(Yicai Global) Dec. 4 -- The Trump administration is soon implementing the largest tax reform bill seen in the US in the last 30 years. It remains difficult to say in the short-term whether the reform will immediately lead to dramatic changes in the international financial and industrial capital flows, and simplistic conclusions should be avoided, Xinhua News Agency cited multiple analysts and experts as saying yesterday.
Although the US government claims tax cuts will help businesses expand investment and stimulate faster growth, economists warn that lower tax rates will not necessarily result in firms investing more and they may put more money into financial markets or dividends, which may not contribute to the real economic growth.
The nominal corporate tax rate in the US is the highest in developed countries. However, due to various deductibles and loopholes, the actual corporate tax rate in the country is only 18.1 percent, lower than the 19.4 percent average level of Japan, France, Germany and Italy, OECD data show. It is therefore unclear if tax cuts can change the current investment behavior of enterprises.
One cannot make conclusions that businesses investment will flow to low-tax countries by simply comparing corporate tax rates among all countries because the tax rate is only one factor affecting investment. There are many other factors to consider including market size, supply chain, industrial clusters, business environment, rule of law environment and macroeconomic policies among others.
The House of Representatives’ version of the tax reform bill states that impacts to the global tax coordination system and challenges related to the international industrial chain cannot be underestimated. If this version of the bill eventually becomes law, it may force through adjustments to many current bilateral and multilateral tax agreements, research from KPMG states.
In the era of economic globalization, especially during a time of rapid development of the digital economy, the issue of coordination in international taxation has become more and more important. International tax loopholes present an opportunity for multinational corporations to avoid taxes. Competitive tax cuts may worsen the finances of governments. Competition related to the tax base may lead to double taxation, supply chain distortions, and other problems. Therefore, tax issues have become not only the internal affairs of a country but a multilateral issue requiring international cooperation.
The US Senate barely approved its version of the tax reform bill with a tight vote of 51 to 49 in the early morning on Saturday. The passing of the tax reduction bill in the House of Representatives took place last month Both chambers will conduct arduous reconciliation consultations to eliminate differences between the two bills from today. The two versions are quite different in many details at present, such as the adjustment of personal income tax brackets, the effective date for implementation of corporate tax cuts, and tax deductibles.
The consultations are expected to be very difficult. The two chambers must reconcile differences between the two bills and then vote to pass a final bill in an identical form before tax reform legislation can be signed into law by President Trump. The top Republican congressmen hope to complete the tax reform legislation by this Christmas, but analysts say delays could last until early next year.
The current versions of both chambers favor the rich, based on the impact of tax reform in the US. High-income families will receive most benefits from this tax cuts, says Washington-based think tank Tax Policy Center. The reform is therefore likely to exacerbate polarization between the rich and poor and associated social conflicts in the country.
Internationally, the tax reform is likely to result in a drastic reduction in corporate income tax in the US and a change in the US taxation system. The US corporate income tax will drop significantly from 35 percent to 20 percent. Multinational corporations would be able to legitimately repatriate some USD2.6 trillion in profits currently hoarded overseas with one-time 14 percent payment.
The US is turning the current global taxation system into a local tax system through the reform, making overseas subsidiaries exempt from dividend income tax, while adding a 20 percent execution tax so that multinational enterprises limit tax avoidance through internal transactions with branches outside US. The new tax could impact the international industrial chain and prevent multinationals from relocating industry out of the country.