There is plenty of coverage of the rights and wrongs of Brexit and the election of Donald Trump as President of the United States. This article is not looking to revisit those discussions but to look at the likely implications for the UK economy from the proposed Trump tax plans and Brexit.
The UK for many years has been the largest beneficiary of US investment and the reasons are fairly easy to understand; language, demand for services, ease of doing business and clear fiscal policy. US companies on the other hand have been faced with a relatively high domestic corporate tax rate of around 35% which provides plenty of incentive to locate non-US profits in a lower tax jurisdiction. Ireland has benefited considerably from this with its corporate tax rate of 12.5% compared to our current rate of 20%. US companies have tended to transfer their intellectual property ("IP") to Ireland and then set up service companies in other parts of Europe, with the UK invariably having the biggest foot print.
In order to reverse the migration of IP and profits from the US, the new US administration is expected to announce a number of changes to its tax policy. The first are to reduce its main corporate tax rate to 15%, offer a one-off rate of 10% for repatriation of profits, penalise US companies manufacturing goods overseas with an import tariff and provide an enhanced tax deduction for those manufacturing at home. There is some doubt that the main rate can be reduced to 15% in one swoop considering the very high spending plans the administration is announcing. Let us assume though that the standard rate comes down to 20%.
The UK rate comes down to 19% on 1 April this year and is planned to come down to 17% on 1 April 2020. If you are a US company planning your expansion to Europe you are now going to have to consider whether it is worth transferring the IP and profits to Ireland as this involves considerable set up and on-going costs. If the UK continues to offer the biggest market it is more than likely that US companies may ignore Ireland now and set up their international holding company in the UK as this offers the lowest tax rate in a country where the US company has the biggest market. This would provide a much bigger footprint and more jobs for the UK.
This is where a potential soft Brexit may have implications. If we end up having to give something in return for easy access to EU markets, the two concessions are likely to be taxation and immigration. The EU is concerned that the UK will use lower tax rates as a way to attract business, to some extent as Ireland has done over the years, with the EU having no way to sanction the UK. As part of a negotiated soft Brexit, we may have to give an undertaking not to reduce our corporate tax rate beyond say 19%. I do not think this would be detrimental to making us an attractive location for US companies, if their main tax rate is at around 20% or even at 15%. Ireland tends to offer tax as the main attraction whilst the UK offers a bigger market and a tax rate that is still low.
The negotiation on immigration on the other hand could work in our favour. One of the main concerns that is raised with me by international companies is that they will not be able to get the skilled manpower they need if we were to stop all migration from the EU or impose a very high threshold of skill for entry. Any easing of these requirements for skilled EU nationals would continue to make the UK attractive for international businesses.
The impact on UK companies doing business in the US will be dependant on whether they sell goods or services. There is uncertainty on the level of import tariff the US is likely to impose on imported goods. This may make UK manufactured goods uncompetitive in that market. Although it is to be hoped that a suitable trade deal will be negotiated that removes any such barriers to trade.
All of the above assumes that whatever the US administration announces will be for the long term. Businesses need certainty and they may not change behaviour if they believe that any measures announced are likely to be short term in nature due to political uncertainties.
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