US Tax Cuts To Have Worldwide Effects

By Global Tax Weekly

2017 saved the best until last.The end of the year saw a series of breakthroughs, with the EU-UK Brexit negotiations moving forward, and the approval in the US of a law to comprehensively reform the US tax code, having ping-ponged back and forth between House and Senate.

And so,the United States has managed its first major tax code shake-up since the 1980s, and one of the largest tax cuts in its history, givingTrump the best Christmas present he could have hoped for, after a year of legislative frustrations – a gift that will keep on giving you might say, especially if it results in the economic growth that Republicans are expecting and the boost in tax revenues.

While much commentary on the subject has focused on the domestic impact of the plan, US tax reform has triggered a wave of soul-searching by government ministers and by national trade associations and chambers of commerce worldwide, suggesting that they too consider that the corporate tax cut and switch to a territorial corporate tax basis will have an impact on global investment patterns and potentially divert foreign investment away from their borders.

For example, earlier this month, the German Association of Chambers of Commerce and Industry (DIHK) warned that a corporate tax cut in the US will put Germany under further competitive pressure and would lead to growing calls for the Government, after the next coalition is finalized, to reduce taxes. “The next federal government will have to respond,” declared Eric Schweitzer, DIHK President.

But it might not be all one-way traffic. According to the Centre for European Economic Research (ZEW) in Mannheim (Germany seems to be especially worried by US tax reform), the corporate and international tax measures will indeed make the US a much more attractive investment location, including for European companies. But, it points out, since, in theory, US investors will no longer face double taxation on foreign earnings, foreign jurisdictions with low corporate taxes, like Ireland, will continue to be attractive for them. On the other hand, jurisdictions like Germany, with much higher corporate tax rates, will lose out, according to Professor Christoph Spengel, who studied the matter.

Certainly, members of the Australian Government are worried about the implications of a leaner and meaner US tax code, with Finance Minister Scott Morrison saying recently that the development makes the case for an Australian corporate tax cut even more urgent.

So, despite warnings of a race to the bottom on corporate tax, will US tax reform trigger a new wave of corporate tax cuts around the world? That will be the main question for 2018.

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