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Tax Advice

Plans for U.S. Tax Reform and its Consequences for German Companies

Plans from the Re­pu­bli­can-do­mi­na­ted U.S. House of Re­pre­sen­ta­ti­ves pro­vide for a sweeping re­form of cor­po­rate ta­xa­tion in the United Sta­tes. Un­der the new U.S. Pre­si­dent Do­nald Trump the pro­po­sal could be­come a rea­lity.

A com­pany’s ta­xable pro­fit would then be cal­cu­la­ted using a strai­ght cash flow state­ment. The cor­po­rate in­come tax rate is set to fall from 35% to 20%. Com­bi­ned with ex­port sub­si­dies for U.S. com­pa­nies with si­mul­ta­neous ta­xa­tion of im­ports, the re­form ob­viously aims to help re­duce the United Sta­tes’ for­eign trade de­fi­cit. The United Sta­tes’ plans could have se­rious con­se­quen­ces for Ger­man com­pa­nies.

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Ta­xa­tion of the cash flow me­ans that the com­pany’s ta­xable pro­fit is cal­cu­la­ted as the dif­fe­rence bet­ween in­come and ex­pen­diture—in­de­pen­dent of the car­ry­ing amounts and depre­cia­tion or amor­tiza­tion of the as­sets.

Example

If a U.S. com­pany purcha­ses a ma­chine worth USD 100,000, the com­pany can de­duct the full ex­pen­diture of USD 100,000 from its “cash flow” tax in the busi­ness year in which the ac­qui­si­tion was made ra­ther than wri­ting down the ex­pense over a num­ber of years.

This con­cept is si­mi­lar to the im­me­diate write-off of low-va­lue as­sets that is well known in Ger­man tax law, but wi­thout any cap on the amount. The “cash flow” tax would re­sult in si­gni­fi­cant li­qui­dity and in­te­rest rate ad­van­ta­ges for U.S. com­pa­nies. The plan­ned re­duc­tion of the tax rate would fur­ther ease the bur­den on these en­ter­pri­ses.

For Ger­man com­pa­nies with busi­ness re­la­ti­ons­hips in the United Sta­tes, the pic­ture is less rosy. Ano­ther core ele­ment of the draft re­form—the bor­der tax ad­just­ment—has po­ten­ti­ally se­rious ra­mi­fi­ca­ti­ons. Ex­ports of tan­gi­ble and in­tan­gi­ble pro­ducts and ser­vices are ex­pec­ted to be ex­empt from the new U.S. tax. At the same time, pro­duc­tion costs in­cur­red for these ex­ports can con­ti­nue to be de­duc­ted wi­thout re­stric­tion. Con­ver­sely, it is ex­pec­ted that cor­re­spon­ding im­ports into the United Sta­tes will be ta­xed in full. The draft does not yet con­tain de­tails of how this will be put into prac­tice, howe­ver. In the case of im­ports to U.S. com­pa­nies, it is ul­ti­mately li­kely that the tax de­duc­tion will sim­ply be wi­th­held by the U.S. com­pany.

German

English

Einfuhr

Import

Aufwand steuerlich nicht abziehbar

Expenditure not tax-deductible

Grenzausgleich

Border adjustment

Ausfuhr

Export

Einnahmen steuerfrei

Income tax free

US-Unternehmen

U.S. companies

Aufwand steuerlich vollständig und sofort abziehbar (Erwerb USA)

Expenditure fully tax deductible immediately (Purchase in USA)

Cash Flow Steuer

Cash flow tax

Einnahmen steuerpflichtig (Verkauf USA)

Income taxable (Sale in USA)

Example

If a U.S. com­pany im­ports a ma­chine pro­du­ced in Ger­many cos­ting USD 100,000, the U.S. com­pany can­not claim a tax de­duc­tion (eit­her im­me­dia­tely or th­rough a write-down). Howe­ver, if the com­pany buys a ma­chine pro­du­ced in the United Sta­tes, it can de­duct the full amount im­me­dia­tely, which ef­fec­tively leads to tax re­lief of 20% in the busi­ness year in which the ac­qui­si­tion was made. The U.S. ma­chine, which in prin­ci­ple costs the same amount, would the­re­fore ef­fec­tively cost the U.S. com­pany just USD 80,000.

As a con­se­quence, from a ta­xa­tion view­point the im­por­ting Ger­man ma­nu­fac­tu­ring com­pany is at a di­sad­van­tage com­pa­red with its U.S. coun­ter­part be­cause the im­por­ted item is USD 20,000 or (USD 20,000/USD 80,000 =) 25% more ex­pen­sive from the per­spec­tive of the buyer in the U.S. This could put cor­re­spon­ding price pres­sure on im­por­ted goods and, in an ex­treme case, lead to the price that can be ob­tai­ned from the Ger­man im­por­ter’s per­spec­tive being re­du­ced by the amount of the U.S. tax charge (20%). This would mean that, fi­nan­ci­ally, the Ger­man com­pany would be sub­ject to the U.S. tax charge even though it was not re­qui­red to pay the U.S. tax at all.

Eco­no­mists be­lieve, howe­ver, that the U.S. tax re­form could cause the U.S. dol­lar to app­re­ciate in the me­dium to long term. This would mit­igate the ef­fect of the dis­cri­mi­na­tion against im­ports be­cause the com­pa­nies im­por­ting into the United Sta­tes would be­ne­fit from a more fa­vor­able ex­change rate. Yet un­less coun­ter­mea­su­res are in­tro­du­ced in Ger­man ta­xa­tion (for ex­am­ple in the form of a de­duc­tion of the U.S. tax charge from the Ger­man as­sess­ment ba­sis), Ger­man ex­por­ters are li­kely to end up with an ad­di­tio­nal tax bur­den.

Note

For groups with com­pa­nies in Ger­many and the United Sta­tes, the U.S. tax re­form would greatly in­crease the si­gni­fi­cance of the trans­fer pri­ces bet­ween the com­pa­nies. The bor­der tax ad­just­ment would ef­fec­tively lead to in­ter­com­pany de­li­ve­ries and ser­vices from the Ger­man com­pany to the U.S. com­pany being ta­xed in Ger­many wi­thout this re­sul­ting in a tax de­duc­tion in the United Sta­tes. Con­ver­sely, in­ter­com­pany de­li­ve­ries and ser­vices from the U.S. com­pany to the Ger­man group com­pany would be ex­emp­ted from ex­port tax in the United Sta­tes and be tax de­duc­tible in Ger­many. The U.S. tax re­form would thus lead to an ef­fec­tive tax rate dif­fe­rence in the amount of the Ger­man tax rate. Wi­thin the li­mits of the arm’s length prin­ci­ple, trans­fer pri­ces could be ex­pe­dient here.

It is not yet pos­si­ble to pre­dict with any cer­tainty whe­ther the new pre­si­dent would ac­tually be wil­ling to em­bark on such an am­bi­tious tax re­form and would in fact be able to push it th­rough. Es­pe­cially as re­gards the pos­si­ble im­ple­men­ta­tion of the bor­der tax ad­just­ment, there is still no de­tai­led in­for­ma­tion avail­able (for ex­am­ple about a po­ten­tial tax lia­bi­lity of the for­eign im­por­ter). Ger­man com­pa­nies with busi­ness re­la­ti­ons­hips in the United Sta­tes should ne­vert­he­less keep a close eye on the re­form plans in the U.S.—mainly be­cause of their far-re­aching con­se­quen­ces. Par­ti­cu­larly when con­clu­ding lon­ger-term (supply) agree­ments, they would be well ad­vi­sed to al­re­ady take into con­side­ra­tion the pos­si­bi­lity that a bor­der tax ad­just­ment may be in­tro­du­ced (for ex­am­ple by wri­ting op­ti­ons for ex­tra­or­di­nary notice of ter­mi­na­tion or agree­ment to re­ne­go­tiate the agreed pri­ces into the con­tracts).

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