US tax reform has a negative impact on Europe
US President Donald Trump has been announcing a comprehensive tax reform on several occasions. Apparently, the main beneficiaries are to be businesses and wealthy individuals. Hence, corporate income tax might fall from currently 35 to 20 %. Apart from that, there are considerations of abandoning inheritance tax. However, a reform plan might have a significant negative impact on the European Union.
Corporate income tax only applies to sales in the US
The US considers taxing profits of companies, where their products have been sold. However, it is common worldwide to tax companies in the country where they have their headquarter.
What impact would this change have? If a company in the United States manufactures a product and if it exports this product to Europe, the company – according to the new rules – would no longer have to pay corporate income tax. Only companies, which sell their products in the United States, would then have to pay corporate income tax. This new regulation would be an incentive for US companies to produce their goods in the US and to direct their focus on exports.
However, the impact this would have on companies of the European Union would be negative. Because manufacturers from the EU area, which export their goods to the United States, would have to pay corporate income tax not once, but twice. Firstly, in the country where the company is registered (and manufacturing the products) and secondly, in the US for goods sold there.
Adopting this system, a trade war between the US and the EU as well as most other countries would be inevitable: US exports would be indirectly subsidised, whilst imports would incur (profit) taxes.
According to initial estimations by economists, individual EU Member States such as Ireland or Great Britain could expect a 1 to 3 % reduced economic output. For Austria and Germany, the US reform could mean a 0.2 to 0.3 % decline in their Gross Domestic Product.
Effects on the tax haven discussion
The US plans undermine the in any case modest approaches of the OECD States and the G20 in respect of combating profit shifting and tax avoidance. They would mean two parallel approaches to taxation, which would result in chaos. However, some experts also note that the US approach – if it was applied worldwide – might by all means help in drying out tax havens. Corporate income tax would be raised in the country, where companies sell their products. Under this system, a relocation of company domiciles to countries with the lowest rate of corporate tax would then no longer be possible.
Firstly, however, the United States is currently the only country, seeking this system and secondly, the US is pursuing a completely different target: namely, to attract the producing industry in her country and to boost exports – at the expense of all other countries.