by Mary Swire, Tax-News.com, Hong Kong
09 November 2017
The Australian Treasury has released a paper that considers the implications of proposed reforms to the US corporate tax system, and which warns that Australia’s GDP and real wages could be affected by the changes.
The paper examines the likely impacts of the proposed reforms on the US and on the rest of the world. The package included a cut to the US federal corporate tax rate from 35 percent to 20 percent, the expensing of depreciable assets, an exemption for dividends paid by certain foreign subsidies to US companies, and a one-time tax on overseas profits.
The paper concluded that the economic impact of the proposals “will depend on how time and compromise shape the package that is ultimately legislated.” The size of the cut, the manner in which it is funded, and the perception of investors as to its permanency are all expected to be key factors.
The paper suggested that, if a cut in the US corporate tax rate does result in a US investment boom, “the rest of the world is likely to experience reduced foreign investment and, as a consequence, lower GDP and real wages than might otherwise be the case.”
The paper noted that the impact on Australia will ultimately depend on how the rest of the world responds to any US tax cuts, and suggested that it is likely that countries may lower their own rates and/or introduce more preferential allowances for capital investment. The paper explained that this would form part of an overall trend, and pointed to the fall in the OECD-average corporate tax rate from 32 percent in 2000 to 24 percent today. It also observed that economies such as Canada, Singapore, the UK, and New Zealand have all cut their rates in the past 10 years.
Australia’s headline company tax rate is 30 percent. The small business rate was reduced to 27.5 percent earlier this year, in tandem with an increase in the turnover threshold for access to the rate. Further increases in the turnover threshold will follow in the coming years. However, the Government was unable to carry legislation to reduce the rate to 25 percent for all firms, and has re-introduced the outstanding elements of its Enterprise Tax Plan to Parliament.
Commenting on the paper’s release, Treasurer Scott Morrison said: “The paper raises serious concerns that should the US implement the Trump company tax cut, investment in Australia will potentially fall, leading to flow-on effects including lower wages for hard-working Australians and lower economic growth.”
He added: “In highlighting the risk to Australia’s international tax competitiveness, the report finds that other countries would likely respond to any US company tax reduction to avoid negative effects. Competition between jurisdictions could accelerate. A permanent reduction in GDP and real wages might become a reality unless steps are taken to maintain Australia’s competitiveness.”
Ultimately, the paper found that the impact on Australia will “depend on the cumulative effect of such changes and how Australia responds.”
The paper noted that the Treasury estimates that the size of the Australian economy would “permanently increase by just over one percent in the long term given a five percentage point reduction in the Australian corporate tax rate.” The revenue lost as a result of the company tax cut would in the long term be recovered through increased economic growth.
According to Morrison, the revenue return of cutting the company tax rate to 25 percent is estimated “to be about 45 cents per dollar of net company tax, with eight cents accruing to state and territory governments and 37 cents to the Commonwealth.”
Morrison warned: “Clearly Australia risks being left behind. It is as simple and as stark as being potentially marooned on our own tax island. The Turnbull Government gets this. That’s why we are moving to shore up our competitiveness on investment through our fully-funded Enterprise Tax Plan, which has already delivered lower taxes for businesses with turnovers of up to AUD50m (USD38.4m).”
Published at Wed, 08 Nov 2017 19:00:00 -0500