Where now for corporate tax under Trump?
The US has one of the highest corporate tax rates in the world, at 35%, and this rate makes the US less competitive in a global economy, where the worldwide average rate was 22.5% in 2016, according to the Tax Foundation. Will a lower rate see more investment and job growth?
When tendering projects, companies must consider the overall cost of doing business in that jurisdiction, which includes all types of direct and indirect tax, including the cost of employee and social security taxes.
Countries with higher taxes are more expensive to operate in; therefore, by reforming the tax code, you make those jurisdictions more attractive and encourage economic activity.
From a corporate tax perspective, lowering the tax rate is necessary for the US to be more competitive - provided the US government can still balance the budget. “Trump was floating a rate of 15% - that is a very ambitious rate,” explained Nadia Durant CA, senior tax advisor for a multinational oil service company, “and we’re more likely to see a rate between 20% and 25%.”
Border Adjustment Tax?
Tax reform could yield fundamental shifts in the way US corporations are taxed. The US is the only OECD member country without a VAT system - which generally encourages exports by eliminating the VAT from the cost of the exported goods and services.
“European countries can effectively subsidize exports by not applying VAT to exported goods and services,” said Robert Jefferson CA, international tax manager in the maritime industry. “By contrast, exports of American-made goods implicitly include the high cost of US corporate income tax.”
Trump’s wavered considerably over the border adjustment tax because of the complexities and foreign policy repercussions.
“I view it as a federal consumption tax, but that will have a negative impact on consumer prices and importers in the US,” said Nadia. “Their costs will go up, which they will pass onto the consumer. He has to do something to counteract the reduction in the corporate tax rate.”
They’re trying to thread a needle between an income tax and a VAT.
One proposal suggested by the House Republican tax reform task force to address this competitive imbalance would move the US tax system to a consumption-based tax system.
While the practical application has to be worked out, the so-called border adjustability tax could tax US companies on income from goods sold in the US, but not income generated from sales in foreign markets, while allowing deductions for US costs and not for the cost of imports.
“They’re trying to thread a needle between an income tax and a VAT,” said Robert.
A US manufacturer that exports its products will have more deductions than taxable income, while a company that imports goods sold in the US will have high taxes and no deductions.
“If the border adjustment tax becomes law, one knock on effect is that there may be some very interesting M&A activity because you’ll have some companies with systemic losses and others that are taxed almost on a gross income basis,” said Robert.
“We may see interesting merger activity as US importers attempt to offset the increased tax burden by merging with companies that manufacture in the US, but primarily sell products abroad.”