James Morris

Written by: James Morris

James Morris

Partner

The UK impact of proposed US tax reform

After much speculation, President Trump has unveiled his tax reform framework to the world. Some measures had been tempered, such as the proposed reduction in corporate tax rates to 20 per cent rather than 15 per cent. This landmark proposal is still a significant tax rate reduction with the prevailing rate set at 35 per cent at present; and the plans would bring the US more in line with UK corporation tax.

Other measures were not so generous, including decreases in tax deductions for both state taxes and limitations on the deductibility of interest for taxpayers. It was also of note that certain legislation that had been speculated upon for several months were absent altogether including the ‘border tax’, which will be welcome news for any UK businesses exporting into the US.

So, what might these proposals, if enacted, mean for the UK? The UK Government has long been a proponent that low headline tax rates generate inbound investment. US multinationals have often headquartered their European operations in the UK as they seek to shelter their overseas profits from high US tax rates alongside the many commercial benefits that derive from being in the UK. Will this still be the case if the differential between UK and US tax rates is only 3 per cent or could the UK reduce its corporation tax rate to the 15 per cent level suggested by George Osbourne to remain competitive? In a similar vein, will UK businesses investing in the US work so hard to keep business functions, assets and risks in the UK if the tax cost of having more activity and higher profits in the US is relatively low? And will the UK treasury feel the hit of reduced revenues as a result? 

Failure to pursue the proposed border tax is welcome news for UK exporters. A weak UK pound is causing many businesses to sell outside the UK whilst they have a price advantage. The controversial plan aimed to tax goods and services imported into the US, whilst introducing an exemption of export goods and services from the US so would’ve had a significant impact. This would have been an unwelcome barrier to UK companies exporting to the US and following an announcement earlier this summer the border tax was not anticipated to be part of final tax legislation, and thankfully the tax framework supports this.

A final point to note is that the tax reform framework does continue to look at how US headquartered multinational businesses are taxed on their worldwide income. At present, many of these businesses have overseas subsidiaries with accumulated cash, that has not been repatriated to avoid high rates of US taxation. The scope of reform in this area remains unclear, however, if reform forces the taxation of this income, or makes it cheaper to repatriate to the US, UK subsidiaries of US companies may see their cash significantly reduced.

Whilst we now have a lot more detail on the proposed reforms, there remains uncertainty over if it will be legislated; the timing of enactment; and the detail of some provisions. As ever we await further developments.

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