Tuesday 16 October 2018

US business tax cut ‘could erode Europe’s tax base’

Countries around the world could respond to the American reduction in an attempt to attract business.

The European Central Bank warned that other countries could cut business tax to boost competition (AP)
The European Central Bank warned that other countries could cut business tax to boost competition (AP)

By David McHugh

Economists at the European Central Bank (ECB) have said the US corporate tax cut should lift the world’s largest economy in the short term – but warned that it could erode the tax base in European countries by intensifying global competition for lower rates.

ECB economists said the cut in business taxes will provide a “significant fiscal stimulus” to growth in the US in the short term. However, it warned that long-term effects were less clear, especially if the cut leads to larger US budget deficits.

Effects on the 19-country eurozone are “highly uncertain and complex” but could include an erosion of the tax base if countries around the world compete by lowering their tax rates to attract businesses.

“Lower US corporate tax rates raise the tax attractiveness of the United States relative to other countries,” the report said.

“Prior to the reform, the US corporate tax rate stood above the rates of all large euro area countries, while, after the reform, it is close to the lower end of rates in those countries.”

The legislation, which was pushed by US president Donald Trump and signed into law in December, lowers the American corporate tax rate from 35% to 21%, among other changes. This came into effect on January 1.

Meanwhile, the UN’s trade and development agency said that as multinational companies return an estimated two trillion dollars (£1.4 trillion) to the United States because of the tax law, there could be “sharp reductions” in foreign direct investment worldwide.

The UN Conference on Trade and Development (UNCTAD) noted in their own preliminary report that the tax law includes a one-time tax on accumulated foreign earnings that could free up funds overseas to be repatriated.

UNCTAD secretary-general Mukhisa Kituyi said the impact on investment in the developing world remains unclear.

The agency says nearly half of all global investment is in the United States or owned by US multinationals, which have kept about 3.2 trillion dollars (£2.2 trillion) in earnings overseas.

Agency officials said the main impact could come over the longer term, as multinationals reassess their foreign investment portfolios and the effects of the tax reform play out.

UNCTAD said much will depend on how big multinationals respond. It said five technology companies — Apple, Microsoft, Cisco, Alphabet and Oracle — together hold over 530 billion dollars (£375 billion) in cash overseas, or about one-fourth of the total “liquid assets” believed to be available for repatriation.

Press Association

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