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Tax implications in a changing world

Date: 15 February 2017

The US is set to cut its corporate taxation rate from 35% — which represents one of the highest tax rates in the world — to just 15%. The move, which was announced by the newly appointed Treasury Secretary, Steven Mnuchin, is designed to bring the US in-line with similar European tax rates.[1]

Europe: a tax haven?

Companies can declare their base of permanent establishment (PE) in one country while offsetting their taxes in another. With Ireland’s Corporate Tax rate at 12.5% and others such as Switzerland and Guernsey, Europe has, for all intents and purposes, becomes home to many US multinationals. But with the US proposing a lower rate of tax, America will become a more competitive player in the market. Trump’s “America First” economic plan hinges on US businesses migrating their tax centres ‘back home’.

It is currently estimated that US multinationals have $1.4 trillion (USD) in offshore accounts. As a result of a more lenient tax system, this collateral could potentially be repatriated into the US economy.

Border tax and the issue of VAT

A‘border adjusted provision’ has also been proposed. The tax imports at 20% in the US and exclude exports from taxation via rebates.[2] Trump has specifically targeted companies such as German carmaker BMW, which intends to open a new plant in Mexico and then import to the US, suggesting it will be taxed at the full rate of 35% unless it moves production onto US soil.[3]

As it stands, the US does not have a Value-Added Tax (VAT) system, and it has been suggested that it could establish a VAT system at firm level based on the subtraction method. This would be disruptive across all sectors, with border adjustment, in particular, proving problematic. Despite the potential issues, it is thought that this tactic could pay off for the country’s GPD in the long-term.[4]

The complexities of tax reform

On the surface, lowering taxation in the US suggests one key outcome: companies that relocate will receive a near-immediate windfall. However, the issue is far more complex.The same laws that govern the mechanics of taxation internationally and allow companies to use offshore facilities, could also be prohibitive when it comes to bringing their tax homes back to the US.

A company that attempts this move could face tax avoidance charges for previous returns. If they are perceived to be manipulating the system the ‘global tax powers’ could demand tax retrospectively.

Companies need to work carefully to manage their expectations and asses the ramifications in order to ascertain the true cost of taking advantage of the US’s new taxation plan.

The butterfly effect

In Edward Lorenz’s butterfly effect theorem, the flap of a butterfly’s wings in Brazil could have the power to set off a tornado in Texas. Similarly, in our hyper-connected world, small actions can have significant consequences.

The US political climate is unstable, and in a landscape where a 140-character tweet by an influencer or politician has the potential power to make a significant impact on global affairs, it is likely to remain that way.

For example, a recent press conference which saw Trump single out pharmaceutical companies’ tax affairs, led to the big players in this industry losing $24.6 billion from their stock prices in just 20 minutes.[5] With this in mind, relocating to the US could potentially be very damaging for a company’s stock price, and this may be a risk company's are not willing to take. 

The implications for Europe

In states where borders are closing and tariffs are increasing, we could see a more isolationist model beginning to form. Rather than companies moving back to the US, it’s possible these changes will cement many companies in their European bases, as this poses a lesser risk.

Taking into account Trump’s recent withdrawal from the Trans-Pacific Partnership and the possibility of pulling out of the free-trade agreement, it’s likely the European market will begin to grow independently. This will be particularly poignant in areas such as automotive and pharmaceuticals where much of the market is already based within Europe.

Ultimately, the political and tax landscape are currently undergoing complex changes, and it’s difficult to predict exactly how these factors will merge together to create results. Whatever the outcome, at DSJ Global, we have our fingers on the pulse of the industry and are well equipped to meet its changing recruitment needs.

If you’re looking restructure your team in light of global events, or if you’re a tax specialist looking for a new role, email me at liam.mcshane@dsjglobal.com today.

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