Opinion: US’ hissy fit sees it take its tax home

Opinion: US' hissy fit sees it take its tax home

Baker Tilly tax partner Rebecca Reading analyses the US's latest move to discourage tax inversions

PRESIDENT BARACK OBAMA this week announced plans to tax the retained overseas earnings of US companies. The proposals recommend a 14% ‘toll-charge’ tax on profits currently held offshore, plus an annual charge of 19% thereafter. Unsurprisingly, businesses’ initial reaction was shock and dismay.

Fundamentally, although the idea is presented as being about fairness (isn’t everything?) and about making US companies pay more tax, it is in practice about making non-US subsidiaries pay US tax and seemingly indiscriminately at that! So, the logic is that the US levies tax on the whole world.

It is hard to believe a mature tax jurisdiction like the US would even entertain such an idea, especially when other developed countries, the UK included, have gone in the other direction, lowering domestic tax rates and narrowing their anti-avoidance rules that can bring offshore profits from artificial arrangements back into the domestic tax net. The UK has been criticised for being too lenient in this area, but this US measure is completely at the other end of the spectrum.

Critics of the OECD/G20 BEPS project have suggested it is doomed to fail unless the US undergoes a monumental shift in perspective in terms of the principles underlying its tax system. The OECD’s stated objective is to align taxing rights with economic activity and to ensure a fairer and more consistent set of international rules is achieved. This move by Obama suggests the opposite: the US it seems will tax all subsidiaries – period. No link to economic activity required – just a blanket tax charge on everyone, everywhere.

Now doesn’t that make the UK an attractive place to do business?

Rebecca Reading is a tax partner at Baker Tilly

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