Keith O'Donnell says the US will be competing with EU member states on pure tax terms.
Speakers' corner: O'Donnell on the impact of the US tax reform on Luxembourg businesses
In our speakers’ corner, Keith O’Donnell, managing partner at Atoz Tax Advisors Luxembourg, presents how the new tax reform bill may impact business in Luxembourg.
There is no denying that this tax reform bill (the “Bill”) is a major, almost revolutionary change. It is a complex, often incoherent package, reflecting the difficult political compromises that gave birth to the final Bill. This article aims to examine some of the key measures for international business and in particular for Luxembourg. Summarising a 500-page Christmas present into a 1 page Christmas card, while making New Year’s predictions, is of course a subjective exercise, but hopefully the reader will approach this in a seasonal mood.
From a big picture perspective, the Bill can be seen as partly pro-business, partly ushering in Trump’s era of pro-American, anti-foreign sentiment. US MNEs are encouraged, through a package of measures, to both bring back capital from abroad and invest locally rather than internationally. In addition to this, inbound investment to the US from European and other foreign companies will suffer from restrictions. As an international business centre, Luxembourg will feel the impacts.
Some key changes
1. “Gifts for everyone” (who is a business)--corporate rate reduction from 35% to 21%. Simply put, this is a positive development for US businesses as a whole, even though when combined with some aggressive investment write-offs, the relative gain depends significantly on the industry. Expect increased dividend payments from US stocks--the jury is out on the effect on business investment decisions however.
2. “Show me the money” -Taxation/ repatriation of foreign profits for US firms with profits abroad.
This corrects the past anomaly of US forms storing low-taxed foreign profits abroad. A combination of immediate taxation of past low-taxed profits (“toll charge” at 15 or 8%), taxation of future low-taxed profits (“GILTI” taxation) and the ability to bring back foreign low-taxed profits without further tax (“participation exemption”) encourages firms to bring back foreign profits. Based on past experience, the biggest effect may be on accounting earnings and dividend payments, rather than on investment decisions however.
3. “Keep it at home” Measures to bring IP back to the US and stop outbound transfers.
US companies are encouraged to keep their intellectual property (IP) at home, with a provision which taxes US shareholders on “excessive” income of foreign subsidiaries, as compared to assets owned (high-value intangibles, ie: IP) with an 80% foreign tax credit offset, as well as a complimentary measure allowing US companies deductions for ‘high margin export sales, leases/licenses of property, or exported services. One way of seeing this is that the US has effectively created an “IP box” type system for US-owned IP used by US firms abroad (13% taxation) while penalizing the use of foreign-owned IP! Expect international litigation on this.
The international and Luxembourg perspective
From an international perspective, despite the OECD and the EU Commission’s best efforts, the US tax reform is proof that the spirit of tax competition is alive and well. The US will be competing with EU member states on pure tax terms. Gold-standard international measures like the OECD’s Beps plan and the EU’s tax directives, ATAD 1 & 2 only make sense when everyone agrees to play the game. The US had clearly signaled that it was prepared to go its own way and the Bill confirms this.
What about Luxembourg? Luxembourg has been a major beneficiary of investment from the US and now stands to see a reduction in investment and the related tax receipts as US companies pull (mainly) Intellectual Property investments out of Europe and back into the US.
For investments into the US that may have passed through Luxembourg, we also expect a chilling wind. As a Christmas wish, if Luxembourg were to align the effective rate of corporate tax on profits to a rate allowing the country to remain competitive (here, the sweet spot is between 13% and 21%), Luxembourg’s non-tax attractions would remain compelling.