The UK, France, Sweden, Belgium and other jurisdictions, for example, also have announced rate cuts for corporate income tax, with countries increasingly settling on a range between 20% and 22%, according to our data.
Incentives will also be a tool to attract investment going forward. While jurisdictions have agreed to review, change and even forego certain types of tax incentives in light of BEPS and other internationally coordinated tax reforms, this doesn’t signal an end to the use of tax incentives to attract investment.
With R&D investment and jobs so highly prized by many countries, tax policy may take on an outsized role in the ongoing global competition to attract this kind of investment. “Countries have already focused on things like having the right infrastructure and workforce,” says Rob Thomas, Director in our Global Tax Policy & Controversy network. “Despite the focus on aligning tax systems, how a country taxes can still be a differentiator for inward investment — albeit under the constraints of the BEPS project.”
In fact, our outlook for global tax policy in 2018 found 14 of 41 countries polled are considering new offerings to attract R&D investment. In Singapore, for example, the 2018 budget released in February 2018 featured several types of incentives. Businesses investing in R&D projects in Singapore will earn a tax deduction of 250% for employee costs and consumables between 2019 and 2025, up from 150% previously. The government also doubled the deduction on the first US$100,000 of licensing costs for intellectual property (IP) registration and in-licensing to 200% for the same time period.
Canada could be among the countries most profoundly impacted by the new US tax laws. It was for years a lower-tax option, and one that offered access to the US via the North American Free Trade Agreement (NAFTA). For new investment in particular, that has changed, with the marginal effective tax rate on investment (METR) at 20.3% in Canada, compared with a decline in the US aggregate METR to 18.9% from 34.6%, according to EY calculations.
Now could be the time for tax reform. Canadian Finance Minister Bill Morneau has pledged to be deliberative rather than impulsive in reacting to the new US tax laws, according to a CBC report in February. Tax policy debates around the world could mushroom into full-fledged tax reforms, which may include lower corporate income tax rates.
China is another country reviewing its tax policy in the wake of the US reform. The Chinese government itself has significant exposure to tax-policy changes as it is the world’s third-largest recipient of foreign investment. Under the current resident-based tax system, China taxes businesses on their worldwide income. A one-trillion-yuan tax reform plan aims to encourage businesses to invest in China by offering lowered corporate tax rates, value-added tax reforms and tax deferrals on corporate profits reinvested in the country, according to a December 2017 report from the South China Morning Post.
Reactions to US tax reform have come at the multilateral level as well, in particular from the EU. European leaders have raised various concerns in recent months, including that the new US tax law could lead to double taxation and hurt trade, and that it may ultimately not be in line with World Trade Organization (WTO) rules. In March 2018, the EU asked the OECD’s harmful tax practices forum to review the US tax reform, according to a Bloomberg report.
- Although countries are lowering their headline corporate income tax rates, there are other taxes, incentives, exceptions and exit taxes to consider as well when comparing jurisdictions.
- Calculating marginal effective tax rates provides a more complete picture of a multinational’s potential tax exposure on the next dollar invested, as long as the measure reflects state and local taxes, as well as indirect taxes such as excise and payroll taxes.
- Businesses should take a global, holistic view, including reviewing R&D incentives that are available to them.
- Business should keep on top of the myriad tax policy changes as they emerge: how countries are implementing BEPS as well as how they are pursuing their own changes affecting tax rates and incentives.