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GRAPHIC-Taxing times: a starting gun on 'corporate tax wars'?
November 23, 2016 / 10:46 AM / a year ago

GRAPHIC-Taxing times: a starting gun on 'corporate tax wars'?

* Effective tax rates graphic: reut.rs/2fQsmwq

* Statutory corporate tax rates graphic: reut.rs/2geWEWw

By Vikram Subhedar

LONDON, Nov 22 (Reuters) - A looming cut in U.S. corporate taxes, high on Donald Trump’s agenda, has triggered speculation that such a move could set in motion a round of cuts in other parts of the world, particularly in Europe, as governments try to maintain a competitive edge in a low-growth world.

British finance minister Philip Hammond is likely to press ahead with plans to cut corporate tax rates to 17 percent in the coming years from 20 percent at the moment.

The implications for the rest of Europe are less clear cut.

For one, there is significant disparity between effective and statutory tax rates as well as in the taxes paid across euro zone countries as the following charts show.

Effective tax rates: reut.rs/2fQsmwq

Statutory corporate tax rates: reut.rs/2geWEWw

A long-running debate on creating a common EU tax has yielded few results. Ireland’s 12.5 percent corporate tax rate stands in stark contrast to France’s 33.3 percent. With chronic slow growth there is little incentive for countries to agree on common taxation policies.

Secondly, in many ways corporate taxation reform in the United States lags steps taken in other developed economies. The statutory rate of 35 percent, unchanged for 16 years, is one of the highest in the Organisation for Economic Co-operation and Development (OECD) countries.

The country’s system of taxing foreign profits when they are repatriated has meant U.S. corporations have stashed hundreds of billions of dollars offshore.

“Corporate taxation is an area where the U.S. has considerable room for ‘catch-up’ when it comes to recent international trends,” said analysts at Standard Life Investments in a note.

Given the Republican Party’s sweep in this month’s presidential elections there is a high chance that the United States will push through corporate tax reform as early as next year.

Some knock-on effects of changes in tax policies could be:

1) Repatriation of U.S. firms’ offshore cash: Estimates on how much cash will be brought back home vary widely. Goldman Sachs expects as much as $200 billion repatriated following tax reform, basing the estimate on a repatriation tax holiday in 2004. The bank expects U.S. firms bringing cash back home to spend the majority of that to buy back their own shares, which would boost earnings per share numbers and likely support equity market valuations.

2) Dollar funding worries in Europe: Deutsche Bank estimates that the vast majority of U.S. firms’ offshore cash is in the eurozone, followed by Britain. A shift of liquidity away from European and other foreign banks to the United States is likely to put offshore dollar funding under pressure, according to Deutsche.

3) Britain: Corporate taxes have already moved steadily lower over the past decade but Brexit has added pressure on Theresa May’s government to take more business-friendly steps. A large budget deficit limits the scope for extensive cuts.

“The fact of the matter is that, in terms of new initiatives, whether it is on corporate tax, benefits, personal tax or new funding Hammond does not have the wherewithal or fire power to push any envelope to over £10 billion,” said James Spence, a portfolio manager at Cerno Capital, an investment firm he co-founded.

“That’s why everything is in the 2s and the 3s and the 4s and the 5s.”

In terms of possible market impact, a lower British corporate tax rate is likely to benefit consumer luxury goods makers like Burberry and financial services firms such as Man Group and Jupiter that generate a significant portion of their profits in the country.

Reporting by Vikram Subhedar; Editing by Mike Dolan and Andrew Heavens

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