For many decades, US multinationals avoided paying income taxes. Transfer pricing and tax avoidance activities are still common practice in most of these organisations.
However, some changes have been seen in the past few months. First of all, large multinationals like Starbucks, Google, and Fiat were called out for having so-called ‘illegal’ practices. The European Commission investigated those firms but, in fact, their practice was found to be completely legal. However, it could be considered unethical by society.
The Current Situation
President Trump has proposed a new tax plan, which completely changes the tax climate in the US. Currently, large multinationals (income above $18.3m annually) pay approximately 35% in corporate income taxes (if the fair amount of tax is paid), which is considered to be one of the highest tax rates in the world. Therefore, the US is an unattractive country for domestic investments from that perspective.
A logical result is that companies try to find ways to legally reduce the tax amount paid. It is quite often the case that companies are “tax shopping”, trying to look for regions (e.g. Europe or the Bermuda triangle) where a flat tax percentage is applied. From this perspective, it is tax behaviour that is natural and legal and companies should not be blamed for this.
Trump’s Proposed Solution
This situation can change entirely under the proposed plan. Trump proposes a corporate income tax structure that results in a 15% flat tax rate, which also includes certain limits on interest deductibility. It is assumed that only half of the expenses on interest can be deducted under the new plan when calculating the taxable income. New investments might be expensed, and accordingly, the depreciation amount is not deductible. Consequently, a drop in revenue is expected for a short period, before this decline will change positively as new capital insertions will result in more income.
corporate tax level
Additionally, it can be concluded that the proposed rate applies to both smaller and larger companies. Hereby, President Trump eliminates the classification between firm sizes.
Moreover, a single tax rate of 10% is proposed for offshore cash profits flowing into the US. Other offshore earnings will be taxed at 4%.
More Cash Flowing Into The US?
This could possibly result in more profits coming to the US, which is, in the end, more beneficial for the companies, since it is a one-time 10% tax rate for offshore firm profits. Furthermore, the entire country will benefit, because more corporate profits are taxed. Moreover, offshore profits in tax havens, which were stuck before, will flow to the US and will potentially be better spent by companies. In the end, this also results in better employment opportunities for American people.
However, there are still tax climates that are significantly more beneficial for multinationals to relocate into or include in the tax structure. The 15% flat tax rate, which is included in the proposed tax plan, will possibly result in a better situation for America overall. Nevertheless, there is still considerable uncertainty about the consequences of the proposed plan (for instance, the impact of the proposed tax plan on the movement of corporates in Europe or other regions in the world). Will Trump make America great again? Yes, he will. A lot of Americans and corporations will benefit from the tax changes.