Trump Presidency Could Mean Drastic Changes to US Corporate Tax and Repatriation Rates
By Scott Wentz, Managing Director, US Tax, Radius
Donald Trump may have alienated some prominent Republicans during his presidential campaign, but he could find common ground with his party’s lawmakers on the subject of US corporate tax reform. Campaign promises often fail in the face of political and fiscal realities, but it’s a safe bet that Trump will go to work early in his presidency to reform US corporate taxation and cash repatriation rules.
Lowering Tax Rates and Encouraging Cash Repatriation
The Tax Plan page of the Donald Trump website indicates the president-elect will seek to “lower the business tax rate from 35 percent to 15 percent” and “provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent.”
The repatriation proposal is perhaps just as notable as the plan to slash corporate taxation by more than 50 percent. A recent Reuters article indicates that US corporations are holding an astounding $2.6 trillion dollars outside US borders in order to avoid paying the US’s 35 percent corporate tax. The most prominent company holding significant cash abroad is Apple, with $200 billion offshore, though GE, Microsoft and Pfizer each hold more than $100 billion outside the US.
Reuters further notes that Senate Democrats could potentially block Trump’s rate-cut and repatriation initiatives as “corporate giveaways,” and that “Trump and House Republicans, including Speaker Paul Ryan, would still need to agree on how to pay for lower corporate tax rates and on whether US-based multinationals should pay US taxes on future foreign profits.” Robert W. Wood points out in a Forbes article that “Trump’s proposals would tax future profits of foreign subsidiaries of US companies each year as the profits are earned.”
A New York Times report on potential tax cuts during Trump’s presidency explains that Trump’s proposal for corporate taxation would permit credits for taxes paid abroad. In other words, US corporations would be taxed on their worldwide income at 15 percent, less any foreign taxes paid.
Republicans in the House, by contrast, have proposed a “territorial” system in which US businesses would be taxed only on what they sell in the US. (The House proposes moving to a 20 percent corporate tax rate.) The Times says that many economists regard the House’s territorial proposal as “flawed” in that “it encourages businesses to shop the world for lower tax rates, ultimately shifting even more profits and jobs overseas.”
I believe the US federal corporate tax rate will likely drop to the House-proposed 20 percent rather than the more drastic 15 percent. The repatriation benefit will also likely be enacted, though probably at a three to five percent rate. The proposed 10 percent rate, when combined with state taxes, will likely be too high to entice companies with substantial offshore cash holdings.
A Wide Range of Effective Tax Rates
The Times article also provides a glimpse of the US’s — and indeed the world’s — truly complex corporate taxation environment. The US may have a statutory 35 percent corporate tax rate, but, the article explains, “many companies pay far less than that, thanks to a variety of accounting maneuvers, including keeping foreign income offshore.”
The article includes a graphic showing the average effective corporate tax rates for fiscal years 2006 to 2015 for the top 50 S&P 500 companies. Effective rates range from a mere 7.8 percent (Boeing) to a whopping 67.2 percent (Citigroup). This dramatic disparity is a reminder of how critical corporate tax structuring is to any multinational’s bottom line. And given the amount of money involved, the disparity also helps explain why the issue is such a contentious one for business leaders, politicians, tax collectors and indeed voters.
The Possible Effects on Corporate Tax Havens Such as Ireland
After this summer’s widely reported ruling by the European Commission that Apple must repay €13 billion plus interest to Irish tax authorities for unpaid taxes for the years 2003 to 2014, most readers will be aware that Ireland has attracted many US-based businesses for its low corporate tax rate of 12.5 percent. Some inside and outside the international business community are wondering about the possible effects of President-elect Trump’s tax proposals on traditional tax havens such as Ireland and Jersey.
Stephen Moore, one of Trump’s tax advisors, said in a BBC Radio interview after the election that when and if the US reduces its corporate tax rate to between 15 and 20 percent, “you are going to see a flood of companies leaving Ireland and Canada and Germany and France and they are going to come back to the United States.”
Some in Ireland, including the country’s Minister for Finance Michael Noonan, are less certain than Moore about the inevitability of US tax reform and ensuing corporate flight back to the US. According to a recent Reuters piece, Noonan believes Trump’s proposals could actually make Ireland more attractive to US-based companies, “because you [would] pay much less tax if you repatriate profits from Ireland in the future.” Noonan adds, dismissively but convincingly, the following dose of reality: “I spent all my life listening to United States election campaigns where there was a commitment to reform corporate tax. I've yet to see tangible measures and I was first elected to a local authority in 1974.”
At least two other prominent authorities have offered similar takes in recent weeks. The Times article I mentioned quotes former staff director of the Ways and Means Committee Janice Mays as saying that when it comes to Congressional legislative battles involving the budget and tax rates, “obstacles continually pop up in both expected and unexpected places.”
Similarly, a November 15 MarketWatch article quotes former House Ways and Means Committee Chairman Dave Camp, a Republican, as saying that it’s “difficult” at this point to predict when any rate changes may be effective: “We don’t even know who the secretary of the Treasury is going to be, the president has not chosen his Cabinet, much less his team, and it’ll be important to see how quickly that process moves.”
These are well-informed warnings from veterans of the legislative process, and US multinationals would do well to consider them in this time of relative uncertainty about possible corporate tax and cash repatriation rates. While it’s true that real change in these areas may be on the horizon, the timeline is still totally unknown. A sound corporate tax-structure strategy will now involve consistent monitoring of tax legislation while creating a nimble structure and processes that will allow for modification as quickly as possible as circumstances dictate.