The overhaul in the U.S. tax law, passed by Congress and signed by President Trump as 2017 ended, has already had a profound impact on the investment climate of the world’s largest economy. Some of the largest U.S. firms are scrambling to take advantage of the new law’s provisions.
Apple, for instance, will bring the vast majority of its overseas assets — which total over $252 billion —back to the U.S. Though it will pay a hefty fee of $38 billion for this privilege, this will be more than compensated for by the ability to access these resources in the U.S. A new round of mergers and acquisitions has begun, for instance, in the hospitality industry, where catering uniform juggernaut Aramark acquired two of its competitors, deducting nearly $500 million on the deal. U.S. manufacturers that formerly looked to Europe or the Global South are thinking of moving back home — such as the bioengineering firm Amicus Therapeutics, which will build a new production facility in the U.S. for an estimated price tag of $200 million.
Though the law is aimed primarily at American business, it will likely have a huge impact on the global economy given the size and vitality of U.S. investment across the world. A preliminary report by the United Nations Conference on Trade and Development (UNCTAD) said that global foreign direct investment patterns will experience a significant restructuring, as up to $2 trillion of funds may return to the U.S. from abroad. In the short to medium term, economies with large amounts of U.S.-sourced foreign direct investment will experience profound effects as some of this is withdrawn.
However, the same report noted that the tax law has opened up a corresponding, smaller but still significant, opportunity for international business to go to the U.S. or to expand their investments already there. This post highlights the main effects of which international firms, especially those in the U.K. and Europe more broadly, should be aware.
Q: What exactly does the tax overhaul do?
A: The most significant aspect of the bill for international business is the new corporate tax rate, which is now 21 percent. This has been cut from the earlier rate of 35 percent, slashing tax responsibilities by two-fifths of the former rate. As the UNCTAD report notes, many foreign firms with operations in the U.S. were already operating at reduced rates, having streamlined their business structures to take advantage of the many loopholes and deductions that already existed. However, the new 21 percent rate brings the U.S. to par with rates in the EU (22.5 percent average), making it competitive with economies like Ireland, where multinational enterprises have taken advantage of the exceedingly reasonable tax rate to store their hoards of cash.
The most-remarked on parts of the bill relate to U.S.-listed multinationals that are invested overseas, shifting from what UNCTAD calls a worldwide system (in which business’ worldwide income is taxed, which is why so many U.S.-based companies had so much of their assets overseas) to a territorial system (where taxes are only on investments at home). This is why companies like Apple plan to repatriate large amounts of their investments. But, at the same time, it can make the U.S. a promising investment climate for European enterprise that formerly stayed home.
Q: What new opportunities does it create for investment in the U.S. by foreign firms?
A: The most significant opportunities enjoyed by all business under the new law exist in manufacturing and other job-creating investments. On the campaign trail in 2016, then-candidate Trump made bringing American jobs back a centerpiece of his campaign, which is regarded by many as the reason he won the election. The tax law attempts to deliver on this promise. Although it is uncertain how much of the money saved will be applied to new investments, as opposed to the bottom line, the most prominent U.S. companies are taking this opportunity to get in the administration’s good books. Apple, which is based in Cupertino, California, has announced that it will build a new campus in a different U.S. city, which could create as many as 22,000 new jobs.
European firms are already looking at the new opportunities to invest — or invest further — in the United States. Danish firm Novo Nordisk A/S, a pharmaceutical manufacturer of insulin and other treatments for diabetes, announced its intention to acquire manufacturing assets in the U.S. They are following American pharmaceutical companies such as Amicus Therapeutics, which decided to find a location for its new $200 million production facility at home rather than in Europe.
Q: How can my firm best take advantage of the new opportunity?
A: This is a limited, even ephemeral, opportunity for all businesses, but especially non-U.S. businesses. In the first place, the new tax rate becomes the new normal, so any savings from it are a one-off occurrence and further expansion cannot be premised on the largesse of the U.S. government. Second, over time, other developed countries will probably respond to the news from America by cutting their own tax rates so that their economies retain a competitive investment climate.
The opportunity for European manufacturers investing in the U.S. is significant right now because American labor costs are substantially lower than European ones. However, UNCTAD noted that U.S. labor represents an investment in excess of triple its cost in the main Asian economies. So the opportunity is limited — by both time and geography.
Now is the time for European business, especially but not exclusively firms already invested in the U.S., to assess the ways in which they can benefit from the new tax policy and begin to restructure their American operations and assets accordingly.
This doesn’t require you to reinvent the wheel. Blueprint’s entity management software offers a number of elegant, effective and affordable solutions to assist with the restructuring process for firms of any size. Like yours, our business is international, so our assistance is tailored to the needs of firms operating on a global scale. We’re ready to help you through this transition period in any way we can. Please call or email us to discuss our solutions.