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

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.

© Thinkstock

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.

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).