As Trump begins his term in office, Eve Ryan examines his tense relationship with multinational corporations
ABUSE of international taxation systems has seemingly become a pandemic. When the European Commission declared last year that Apple had benefited from illegal state aid, many pointed out that this was simply another addition to the ever-growing list of international tax avoidance.
Starbucks, Amazon, McDonald’s; all have paid egregiously low amounts of tax in recent years. These companies, and many others, benefit from strange, lucrative tax structures and rulings by individual European states.
International attempts to clamp down on corporate tax inversions have been slow and largely ineffective. However, US President Donald Trump has vowed to clash horns with multinational corporations, forcing them to locate jobs in America, and resist shifting their profits to countries with lower tax rates and large tax credits.
“Republicans have not offered a route out of the apparent ‘race to the bottom’ when it comes to corporate taxation.”
President Trump has taken an aggressive stance by threatening to impose a hefty fine on Toyota in response to a shift in production from the US to Mexico, signalling a willingness not only to punish US multinationals who move jobs or production abroad, but also foreign companies who do so.
As in the past, the Mexican peso fell as investors were reminded of the tension between the incoming administration and the US’ neighbours. Toyota produces more than 1.3 million vehicles in the US each year at 10 production plants in 8 states, while Mexico accounts for roughly 20% of vehicle production in North America.
The Trump administration is also offering these global companies a carrot; Wilbur Ross, the new US Commerce Secretary, has announced plans to lower the US corporation tax rate in order to increase competitiveness and attract business.
According to a 2014 report by the Tax Foundation, a US federal policy think-tank, the US has the 3rd highest marginal corporate tax rate globally, at 39.1%. This is in comparison to Europe’s average corporate rate of only 18.6%.
While cutting the top rates of tax, Congressional Republicans have promised to alter the treatment of overseas corporate profits, expenses, and debt financing. Indeed, many have hailed Republican tax plans as an antidote for a dishonest corporate tax regime.
However, they have not offered a route out of the apparent ‘race to the bottom’ when it comes to corporate taxation. Financial Times economics editor, Chris Giles, estimates that in large, advanced economies, corporate tax rates have fallen from an average of nearly 50% in 1983 to less than 30% in 2015, in a constant attempt to become more competitive.
“International attempts to clamp down on corporate tax inversions have been slow and largely ineffective, but Trump has vowed to clash horns with multinational corporations”
Stephen Moore, Trump’s senior economic adviser, stated last November that an essential part of the administration’s economic plan was to encourage foreign-based US firms to return, and targeted Ireland in an interview with BBC Radio 4’s World at One.
“[US firms] are effectively renouncing their US citizenship and they are moving to Canada, to Britain, to Ireland, to China and Mexico… that is a significant loss of jobs… we don’t want to have them go abroad.”
However, Trump, as ever, is liable to change his mind at a moment’s notice, and the early stock boom following his election win has given way to more uncertainty than Republicans would wish to admit. Spokespersons for Trump have encouraged critics not to take the president at his word, a tactic which may have created anxiety among his proponents, and divisions between Trump’s administration and Republican seniors have not been wholly bridged.
The repeal of the Affordable Care Act, or Obamacare, is one such example. Trump told the Washington Post that he planned to replace Obamacare with “insurance for everybody,” while many congressional Republicans have backed an immediate repeal of the Act. Furthermore, the new President’s economic team and Republicans are split over how to recuperate tax revenue from foreign-based profits.
The uncertainty surrounding US participation in the North American Free Trade Agreement (NAFTA) will become a critical issue for multinational groups in the coming months. Research by the Mexico Institute, a think tank in Washington D.C., has found that almost 5 million jobs depend on trade with Mexico.
Investment in the US will almost certainly depend on a functioning economy, and job insecurity for such a large number of people will hardly attract wary businesses. On the eve of Trump’s inauguration, US stocks on the DOW marked a 5th consecutive day of losses, only amplifying the anxiety felt by businesses.