Most of us may be familiar with the expression, or some variant of, “When the US sneezes the world catches the cold”.
Therefore it is perhaps not surprising that many people have been contemplating what the UK economic impact may be of the recent US tax reforms. With effect from January 1, 2018, the US has undertaken its most extensive tax reform in more than 30 years – and confounded many who thought that President Trump would not be able to deliver on an electoral pledge which predecessors have been unable to pull off.
It is inevitable that such material changes to taxation in the world’s leading economy will have an impact on US foreign direct investment, on US inward investment and on those non US corporations who may hold part of their international groups under the US. However, it is much more difficult to predict what that impact may be.
The reforms of corporate tax are significant and extensive and include:
A reduction in the federal corporate income tax rate from 35% to 21% but coupled with a broadening in the tax base;
The continuation of the US worldwide basis of taxation but with the introduction of a limited participation exemption regime; The introduction of a new limitation on interest deductibility; and A one-time tax on untaxed foreign earnings.
The complexity of these changes, in the context of one of the most byzantine tax regimes in the world, mean that many businesses will be working very hard to establish whether they are net winners or losers.
What we can expect to see in the short term is focus on the financial statement implications of the changes, in terms of both the rate reduction and the taxation of foreign earnings, and on the funding of the one-off tax bill, the first instalment of which is payable on April 15, 2018.
In the medium term we are likely to see consideration of where certain people functions are situated, where intellectual property is held and where manufacturing is undertaken. One apparent oddity of the new regime is that it imposes a tax on overseas earnings where there are no significant tangible assets – this would appear to discourage the deployment of such tangible assets in the US, which one may have thought was a policy objective.
As far as the oil and gas sector is concerned, it may be that restructuring of operations for US headquartered groups will be more of an issue within oil field services – where the assets are mobile – rather than in the upstream sector where hydrocarbon deposits are immoveable.
Many commentators have noted that oil and gas exploitation in the US is likely to one of the industries most affected by the interest restrictions, since unconventional oil and gas production in the US has been debt funded to a significant degree.
Whether “UK plc” will end up as an overall beneficiary or as a loser as a result of these changes is hard to say but to the extent that the short term requirement for cash, or revisions to organisational structures, drive M&A activity in the UK then the changes are welcome.
Derek Leith, pictured, is EY’s head of oil and gas tax