The shifting tax landscape in the US…

• The global tax environment is characterised by the US’ shift towards tax competitiveness. The strategy of reducing corporate taxes to attract investment has previously seen success in smaller countries such as Singapore and Hong Kong. In the case of the US, Mr Trump’s policies act as ‘carrot and stick’ approach aimed at advancing the country’s interests.
• The US’ surgical reduction in corporate taxes, from 39% to 21%, is a fiscal leap of faith that comes in sharp contrast to the strategy of calibrated reductions followed by say, the David Cameron administration in the UK a few years ago. The tax reduction, however, does not necessarily ensure economic growth in and of itself.
• Other policy changes under Mr Trump include directional shifts for digital businesses as well as improvements in tax transparency and enforcement through real-time information sharing between tax jurisdictions.
• The changing tax landscape in the US has also seen the emergence of the new base erosion and anti-abuse tax (BEAT), which acts as a stick, or a disincentive, in the form of an added tax on deductible payments by US shareholders to foreign affiliates. BEAT pushes debt towards other countries that do not have thin cap rules, resulting in lesser debt within the US economy and erosion of tax bases of other countries.
• Preferential tax policies, on the other hand, serve as the carrot with a 10.5% tax on profits made post-inversion, and a reduced rate of 13.125% for licensing IP outside the US.
• The 100% depreciation of tangible property has led to the creation of a participation exemption regime, under which dividends from a foreign country are exempt in a home country. Countries such as Germany, Denmark, and Belgium have seen effective use of this provision.

…and its impact

• These tax reforms are likely to lead to an increase in investment and economic activity and provide a benefit of USD 3,500 to the average American working household.

The new regime will increase investment and economic activity…

• The disincentive to shift production outside of the US gives companies a reason to keep producing domestically. At the same time, these policies mark concerns for the country’s fiscal deficit and macroeconomic landscape – the US’ fiscal deficit still looms high at 5-5.2% of GDP although down from a whopping 10% a few years ago.

…but could have global implications in the form of a tax war….


…and increased aggression by global
tax authorities to alter their own tax regimes to match the status of the US


The impact of the new US tax regime will not
be too direct for the Indian companies especially in the technology sector

• At the global level, in an international economy that is already marked by tariff wars between countries like the US and China, the shift in taxation policies could now lead to tax wars. China, for instance, is already seeking to make itself more investment-friendly through a Research & Development regime that applies across sectors and offers greater incentives.
• It is unlikely that holding companies from other countries will carry out reverse-mergers and shift back to the US, for two reasons. First, the stability of the current tax regime is so far unknown. Second, the aggression of tax authorities around the world is likely to ensure that other countries do not allow for large-scale migration of companies. At the same time, for companies whose market is primarily based in the US, there is now a lesser incentive to sell from outside the country, and so shifting base might be in these companies’ best interest.
• Going forward, other countries will feel the need to alter their own tax regimes to match America’s tax-attractiveness.
• The European Union has seen its taxation policies focus on transparency, disclosure and information sharing so far. The US’ new policies, however, seem to be leading to a new ‘Atlantic divide’, with Europe echoing concerns that the developing world traditionally held, as it sees its tax base getting eroded.
• Trends in international taxation have created tension between developing countries, which serve as sources and markets within the production process, and developed countries, which are responsible for exporting capital. While the developed world has typically pushed for lower or zero taxation on royalties and technical services, developing countries have found this to be unfavourable towards them.
• The impact of the US’ changing tax regime on India is not too direct. Standalone Indian technology companies, which seem to have been impacted by the BEAT tax provision, will in fact not be affected because payments to offshore companies do not fall under this tax setup at all.
• If India, with an effective corporate tax rate of ~40%, were to take a leaf out of the US’ book and carry out similar tax cuts, it would lead to a projected loss of more than Rs 100,000 crores – the amount that the government is currently channeling into a new healthcare scheme.