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.
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.
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.
Aufwand steuerlich nicht abziehbar
Expenditure not tax-deductible
Income tax free
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)
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.
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).