Love him or loathe him, Donald Trump cannot be accused of being a man who makes hollow promises.
One of his campaign statements was an intent to amend the US tax system to remove the conditions that have incentivised large corporations not to bring foreign source profits back to the US. In simple terms, a high US corporation tax rate, coupled with a tax charge on dividends paid from foreign subsidiaries, has resulted in vast amounts of cash being left offshore in non-US subsidiaries in order to avoid suffering a significant US tax charge on the repatriation of those funds.
These legislative conditions have been in place within the US for many years and so not only businesses within the US, but also businesses around the world and, to some extent governments, have been able to plan their affairs with a degree of certainty within this stable tax environment.
But this is no longer the case!
Mr Trump was unhappy that trillions of dollars were not being brought into the US that could be utilised to boost the US economy. Of course, every sovereign state is perfectly entitled to set their tax policy to suit their own economic conditions, but governments normally subtly tweak things here and there to influence the behaviour they are looking to encourage.
In simplistic terms, not only has he created a period of low tax amnesty on foreign source dividends to encourage the flow of funds back to the US, he has also slashed the US corporation tax rate from 35% to 21% in one fell swoop.
There may not be a problem in the US, in the short term at least, but the impact on the rest of the world is likely to be positively seismic.
Some of the more significant effects are anticipated to be as follows:
- Stripping of cash reserves out of non-US jurisdictions, where the impact will be felt particularly keenly in developing countries
- An incentivisation on US parent companies to locate their subsidiaries in low tax (less than 21%) jurisdictions, creating even more corporate tax rate competition than already exists. This could cause a race to the bottom for corporation tax rates worldwide, which will have far reaching knock on impacts on many countries’ economies
- With the UK’s current focus on Brexit negotiations, our economy could be impacted more than most, but it could equally be seen as an opportunity, bearing in mind our already low corporate tax rate
- EU and UK parent companies will now be more likely to set up subsidiaries in the US than previously due to the low tax rate and the removal of withholding taxes on dividends. This will shift jobs away from the EU/UK towards the US
- US corporations will be more likely to make sales directly from the US, rather than establishing foreign subsidiaries due to another tax measure that incentivises this behaviour. Again, this shifts jobs and prosperity away from the rest of the world, towards America
Is this a master stroke on Trump’s behalf or has he opened up Pandora’s Box? Only time will tell…
For more information on Corporate and International Tax matters, please contact Brian Jukes