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How Do You ‘Trump’ the World’s Largest Tax Haven?

Many commentators, including Mike Phillips, Marketing Director of ItsInternational – International Service Provider for TEAM Members – believe vibrant low tax regimes such as Ireland, Luxembourg, Switzerland, the Isle of Man and the Cayman Islands are soon to be superseded by the USA when it becomes the world’s largest tax haven.

The Republican Party majority in Congress wants a ‘Border Adjustment Tax’ meaning no tax on exports while imports would be. This will trigger a move by American multinationals to manipulate transfer prices (what different branches of one corporation charge each other for exchanged goods and/or services) enabling profits to move artificially back to the USA.

For example, Apple in California could charge its UK subsidiary a substantial price for using its brand and logo which, in turn, reduces the same amount of taxable profit in the UK. As that charge is deemed an American export, it will not be taxed in the USA. Conversely, American importers such as the retail giant Walmart gain absolutely nothing.

Even if this Border Adjustment Tax fails to see the light of day, the Trump administration’s alternative options are equally depressing. The new government hates any tax on capital. The President wants a drop in the corporation tax rate from the current 35% to 15%. Such a strategy will warm the hearts of current ‘tax haven’ States such as Delaware, Nevada, New York, Montana, South Dakota and Wyoming.

Theresa May is threatening to make UK corporation tax the lowest in Europe. She has openly called for a 17% rate by 2020. Perhaps it will be 15% and introduced much sooner if President Trump does what he says he would do.

Mike Phillips from ItsInternational suggests such tax optimization can be blocked, which is good news for the UK and for the EU. The answer rests in ‘formulary apportionment’, better known as Unitary Taxation. This is where a country taxes a proportion of the global profits of a corporation based on the number of employees or volume of sales in that country.

For example, if Apple makes 10% of its global sales in the UK, then 10% of its global sales become taxable in the UK. This approach neutralises any tax optimisation activity in the USA and in the UK. It is impossible for Apple to beat this system by registering disproportionate profits in the USA or in its current ‘haven’, Ireland. Apple cannot control the location of its UK customers…and cannot move them from the UK to (say) Ireland or the USA. HMRC knows the value of Apple’s products and services sold in the UK. This is easily gleaned from the mandatory VAT returns submitted by Apple’s UK customers.

Corporation Tax is not bound by EU law. However, its reform is very relevant to most EU Member States. However, some countries such as Ireland, Luxembourg and Switzerland will lose out because ‘accounting manipulation’ has become mainstream business for them.

If the UK government adopted Unitary Taxation, HMRC would demand of companies working in the UK that they report their global profits and the share of their sales made in the UK. HMRC could then calculate those companies’ UK tax liabilities. Any company refusing to provide this accounting information would be denied access to the UK market. This is surely better than being sucked into a corporation tax war.

As a TEAM Member, if you are either placing or aspiring to place consultants or interims abroad on fixed-term assignments, you can benefit from accessing the TEAM INTERNATIONAL HELPLINE – a free service provided by ItsInternational’s Central London offices exclusively for you.

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