A raft of new geopolitical events, like, among other things, the U.S. tax law reform, a NAFTA exodus, and a Brexit reboot in Europe, could be a taxation game-changer for companies doing business overseas. That's especially the case as a new year beckons.
With the U.S. corporate tax rate officially falling to 21%, the global business environment has changed dramatically
Overall, the global corporate tax landscape has changed dramatically in the aftermath of U.S. tax reform passed and signed into law at the end of 2017, and as its enactment creates ripples across the globe, even in late 2018.
Previously, the average effective U.S. corporate tax rate stood at 29%, higher than tax rates in competing countries like Japan (a 27.9% average corporate tax rate), France (20%), and Germany (14.7%). With the U.S. corporate tax rate officially falling to 21%, the global business environment has changed dramatically, making it more affordable to do business in the U.S.
What are the biggest global business hot spots, tax-wise, right now—and what should corporate financial officers know about them?
These global tax scenarios offer change in the Americas and some stability in Europe (for now)—and the sooner company financial decision-makers get a grip, the better.
In the U.S.—The changes in the U.S. tax code stemming from the recently passed Tax Cuts and Jobs Bill are starting to morph from theory to reality. Exhibit A is the new tax rate of 21% for pass-through businesses, including S Corporations, business partnerships, and sole proprietorships. Since these businesses don't pay a corporate income tax, the pass-through provision enables smaller businesses to deduct 20% of specific “pass-through" business income—a welcome boon to smaller U.S. companies. With that, and other business tax cuts (the new tax law also cuts the total corporate tax rate from 35% to 21%), KPMG expects US. companies to see a total tax reduction of $654 billion annually and will see a total tax decrease of over $1.34 trillion over the next decade.
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In North America, Post-NAFTA—Tax changes coming out of the recently-agreed United States-Mexico-Canada Agreement have a decidedly industry-specific impact, with autos and agriculture especially feeling some tax-related gain and some ancillary pain. No doubt, the U.S. auto industry and the domestic agriculture sector may gain financially from the so-called “New NAFTA," with reduced tariffs on auto manufacturers and easier access to Canadian dairy products a cornerstone of the new trade agreement. Yet the prospect of paying higher costs for moving machinery and goods across three borders (North American companies do so at an average of five to six times during the manufacturing process) and paying employees more per paycheck could negate those tax and tariff advantages.
Brexit Boom or Bust—Corporate tax changes linked to ongoing Brexit discussions between the U.K. and the Eurozone should continue to have little impact on the European tax picture—even though those negotiations are at a stalemate, as of October 2018. From the get-go, the tax issue was mitigated with the passage of Brexit, at least for the short term. That's because no matter what happens, the UK remains firmly in the EU member state camp for the next two years (after Brexit's Article 50 is invoked, which was triggered in March 2018). Consequently, the U.K. is holding off on any major corporate tax changes until those negotiations are complete and the air is cleared on Brexit. Down the road, so-called indirect taxes like the VAT, customs taxes, and excise duty taxes may wind up changing the most for companies doing business the in the U.K., as any Brexit exit will fuel changes in Euro-based tax policies.
Certainly, the impact of tax policy in the U.S. and in North America is having a significant impact
A Shifting Tax Picture
Certainly, the impact of tax policy in the U.S. and in North America is having a significant impact on the global corporate financial landscape, as global foreign direct investment (FDI) has declined by 41% (or $470 billion) during the first half of 2018. That's the lowest level in FDI in 13 years, according to the United Nations trade and development agency.
Expect global companies to demonstrate more patience as tax-related issues continue to roil as 2018 comes to an end, especially for companies doing business in the North American economic sector.