Trump tax cut to make India subsidiaries of US firms less competitive

President Donald Trump’s US tax bill, signed into law on Friday, is set to hit the competitiveness of US firms’ Indian subsidiaries and encourage flow of capital from these units to their parents.

The Tax Cuts and Jobs Act is set to make some taxes that Indian units of US multinational firms pay in India a cost to their parents. The differential in tax rates—30% in India, exclusive of surcharge, versus the proposed 21% in US— will prevent US parents from fully adjusting the tax credits earned in India to meet their tax liability on worldwide income in the US. The unused tax credit becomes a cost.

Also, the US tax overhaul is expected to encourage Indian units to repatriate their ‘passive income’ back to their parents as repatriated dividends will be taxed at a nominal rate. Many Indian arms of US firms have so far been deferring repatriation owing to the high tax rate on such receipts.

All these changes put together could see a major change in the way US corporations invest and structure their businesses in India. Read more….