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Richard Asquith Avalara
Richard Asquith, VP Global Indirect Tax, Avalara
We are going to war—global tax war sparked by the recent U.S. Federal Tax reforms—and Europe is struggling. Many countries that feel harmed by the reforms are likely to seek redress.
This month, the European Union (“EU”) is expected to publish details of its proposed 5 percent gross revenues tax on U.S. digital multinationals such as Google, Facebook, Amazon and Apple. Apple immediately seized on the reforms to shift to the U.S. over $200 billion in foreign earning previously held offshore. This has been partially spurred by President Trumps' slashing of corporate taxes on U.S. multinationals' foreign earnings to encourage a massive repatriation of $3 trillion in U.S. foreign profits currently sheltered from U.S. tax offshore. But the EU's proposals, launched by France and Germany, are already facing internal opposition from member states, and may also flout bilateral agreements against double taxation with the rest of the world.
Globally, countries such as China, Israel, and Australia have also launched plans to reduce their tax burdens to remain competitive with the new U.S. regime. A number of countries have also threatened to make a referral to the World Trade Organization (“WTO”) court, presaging a U.S. retreat on international trade cooperation and an attack on the global tax consensus and the balance of global investment.
For more than 30 years, the U.S. stayed out of the “race to the bottom” on corporate tax rates, leading to significant international investments by U.S. companies that have helped underpin the economies of many trade rivals. For example, many U.S. companies hire a high percentage of foreign employees, including Johnson & Johnson (72.6 percent), Proctor & Gamble (73.3 percent), and Oracle (62.9 percent) (December 2016). However, the new U.S. reforms make the U.S. far more attractive to multinationals that are able to shop around the world for the most favorable tax environments.
The U.S. reforms are designed to spur future investment in the U.S. and bring back trillions of dollars in offshore U.S. profits, but they are viewed by some countries as a grab for tax income.
Which are the specific reforms deemed threatening to U.S. trade rivals? These include:
These measures will transform the U.S. corporate tax system from arguably the most uncompetitive among the major economies into a hugely attractive location in which to base investment, research and jobs. However, for every dollar retained or repatriated to the U.S., another country loses a dollar of taxable income. And the numbers are big—the U.S. is the world's largest foreign investor, sending around $26 trillion offshore in 2016.
In anticipation of losing much of this benefit to their economies, many global trade rivals have been quick to react. The EU, China and Russia have already launched retaliatory actions or plans, while Israel and others have alerted the U.S. of their intent to shield their fiscal sovereignty. Here are the specific actions to date:
Many of the countries that feel harmed by the U.S. tax reforms will seek international redress, typically through the WTO court, which oversees global trade and tax rules and resolves disputes arising among the more than 160 member countries. The petitioners will likely claim that the U.S. reforms lead to double taxation and problems with transfer pricing issues.
Since President Trump has already publicly expressed his disdain for the WTO and the constraints it puts on the U.S., such a referral could simply initiate a U.S. exit from the organization as another demonstration of the current administration's America-first policy. This would be a major setback to the progress of globalization and fair trade.
If this trend continues, the “race to the bottom” will accelerate, pitting various countries against each other as tax becomes a powerful weapon in trade competition.
Richard Asquith is VP Global Indirect Tax at Avalara.
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
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