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At Taxand’s 2018 Global Conference in Washington DC, two panels discussed the 2017 US tax changes and their global implications, including crystal ball gazing about the future of tax. The panels involved Pat Tiberi (former US Congressman), Vincent Roberti (Government Relations expert), Keith O’Donnell (Taxand Luxembourg), Ernie Perez (Taxand USA), Suhail Nathani (Taxand India), Martin A. Sullivan (Tax Analysts) and Grace Perez-Navarro (OECD).
Tim Wach, Managing Director of Taxand, notes the key themes:
Late to the party
It had been clear for many years that the US’s corporate tax was out of sync with the rest of the world dramatically impacting its ability to compete with other countries. A number of factors have driven the Trump administration’s moves towards the most significant overhaul of the tax system for a generation. Not least is the desire to stop company’s inverting and developing a carrot to encourage companies to reappraise their decisions to locate outside of the US. Any tax reform is controversial, creating winners and losers, and whilst not the perfect solution, the tax rate reductions and significant changes to the taxation of foreign earnings of corporations are significant steps in making the US system more competitive.
With the slashing of the corporate rate from 35% to 21%, many have called the start of the race to the bottom, but if anything, the US is late to the party. For some time, the US has had the highest rate in the OECD and the reduction only puts them into the middle of the pack. The US was a sleeping giant in the corporate tax arena, and it was inevitable that significant changes were long overdue, the question was when the political stars would align such to allow for the needed changes. They align in late 2017.
However, decisions around where to locate a business goes way beyond the race to the bottom. The fight to attract capital has many fronts and corporate tax rates are just one. In India, for example, the access to a huge market tends to be the primary reason for businesses locating in the country, with tax rate much further down the priority list. What this has done is tilt the playing field back towards the US. The upper hand has not been gained, but perhaps we will no longer see a default decision to locate multinational business outside of the US.
The party could be over and the music could stop
This all assumes that US tax reform will remain. There are strong arguments to suggest that the bill doesn’t necessarily have staying power, particularly if the Democrats take back control of the House later this year, which could bring tax reform back to a deadlock. The economic situation in the US also casts a shadow over the reforms. Given the level of the US federal deficit, a point could come where the party will be over and the music will stop. With debt already in a worryingly unprecedented territory, at some point in the future the US will have to consider tax increases, unless we see a significant level of economic growth.
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Treading water
The challenge for all multinationals will be to digest and adapt to the new rules. At present, businesses are treading water and struggling for guidance and clarity on what the reforms mean in reality. The bill was passed very quickly and on a partisan basis meaning it is not without its issues. The proposed regulations will come sometime later and multinationals remain in standby mode, waiting to see what happens with guidance before they act. One thing’s for sure – change and uncertainty is the new norm.