Trump tax plan could cause US-Australia revenue disputes
US President Donald Trump has confirmed he wants to cut the corporate tax rate to 15 per cent, but overnight investors largely shrugged off the news because of the lack of detail.
The one-page document released overnight by US Treasury Secretary Stephen Mnuchin and Director of the National Economic Council Gary Cohn lists aspirational tax reform goals but is by no means a plan which can be evaluated in a meaningful way, says Chartered Accountants tax leader Michael Croker.
First, Trump has not explained how the tax cut – together with a string of personal income tax cuts that would reduce the top rate from 39.6 per cent to 35 per cent and the number of personal income tax brackets to three from seven – can be achieved without raising the deficit.
Second, the President – who has repeatedly avoided releasing his own tax returns – may still proceed to reverse former president Barack Obama’s “inversions” laws, designed to crack down on multinational tax avoidance.
Mr Croker says if the 15 per cent rate is implemented – and there’s no certainty it will pass Congress – the question will be whether the US tax rate will curtail use of low tax jurisdictions to park offshore profits.
“The answer depends on the as yet unseen aspects of the President’s international and domestic law changes,” Croker says.
He adds that if traditional low-tax countries such as Ireland and Singapore are no longer used as much by US multinationals, then the tax adjustments made by the Australian Taxation Office against US-based companies have the potential to create tax disputes directly between the ATO and the IRS.
“Congress is well aware that if the US doesn’t get its share of the pie, other countries will,” he says.
“We hear from US colleagues that the Border Adjustment Tax is becoming too hard politically as lobbyists line up to make Congress aware of the detrimental impact for US domestically focused and import-reliant businesses.”
Australia now has tougher anti-avoidance laws – including the Multinational Anti-avoidance Law (MAAL) and the Diverted Profits Tax. “Inbound investors from the US are already seeking ATO and professional guidance on how they can undertake economic activity in Australia within the ATO’s so-called ‘swimming between the flags’ approach,” Croker says.
“No doubt more tax will be ‘left on the table’, to use the Commissioner’s expression. But with a 30 per cent general company tax rate, Australia is less and less likely to be chosen as a location to host key assets, functions and risks.”
Personal tax reforms could also mean the US would become an even more attractive location for furthering one’s career and for start-ups, he says. “Australia’s ability to be an innovation hub and achieve Prime Minister [Malcom Turnbull’s] vision under the National Innovation and Science Agenda will be impacted.”
But PwC tax partner Paul Abbey said if enacted, Trump’s changes “would be monumentous reform. In essence, he is proposing is a much simpler tax system with much lower tax rates. Reaganomics is back”.
‘Inversions’ rule reversal?
On April 21, Trump signed an executive order to review all “significant” regulations from 2016, which include the inversions rules.
Fast-food giant Burger King is among 50 US companies that since the early 1980s have reincorporated in low-tax countries to reduce their US tax rate. Bloomberg’s list of companies using inversions shows many others fled to low-tax Ireland, where the company tax rate is just 12.5 per cent.
Tax experts say a reversal could see a comeback of earnings stripping – where multinational companies make inter-company loans to a foreign parent to reduce their taxable income. The US subsidiary pays interest on those loans, so the interest income received by the foreign parent isn’t taxed, or is taxed at a lower rate. (In an Australian context, we saw a similar interrelated party deal in the case of Chevron, which used interest payments to Delaware and is now up for a $300 million tax bill).
Once Trump has cut the tax rate to 15 per cent, he could in theory argue there won’t be a rush of companies moving offshore because other elements of his tax reform package will make it attractive to keep profits in the US.
He also wants to give the Fortune 500 a special corporate tax repatriation holiday rate, whereby corporations with money stashed overseas would be able to pay a lower tax rate (again, light on detail; Trump has not as yet confirmed what the rate will be) on that income in order to bring it back into the US.
Pfizer Allergan merger back on?
Obama’s inversions laws, which were largely aimed at the pharmaceutical giants, were said to have killed the largest-ever proposed inversion deal between big pharma Pfizer and Ireland-based Allergan.
New York-based analyst and former Lehman Brothers managing director Bob Willens has said that that merger could be back on the table.
Grant Wardell-Johnson, KPMG Tax Partner says inversions laws are out of step with the rest of the world, and abolishing them would better facilitate business-driven takeovers.
Wardell-Johnson believes that because of the proposed lower US tax rate, some companies could bring money back into country but it’s unlikely that money would be reinvested in American jobs.
“When the Bush administration introduced the Jobs Creation Act of 2004 at an effective tax rate of 5.25 per cent this did result in substantial repatriation, but it did not lead to significant additional investment in the US,” he says.
“Much of the funds were returned to shareholders rather than reinvested.”
Wardell-Johnson says the top 50 US companies have amassed cash assets of about $US1 trillion: “The problem is that this cash does not have an investment home based on what constitutes an appropriate investment profile. “Tax is only part of the picture here.”
Getting tax reform through Congress
Tax Institute Bob Deutsch also believes the rate of corporate inversions could reduce because of the lower tax rate, but the caveat is getting the tax reform package through Congress.
If inversions laws are reversed, “there is likely to be a trickle of companies moving to the US in the early days”, he says.
“If a 15 per cent rate is achieved and seen to be sustainable, I can see it growing over the course of the ensuing five years.”
But as we saw with changes to US healthcare legislation, “it is no lay down misere”, he says.
“There will be many, maybe even some Republicans, who will oppose a 15 per cent rate, especially if the exact way in which it will ultimately improve the budget bottom line is not spelt out more clearly.”
No incentive to behave
Tax Justice Network spokesman Mark Zirnsak says the tax rate makes little difference, given many of the biggest companies paid no tax by taking advantage of global loopholes.
“If a company can get away with paying no tax or next to no tax under current arrangements and if they cannot be subject to penalties for doing so, then there is little incentive to bring the profits back to the US and pay tax even at 15 per cent,” he says.
“Many of the Fortune 500 companies already have negative tax rates; that is, the US government pays them more than they ever pay in tax, so there will be little incentive for this behaviour to change under the Trump plan. It seems like fantasy thinking.”
Richard Phillips, senior policy analyst at the US-based Institute on Taxation and Economic Policy (ITEP), says inversions laws should be strengthened, not weakened.
“By claiming to be a foreign company, inverted companies avoid billions in US taxes by artificially shifting more of their profits offshore or avoiding taxes on their existing offshore earnings,” he says.
“Rather making inversions easier by reversing these rules, the Trump administration should support legislation that closes the corporate inversion loophole entirely.”
The story Trump tax plan could cause US-Australia revenue disputes first appeared on The Sydney Morning Herald.