Impacts of the Base-Erosion and Anti-Abuse Tax on Alfatone, Taxation Essay Sample

Trentmann, S. (2018). BEAT Up? U.S. Tax Provision May Sting Foreign Firms. WSJ. Retrieved 13 February 2018, from https://www.wsj.com/articles/beat-up-u-s-tax-provision-may-sting-foreign-firms-1518526800

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

The subject article of this essay was written by Nina Trentmann in The Wall Street Journal on the 13th February 2018. The author frames the introduction of the article to address the positive reaction of the Executives of the companies to the United States of America's Tax Laws. The author notes that the Chief Executive Officer of SAP, a leading German firm in the manufacture of software, Bill McDermott publicly appreciated the government's move in the reduction of the taxes from 35% to 21% (Trentmann, 2018). The executive lauded Trump's administration for improving the working environment of the corporate firms in the country.

However, the author goes on to caution foreign firms from celebrating the reduction of the taxes yet. They state that the underlying factor of the Tax Bill may haunt many firms as they outline a contradictory policy aimed at slashing the potential profits to be made by the US-based foreign firms. Th most prominent issues of the Tax Bill is the Base-erosion, and Anti-Abuse Tax also called BEAT. The aspect mentioned above is part of the Tax Bill (Trentmann, 2018). The BEAT works in such a way that the if a US-based firm generates revenues that exceed the 500 million dollars threshold per year, they are subject to taxes that exclude any deduction. Also, if their American units generate payments that are deemed taxable by the American authorities, the accrued deductions are exempted from potential cross-border taxation reductions (Schmidt, 2016). Therefore, the rate of taxation for the firms described above stands at 5% in 2018. However, they have the potential of rising to 10% in 2019 and up to 12.5% before 2026.

Alfatone, a bulb manufacturing company where I am a finance manager is a Spanish US-based firm. The suggestions brought forth by the Tax Bill propose lucrative working environment in the United States of America because the 21% tax represents a significant reduction from the initial 35%. However, the Base-Erosion and Anti-Abuse Tax present unprecedented challenges to the management of the finances of the Alfatone Company (Schmidt, 2016). For instance, since the company is a foreign US-based firm, it finances are subject to the deductions outlined in the Base-Erosion and Anti-Abuse Tax. Also, the firm makes a profit of beyond 500 million dollars in a year. In fact, the financial reports of 2017 showed that the firm made a gross profit of around 700 million dollars (Schmidt, 2016). Therefore, the firm is eligible for deductions of the 5% this year, followed by 10% in 2019 and the deductions may reach the anticipated 12.5 before the commencement of the financial year of 2026.

The above disclosure of the formerly unknown aspect of the Tax Bill present fundamental operational issues to the Alfatone management. First of all, to sustain the continued operation in the United States of America, the firm needs to increase the quantity of the bulbs that it produces (Greggi, 2017). The increase in the number of the products of the firm will ensure that the firm generates the gross profits after whose taxation, the firm will still manage the operational costs of the company and attain the primary objective of the firm, which is to make profits for the Spanish ownership of the firm.

Furthermore, as the author identified, the foreign firms in the United States of America can also avert the effects of Base-Erosion and Anti-Abuse Tax by reducing the number of the American Units that they operate. The assessment is derived from the excerpts of the Tax Law that state that the increment of the taxation based on Base-Erosion and Anti-Abuse Tax will depend on ion the number of units that the firm operates in the country. It is known that the term Base-Erosion and Anti-Abuse Tax is based on the statement that the government of the United States of America presumes that the foreign companies in the country erode the resources of the state. Therefore, the reduction of the overall net tax and its replacement with the Base-Erosion and Anti-Abuse Tax is meant to proportionate the tax deductions on the foreign firms that operate in the country (Greggi, 2017). Thus, reduction of the units operated by Alfatone in the country will serve to minimize the anticipated tax deductions. Also, diversification into other countries such as Mexico and Canada will serve to generate profits for the company while evading the high taxes levied by the federal government.

To sum up, the author of the article in the Wall Street Journal observes that the celebration of the reduction of the taxes from 35% to 21% is untimely. The other sections of the Tax Bill provide the reality of the predicaments of the foreign firms based in the United States of America. The Base-Erosion and Anti-Abuse Tax propose higher taxation recommendations than the previous tax law regarding US-based foreign firms such as Alfatone. The procession of the tax rates from5% this year to an anticipated 10% next year will be costly for Alfatone. Therefore, as the financial manager of the firm in question, I recommend, just as the author of the article suggested, that the firm ought to reduce their units of operations in the country and diversify into other markets in neighboring countries.

References

Greggi, M. (2017). In Search of a Compass. Base Erosion, Profit Shifting and New Dilemmas in International Taxation. Economic Journal, 119(537), 764-795.

Schmidt, P. K. (2016). Taxation of Controlled Foreign Companies in Context of the OECD/G20 Project on Base Erosion and Profit Shifting as well as the EU Proposal for the Anti-Tax Avoidance Directive-An Interim Nordic Assessment.

Trentmann, S. (2018). BEAT Up? U.S. Tax Provision May Sting Foreign Firms. WSJ. Retrieved 13 February 2018, from https://www.wsj.com/articles/beat-up-u-s-tax-provision-may-sting-foreign-firms-1518526800