There is no doubt in my mind that the Trump tax plan, specifically the reduction in the corporate tax rate from 35% to 21%, will new create jobs in the US.
I know this because I already have clients and fellow tax lawyers in the US talking to me about making this happen.
Let me explain why from an Australian international tax lawyer’s perspective, as it is really quite simple and there hasn’t been any media that explains this properly.
There are two key factors:
- The goal of any international business, however small, is to reduce its effective global tax rate. The lower the rate, the more money it has in the bank to reinvest in the business or distribute to shareholders (or owners) in one way or another.
- The US is a large consumer market and every business, where ever it is from, must be in the US market if they want to make it big.
If you’re a business in Australia or another country you will usually pay tax in your home country except if you have a branch in another country. Then you pay tax in the other country on the money that branch makes instead of in your own country. If the tax rate in the branch country is lower, then your overall tax rate is lower.
How do you get a branch in the US? The easiest way is to have employees. If you don’t want a branch in the US, you try to avoid having your own office or people on the ground (i.e. do not create jobs in the US).
Historically, international business would want to access the US consumer market but would also usually try to avoid having a branch or connection to the US which could generate taxation in the US if they could. This is because the tax rate was higher.
Take an Australian company for example. You would be paying 35% if you have a branch or subsidiary resident in the US. By contrast you pay somewhere between 27.5 – 30% in Australia. Why would you want a branch or US resident subsidiary in the US? It would mean you would be paying more taxes overall. And if you had to have one, you would want to make it as small as you could.
International businesses with international operations would look to setting up offices in countries with lower tax rates, creating a branch or subsidiary there which would then reduce the overall tax rate paid. This also means that the jobs would be created in those countries.
Now the game has changed. If you can pay 21% in the US abd access the US consumer market, as opposed to paying 27.5 – 30% why wouldn’t you?
What’s the easiest way to have a branch? Set up an office and hire some employees (i.e. create jobs in the US).
The best part of it is:
- The cost of labor in the US is not prohibitive for an Australian company or companies from other developed nations, and the quality of workers is comparable.
- There is no need to fear the Australian equivalent of the IRS (called the ATO) when your local tax bill is reduced. Usually the ATO will tend to be conservative and try to tax you, and claim you don’t have a branch, and say you shouldn’t pay tax in the other country and only pay it in Australia. However, now they will have to go head to head against the IRS if they want to push that view because the IRS will want their share of the profits and because the IRS has already taxed it, the ATO can’t tax it. Only one country can tax the profits. The way the tax treaty works is the IRS and ATO will need to agree on what profits get taxed in the US vs. in Australia. I don’t see the ATO beating the IRS. Now Australian and other non US-businesses from tax treaty countries will have the IRS on their side against their local tax authorities when it comes to their taxes. How would you feel to have the IRS on your side helping lower your global tax rate?
This isn’t speculative, there are already people talking about this and planning for this in the tax world. It is also on the cards for businesses of all sizes, even smaller businesses that sell into the US market. Most jobs are created by small businesses. From an Australian perspective, if you could reduce your tax bill by 20 – 30% and reinvest that into growing your business by creating jobs in the US why wouldn’t you?
Adam Ahmed is an Australian international tax lawyer. Adam has over a decade of experience working at 3 of the big 4 accounting firms and one of the top tax law firms in Australia. He is currently the managing director of Adam Ahmed & Co. This article is reproduced from Adam Ahmed & Co.