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Transfer pricing in the light of Trump’s tax reforms

Following Donald Trump’s inauguration last Friday, many businesses are keenly awaiting the effect the tax policy announced by the president will have on them. Prepared in association with our colleague Ken Almand of RSM UK, this article describes what Trump’s tax plan will change.

The main change is a cut in the US corporate tax rate from the current 35 per cent to 15 per cent. To encourage activities in the US market, a measure has been adopted permitting businesses to expense capital investments (rather than depreciate). Nevertheless, they will lose the deductibility of interest expense. To repatriate profits held by US multinationals offshore, Donald Trump is going to introduce a one-off tax holiday offering a reduced rate of 10 per cent. These changes are to boost the domestic economy by increased business activity, investments as well as the repatriation of substantial profits held by US companies outside the US.

Yet even such significantly reduced tax rates must take account of state taxes. The resulting rate will still be much higher than, for example, the corporate tax rate in the UK (that is due to fall to 17 per cent), Ireland (12.5 per cent) and the Czech Republic (19 per cent). As a result, multinationals are not expected to rush to make any major reviews and changes to their existing transfer pricing strategies to ensure more profit arises in the US.

What may have a much greater impact on the application of transfer pricing are the President’s proclamations about substantial import duties on cars manufactured in Mexico. Such rhetoric has already caused policy rethinks at Ford and Toyota. If these proposed measures (one-off depreciation plus the loss of interest deductibility) and proclamations (major import duties) become reality, their impacts will have to be reflected in the transfer-pricing strategies of multinationals operating in the US market to comply with the new US environment and legislation.

It is also disputable what support will be given by the Trump administration to current projects such as the Base Erosion Profit Shifting (BEPS) and related efforts by the OECD and the EU. We can now only say that the implementation of such projects may also be affected by major changes associated with the handover of the government in Washington. Nevertheless, the implementation of specific measures at the EU level through relevant directives continues without interruption, such as the Anti-Tax Avoidance Directive, and amendments to directives including country-by-country reporting which will be required for the 2016 tax period.

For more information please contact the author.
Source: www.rsmuk.com, Ken Almand – What will President Trump’s tax policy mean for transfer pricing?

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