Public opinion in many countries has been outraged in recent years by stories of large multinationals apparently paying little or no corporation tax. This has focussed in large part on Intellectual Property (‘IP’) based planning by US multinationals highlighted recently by the EU ordering Apple to repay €13bn to Ireland, on the basis that their tax arrangements contravened EU State Aid rules.
If the value of a global business is mainly down to software and technology developed in California, under current international rules it would be expected that the bulk of its corporate profits would be taxed in the US. By and large that is what happens. However, it would also be expected that the tax rate on such profits be around the 40% mark, based on the rates of tax imposed at the Federal and State level; but some US multinationals may be paying closer to half that rate, or even less. The precise reasons differ, and may in some cases not relate to IP planning at all, but a large part of the reason for a low tax rate can be that a big chunk of IP has been transferred out of the US, and that royalties (from the UK and/or other third countries) that might otherwise have gone (with most people’s blessing) to the US have gone to a ‘tax haven’ instead.
The US multinationals involved would argue that they have merely deferred US tax on such income, and it will eventually be taxed when repatriated to the US. Sceptical taxpayers and tax administrations outside the US may well regard such deferral, when it persists for a number of years as nothing more than a loophole; but the US Tax Administration is aligned with its multinationals in regarding this offshore money as fundamentally “belonging to America”, and asserting that if and when it is taxed, it should be taxed in the US, and certainly not in places such as the EU.
US tax policy has been stymied by deadlock between President and Congress, and no progress has been made on bringing this enormous offshore cash pile, most likely measured in the trillions of dollars, into the US tax net – and left it vulnerable, in US eyes, to raids by others (such as the EU Commission). President-Elect Trump has plans to change that.
His plan is to reduce the rate of US Federal corporate income tax from 35% to 15%. (By comparison, in the last 6 years the UK rate has come down from 28% to 20% and may well continue down to 17%.) In addition, Trump plans that existing offshore cash piles will be taxed at 10%. Whilst these plans remain in outline, it appears that the intent is that once that 10% is levied, no more tax will be paid if the profits are then actually paid by way of dividend back to the US. On that basis, it would be expected that the cash piles would in large part be repatriated to reduce debt, invest in the US or return funds to shareholders.
It is possible that critics will then argue that such US businesses are getting away with paying a lot less than the critics think they should have paid in the first place (if only the US had applied UK-style anti-avoidance measures, while keeping its up-till-now-US-style higher headline tax rate). But it would still be extra revenue as compared with what the US Treasury realistically can expect today
Will Trump’s plans stop cash piles building up in the future?
If the Trump plan goes through, Federal tax will only be 15%, but why would you collapse your structure and risk a future President driving the rate up again? Why not build up a new offshore cash pile? The Trump plans have taken that into consideration. The plan is to tax all income earned abroad at the new Federal rate of 15% (with credit if any foreign tax has been paid). So structures that build up cash piles in tax havens will no longer work; US tax will be due on the amounts anyway, and you might as well send it straight home.
Quite where this will leave the EU in regard to the Apple case is uncertain; if Apple does repatriate its cash, and pays US tax on what has supposedly “escaped” Irish tax, how should the EU contest an appeal from Ireland against the recent judgement? There is already outrage in the US that Europe is raiding past profits that they argue belong to them, however ineffectively they’ve taxed them in the past. But the public anger in Europe that underlies the case is unlikely to be assuaged if the perception is that past profits have been extra-lightly taxed and future profits may be lightly taxed as well.
There are many drivers here and some of them work differently for the past as compared with the future. Much, though not all, of the US anger is at what they perceive as the retrospection inherent in the State Aid cases. The stakes are high – anything seems possible from a transatlantic ‘Tax War’ to an unlikely confluence of interests between Trump’s America and the EU, at least in the tax field. Whether the solution comes from the European Court or from the politicians, it will need to consider both how past and future profits are to be taxed.’
By Glyn Fullelove, Chairman of the Chartered Institute of Taxation's Technical Committee