22/12/17

Trump’s tax reform could spur us to build a British system fit for the economy of the future

Source: Comment from Kevin Nicholson, head of tax at PwC for City A.M.

Why the worldwide interest in US tax reform?

For one, it’s a massive legislative achievement for the White House. It also shows a radical shake-up of a country’s tax code is possible.

But ultimately, it’s because the effects will be far reaching – so much so that finance ministers from France, Germany, Italy, Spain, and the UK have written to the US treasury secretary about the potential distortive effects on international trade.

But are there any upsides for UK business?

Given that the reforms are part of President Donald Trump’s America First agenda, it is no surprise that the main winners are likely to be US corporations. The flagship measure is the cut in the corporate tax rate from 35 per cent to 21 per cent. Even though this will be offset a little by other measures, it’s a dramatic change.

Other positives for American businesses include a temporary tax break on certain capital spending, and allowing firms to write off or expense the value of new and used equipment.

A likely boon for US multinationals is lower rates (and in some cases exemption) on foreign profits.

The related repatriation tax on overseas earnings is designed to deal with historic earnings to date and to encourage US multinational companies to return cash to the US instead of keeping it offshore, by taxing it at a one-off lower rate.

Anything that encourages global firms and investment back to the US arguably comes at a cost to other locations. The incentives to encourage US firms to move back home are coupled with disincentives for certain cross-border payments.

There are, undeniably, similarities between these US changes and the UK corporate tax reforms put in place under the “open for business” agenda.

These changes have seen the corporation tax rate fall from 28 per cent in 2010 to 19 per cent now (it will reach 17 per cent in 2020), which has helped encourage many US firms to move activities here.

It seems unlikely that the US changes will tip the balance back.

Tax is just one of many factors businesses consider when choosing location, but it will certainly factor into decision making. The reforms will make the UK tax advantage less clear cut.

There could be upsides for UK multinationals investing into the US, because they may see a benefit from the cuts in the US rate. But restrictions on tax relief on debt and other provisions may temper this somewhat, so it’s probable that the impact for many UK multinationals with US investments will be neutral.

There could be an upside for UK investors of US multinationals, if those US multinationals use their offshore cash to fund dividends and share buybacks.

But there’s another opportunity.

Aside from the corporate tax reforms, the UK tax model hasn’t seen any wholesale changes since the 1980s. It’s in real need of a revamp. Attempts to adapt the tax system to suit the gig economy and rise of self-employment have been deemed too difficult. But the challenges are going to get more pronounced as the fourth industrial revolution changes the basis of our economy and sources of future tax revenue.

This isn’t about a competition on rates; it’s about getting a UK tax system that’s not only fit for tomorrow’s economy, but is streamlined and easy for all taxpayers to comply and engage with.

There’s a long road ahead with US tax reform, and how the legislation works in practice will be the real test. But the momentum is something all countries should take note of.