An update on US tax reform

03 June 2017

The importance of the United States to the UK is obvious. It is currently the world’s largest economy, the largest destination for UK exports, and the second largest source of UK imports, so the US has long been a target for businesses seeking to attract interest from overseas or to expand their horizons beyond the UK.

For many years a central pillar of the international tax landscape has been the heavy tax burden of operating in the US, both administrative and financial.

The US is in an outlying jurisdiction in international tax terms, with a highly complex tax code and a headline rate of corporate tax that reaches 35 per cent even before state income taxes are considered.

But now things may be changing, and with the President and the Republican Party in broad agreement on the need for and shape of US tax reform, the stars may finally be aligning for tax change in the US.

However, the position remains highly complex and fluid, and not all of the proposed changes would be welcomed by businesses.

What has been proposed so far?

At the end of April the US administration started the process in earnest by publishing a one-page summary of its tax reform goals, including:

  • a plan to reduce the federal business tax rate to 15 per cent. This would be a dramatic change and lead to the US having one of the lowest corporate tax rates in the world;
  • a one-off tax charge on profits held outside the US, thereby encouraging businesses to repatriate profits to the US, for example, by way of dividend;
  • a move towards a territorial tax system. A similar policy a few years ago shifted the UK tax code to focus on taxing activity taking place in the UK, and not outside the UK unless it had been artificially diverted. This led to the introduction of the UK’s dividend exemption, an elective branch exemption regime, and the wholesale reform of the UK CFC rules; and
  • an intention to simplify the US tax code.

In addition, there have been a range of other possible changes raised which did not appear in the one-page summary, so may be moving towards the long grass, but remain notable, including:

  • the restriction of corporate tax deductions for finance costs. This would be a departure from the international tax norm that the costs of non-equity finance are tax deductible in principle;
  • granting upfront tax relief for all capital expenditure to encourage investment in US infrastructure, and as a quid pro quo for the restriction of interest costs on debt finance; and
  • ’border adjustment tax’ which, in crude terms, could involve exports by US companies being US tax free, whilst imports by US companies being subject to tax

Each one of the proposed policies would have substantial ramifications and taken together could eclipse the impact of the OECD’s BEPS programme that has dominated the global tax reform agenda since 2012.

Indeed, given the significance of the US to the global economy, the proposals could lead to an international tax landscape that is unrecognisable from today.

What will happen next?

Of course, whether these proposals end up in law will depend on the intricate workings of the US political and legislative process.

It is likely that there will be many twists and turns before the position becomes settled, though the US administration is currently committed to making changes during 2017.

Even if this is not ultimately achievable, the genie of US tax reform appears to be out of the bottle and it will be important for UK businesses to keep up to date as the fiscal environment in the world’s largest economy seems set for change.

For more information please get in touch with Dan Robertson, or your usual RSM contact.