate of only 10%. Right now, the money is not being brought back because the tax is so high.”
It’s a bold plan that would cut the U.S. corporate tax rate from its current 35%, which is one of the highest in the world, to a level that’s more in line with famously low corporate tax regimes like Switzerland (8.5%) and Ireland (12.5%). In fact, with Switzerland reportedly overhauling its business tax laws and raising tax rates to 16% for businesses operating in the region, a U.S. tax of 15% would indeed be quite competitive with the rest of the world. It would also provide some additional incentive for U.S. multinationals to repatriate some of the $1.4 trillion in cash they currently have sitting in offshore accounts.
Economists and stock market analysts have been quick to seize on the tax plan as a potential catalyst to stock buy-backs and dividends. A Goldman Sachs report suggested that stock buybacks would increase 30% to $780 billion, with about $150 billion of that directly attributable to repatriation of overseas cash. Indeed, this type of activity would be consistent with what happened in 2005, when the U.S. initiated a repatriation tax holiday.
What these purely economic models overlook, however, are the deeply-embedded legal structures that have been assembled over the last several years of sky-high U.S. corporate taxes and the huge amount of work that would go into unwinding them.
The fact is, while everyone is focused on the windfall U.S. companies will create when they bring their overseas cash back into the U.S. and simplify their global transfer pricing strategies, few have realized that massive scale repatriation is not the kind of thing that will happen overnight. The mechanics of global tax law that currently make it possible for companies to keep this cash overseas will also make it challenging for them to simply bring it all back into the U.S.
To get a deeper understanding of these mechanics, I spoke with Sam Cicogna, vice president and head of ONESOURCE Transfer Pricing at Thomson Reuters. He explained that the very structures that allow companies to keep their profits overseas may also make it difficult for them to bring them back.
For example, most of that $1.4 trillion in cash U.S. companies currently have parked offshore is governed by a longstanding accounting rule called APB 23, which allows a U.S. multinational to assert that its investment in a foreign subsidiary is permanent and those foreign earnings will be indefinitely reinvested so there is no current or deferred incremental U.S. tax liability.
“To meet the standard, companies need to be able to demonstrate that the cash is not needed at home and can be successfully deployed abroad, either through local expansion or overseas M&A transactions,” Cicogna explained.
“A sudden decision by a company to bring all of that cash back into the U.S. could raise some questions about the company’s previous assertions that it would use that money for overseas transactions.”
Cicogna added that an even bigger set of challenges exist around unwinding current transfer pricing structures that U.S. multinationals have in place with other tax jurisdictions around the world. Consider, for example, a U.S.-based multinational that has a significant portion of its intellectual property housed in Ireland. This would include a physical presence in the country, large numbers of employees, and patent and trademark portfolios on which the company is currently playing the 12% Irish corporate tax rate.
“The idea that the hypothetical U.S. company would suddenly undo that apparatus just to take advantage of a 15% U.S. tax rate is a bit ambitious,” Cicogna said.
Beyond the logistical hurdles involved with moving staff and infrastructure around the world, a move like that would be sure to spark controversy with global tax authorities who could feasibly demand back-taxes if they feel a company had been unfairly manipulating the system to pay lower taxes. A series of scenarios like the one currently playing out between the European Commission and Ireland, which is accused of granting undue tax benefits to Apple, could potentially unfold if companies were to suddenly dissolve tax structures they’ve been supporting so strongly for so many years.
It’s also important to note that very few U.S. multinational corporations are actually paying the 35% corporate tax rate. A March 2016 study by the Government Accountability Office found that, for tax years 2008 to 2012, profitable, large U.S. corporations paid on average 14% in federal taxes. They did this, of course, by taking advantage of tax deductions for carried losses, tax incentives, and profit shifting. Whether a Trump tax reform plan would eliminate these deductions and incentives or not is still unclear, but it is likely that the impact of a major tax cut on large companies will be more structural than fiscal, since many are already paying less than 15% in federal taxes today.
While the specifics of Trump’s tax plan are still speculative, the one certainty is that any significant change to the U.S. corporate tax code will trigger a host of complex decisions by multinational corporations and global tax authorities. Changes to the tax code – even broad based overhauls like the one Trump is proposing –will have an impact, but it will be an impact that is felt over the course of years, not days, and the exact outcome will be anything but predictable.
View the story as it originally appeared on Forbes.com