By Eric Sylvers and Jenny Gross
An international race to lower corporate taxes is back in the global spotlight after Britain recommitted to slashing rates and as the election of Donald Trump puts U.S. corporate-tax overhauls on the front burner.
U.K. Prime Minister Theresa May on Monday officially endorsed a move by Britain's previous Conservative government to lower the main corporate rate there to 17% by 2020, from today's 20%. President-elect Donald Trump promoted on the campaign trail a 15% U.S. headline corporate tax-rate -- down from the current 35%.
Mr. Trump's plan is far from a done deal. It faces domestic political hurdles and fiscal reality. And Mrs. May backed a tax cut already approved byParliament but stopped short of endorsing her predecessor's further recommendation -- made after the Brexit vote -- to go down to 15%.
Still, the rhetoric on both sides of the Atlantic represent the latest volleys in a long tradition of trying to use national corporate-tax codes to spur investment at home or lure foreign firms. The new attention being paid to corporate tax in both places follows close on the heels of recent moves in Japan, Canada, Italy and France to attract investment with lower rates of their own.
For Britain, the Brexit decision has made the pressure to keep the welcome mat out especially intense. The country, in particular London, has been a magnet for global firms looking to set up European beachheads or global offices. It benefits from a convenient time zone between Asia and the Americas, strong legal protections and a large pool of well-educated, English-speaking workers.
But after Britain's June 23 vote to leave the European Union, many companies based there have scrambled to assess whether they will continue to benefit from two other, big advantages that come with EU membership: unfettered access to Europe's common market and the free movement of labor across the bloc. Britain's Institute of Directors, a group of company directors and senior business leaders, found in a poll shortly after the vote that more than a fifth of respondents said they were considering moving some of their operations outside the U.K. because of the vote.
Mrs. May has tried to assure British and foreign companies that the U.K. will continue to be a competitive place to do business. Her charm offensive has included closed-door meetings with corporate heads such as Carlos Ghosn, chief executive of Nissan Motor Co., the second-largest car maker in the U.K. Mr. Ghosn had considered passing over Sunderland and picking a factory in continental Europe to build a new model, but he backtracked after meeting with Mrs. May.
Mrs. May's announcement, made in a speech to U.K. business leaders, reassured companies that she was still prepared to carry through on the tax reductions approved by Parliament during her predecessor's government. She didn't mention a specific tax-cutting target.
That left unclear whether she would be willing to embrace a further cut to 15%, which was proposed -- but never acted upon -- by then-Prime Minister David Cameron's government in the immediate wake of the Brexit vote. An aide to Mrs. May said only she was committed to the plans already in place to cut the rate by 2020 to 17%.
Still, business leaders took it as a strong signal of support for keeping corporate tax low. "It's good to see the government reaffirm its commitment to lower corporation tax," said a spokesman for the Confederation of British Industry, a trade group.
The plan to gradually move to a 17%corporate-tax rate would give Britain the lowest headline corporate-tax rate among the Group of 20, a collection of the world's richest nations. At the current 20%, its headline rate is already one of the lowest in the G-20, equal to that of Turkey, Russia and Saudi Arabia. At 17%, it would still be above Ireland's 12.5%, but well below most other large economies.
It might also be at the limit of what Britain's finances can stand.
"Britain has a large deficit and is very constrained on how much tax-cutting it can do," said Charles Beer, managing director of independent tax advisory Taxand in Britain. He said the government could speed up implementing the 17% rate, "but it's hard to see how they can do a major move down."
Vodafone Group PLC said in the days immediately after the June vote that it might have to reconsider its U.K. headquarters. It has since backtracked, saying it is happy to be British based. A spokesman declinedto comment on Mrs. May's tax pledge.
The race to lower corporate taxes comes amid a broader tax shake-up that has played out over recent years. Almost 100 countries, including the U.S. and most of Europe, have agreed to close -- or at least narrow -- legal loopholes that big companies use to shift profits to places where they pay little or no income tax. EU regulators have also taken aim at tailor-made tax deals between certain member countries and companies.
"Once those loopholes are closed the main way countries can compete is by lowering their base corporate tax rate," said Paolo Giacometti, a partner at Italian law firm Chiomenti. "So we will see this trend continue."
It is often hard to compare corporate-tax rates in an apples-to-apples fashion. Some countries have wider corporate-tax bases, for instance, or charge different rates for different-sized companies. Companies also have to contend with an array of regional taxes, such as U.S. state taxes. Still, the national rate is often the easiest-to-convey message of welcome -- or warning -- a government can send to corporate executives.
Germany and Ireland made big cuts at the beginning of this century in a bid to attract corporate investment. Berlin clawed back much of what it lost in revenue by making it harder for companies to take deductions. Ireland's sharp headline corporate-tax cuts early in the decade helped it become one of Europe's most attractive destinations for many companies looking for European or global headquarters.
But it is also now pulling back on other corporate-tax benefits. Two years ago, for instance, Dublin said it would end by 2020 a gambit it called the "Double Irish." The structure allowed multinationals to lower their taxable profit in one Irish subsidiary by paying royalties into another Irish-registered subsidiary that was managed in a tax haven -- making it exempt fromIrish income tax.
Italy in late 2015 moved to lower its national corporate tax rate by 3.5 percentage points, to 24%. That reduction takes effect next year. Even France, long a holdout, has embraced the trend in the past few years, though rates in the country are still higher than in most of Europe.
Japan, struggling to promote growth as the country's population ages, has been cutting the rate to encourage investment. This year, the rate fell 2 percentage points to 30%, bringing the drop to 10 points in just a few years.
In the U.S., however, the policy debate has been stalled for years, despite bipartisan consensus to lower corporate taxes. The U.S. rate is now the world's highest, though effective tax rates are lower than the 35% marginal rate. House Republicans have proposed a 20% rate, saying they want to leapfrog other countries that have been reducing their rates more incrementally. President Barack Obama several years ago proposed a 28% rate and 25% for manufacturers.
Unlike many other countries, the U.S. doesn't have a value-added tax -- akin to a federal sales tax -- that it can increase while cutting the corporate tax rate. That means Washington has had to look for offsetting revenue elsewhere. All the likely sources -- a broader corporate tax base, higher taxes on small businesses and wider budget deficits -- are politically problematic.
--Jenny Gross in London and Sam Schechner in Paris contributed to this article.
Write to Eric Sylvers at email@example.com and Jenny Gross at firstname.lastname@example.org
(END) Dow Jones Newswires
November 21, 2016 19:12 ET (00:12 GMT)
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