What will President Trump’s tax policy mean for transfer pricing?

17 January 2017

Ken Almand 

Ahead of Donald Trump’s inauguration on Friday, many are focusing on what his tax policies will look like. Supporters of Donald Trump argue that he will stimulate the domestic economy and that tax cuts and tax reform will play a key policy role in doing so. Opponents argue that reforms will mainly benefit the wealthy and large corporations.

Mr Trump’s attention-grabbing election pledges were to massively cut US corporate tax rates from 35 per cent to 15 per cent and to introduce a one-off tax holiday whereby US multinationals could repatriate profits held offshore at a reduced rate of 10 per cent. Whether he can deliver these pledges remains to be seen; even with the House and Senate under Republican control. Most commentators are of the view that the repatriation scheme will happen but that the corporate tax rate will not be reduced lower than around the mid 20s in percentage terms. If that transpires then by the time you add on state taxes, the rate would still be almost double the 17 per cent corporate rate that the UK will enjoy shortly. Therefore, whilst multinationals will be reviewing their tax strategies, the rate cut itself may not cause a huge rush to use policies, such as transfer pricing, to ensure more profit arises in the US.

What may be of more interest from a transfer pricing perspective are the President-elect’s warning shots, such as that fired at carmaker BMW last week. Donald Trump suggested that cars manufactured in Mexico would incur a 35 per cent import duty on any US sales. Such rhetoric has already caused policy rethinks at Ford and Toyota. It is part of a broader, some would say crude, policy approach that includes denying deductions from US taxable profits for imported goods, allowing full deduction for asset costs in the year of purchase and restricting relief for interest on corporate debt. If only some of these measures make it onto the statute book, tax and transfer-pricing specialists will be working overtime to help corporates with US operations to be compliant and spot opportunities arising from the new environment.

Finally, far-reaching tax changes brought about by the efforts by the G20 and the OECD to curb international tax avoidance under the Base Erosion Profit Shifting (BEPS) project seem unlikely to foster great support from the Trump administration. Given that the US was rather lukewarm in its enthusiasm for many of the recommendations from BEPS under the previous presidency, the indications are that Mr Trump will very much view the plan as secondary to his own policies. The impact on the global implementation of the ground-breaking BEPS project may be significant.

For more information please contact Ken Almand, or your usual RSM contact.