What will be Trump effect on global tax regime?

US President-elect Donald Trump’s tax reform plan (TRP) has been seen as one of his clear objectives during the campaign and Congress perceives this as a likely opportunity to update a tax code which has not seen any major overhaul for over three decades. While the uncertainty about what policies Trump will pursue as president will remain till he assumes office, analysts are anticipating a comprehensive tax reform to have a knock-on effect on the global tax regime.

The major reforms in Trump’s TRP aim to broaden the individual income tax base and targets modifying the corporate income tax base (eliminating expenditures other than research and development credit, corporate deduction for interest, moving from multi-layer depreciation deductions to first-year expensing, etc.) and lower the corporate income tax rate to 15 per cent from the existing 35 per cent. It also includes amendment in the individual income tax code by lowering marginal tax rates on wages, investment, and business income. The TRP also intends to eliminate federal estate and gift tax while eliminating the step-up basis.

While the tax reforms propose major cuts in both the personal and corporate taxes, they also aim at eliminating the alternative minimum tax. The current US tax code, with a headline rate of 35 per cent for corporates, is one of the highest in the world and resultantly the State’s corporate tax haul has been falling as businesses increasingly shift production overseas and stack profits offshore. 

In view of the massive tax rate cut, the TRP intends to promote business activity 'at home' rather than 'abroad'. Nonetheless, reduction in corporate and personal taxes foresees its own challenges within the State. The reforms are likely to intensify the global tax competition and the pressure on medium and small economies to reduce corporate income tax rates would be even higher. 

The TRP imposes tax on deemed repatriation at one-time 10 per cent rate on all deferred foreign earnings held in cash and 4 per cent for other earnings. This one-off tax liability can be spread over 10 years. Analysts predict that the repatriation would potentially augment stock buybacks and dividends. While this may seem to be a stimulus for the US MNEs at the inception, it needs to be matched with a shift from the existing taxability on a global basis to a territorial tax system. Consequential global double taxation still remains a threat for such companies in the transitional phase. Further, the mechanics of global tax law that currently make it possible for companies to keep this cash overseas will also make it challenging for them to simply bring it all back to the USA.

With the change in the global tax landscape Base Erosion and Profit Shifting (BEPS) is putting tax firmly on the strategic business agenda with issues varying from transparency to financing to transfer pricing. BEPS is perceived to impact any business that operates in multiple territories. While the TRP does not mention about BEPS, it will be interesting to see as to how the Trump administration will embrace the BEPS agenda.

All in all, one does expect several changes, but only time will witness as to how far-reaching they would be. One may agree that tax reforms are inherently complex and to succeed politically, ‘they would ideally require the support of all stakeholders. While the specifics of TRP are still speculative, any tax reforms in US may trigger a host of consequential measures for the multinationals as well as global economies. One may just hope that the ambitious tax reforms and the overhaul of the current US tax code is more US-centric and may have positive implications for the rest of the world.

(The writer is national head of tax, KPMG in India)