Business tax and personal tax of US citizens living in Australia.
“On business taxes, Trump intends to reduce the company tax rate from 35 percent to 15 percent – my view is that this is unlikely to happen, given that the cost to the US revenue would be in the trillions* Probably a compromise package will get through Congress under a Budget reconciliation process.
This proposal would also come with some odd base-broadening. Manufacturers and other businesses would be able to claim investment in capital upfront (rather than over time), but will not be able to claim interest deductions if they do so. This is an imbalanced approach if one takes the view that it is economic gains that should be taxed. It is also likely to attract some odd structuring.
One feature of the US economy is that it contains a substantial number of businesses located in transparent or pass-through entities. Trump has indicated that these entities will be optionally entitled to the 15 percent tax rate at the owner level, rather than the personal tax rates of 25 percent or 33 percent. This will encourage workers providing services as employees to ‘incorporate’ into a business structure, given an 18 percent difference between the top marginal rate and the business rate. How this would be dealt with is unknown, but there are clearly strong equity issues associated with this measure.
In terms of his effect on the global tax agenda, his antipathy to international co-operation suggests he is unlikely to embrace the OECD’s BEPS agenda, at least one with an international branding.
A sub-text of Trump’s plan is closing concessions and loopholes. Such ‘closures’ can fill holes in funding packages – something he is likely to need for this tax plan.
While Trump is seeking to promote business activity ‘at home’ rather than ‘abroad’, this ironically may give rise to implicit support for measures which assist US firms reduce taxation offshore.
A lower corporate tax rate in the US – even if not as far as 15 percent – is likely to increase pressure on the Australian Governments to reduce our corporate tax rate. The world appears to be moving to a corporate tax rate band of between 17 percent and 25 percent. The US, Japan and India are three major outliers, currently. If the US rate is significantly reduced the pressure for corporate taxation in a competitive band for smaller and medium economies will be even greater.”
“Trump’s victory, combined with a Republican-dominated Congress, means there are likely to be some long-awaited changes to US tax law, which will be very positive for the 80,000 US citizens living in Australia.
Income Tax rates overall will come down and the top individual marginal tax rate will be reduced to 33 percent from 39.6 percent. This will create a larger differential between Australian and US individual income tax rates. Such a differential will allow US citizens living in Australia to more effectively utilise investment vehicles such as family trusts and superannuation to reduce their global effective tax rate without inadvertently triggering US tax.
In addition, the infamous US death tax (AKA Gift and Estate tax) will be removed. This will eliminate what is currently a tax of up to 40 percent on the estates of US citizens who die holding more than $5.5million USD in worldwide assets. Australian investors holding US assets can also breathe a sigh of relief, as currently the threshold before paying US estate tax upon death is only $60,000 USD, over which the tax kicks in.
However, the best tax news of all for US citizens living here is the proposed repeal of the net investment income tax (NIIT) or ‘Obamacare’ tax. This 3.8 percent tax on passive income has left a sour taste in the mouth of higher-income earning US citizens in Australia since 2013 when it was first introduced. Under the Internal Revenue Code no foreign tax credits can be used to offset this tax, effectively leading to a ‘double’ tax by both Australia and the US on the same income. It's repeal will be one less thorn in the side of US taxpayers outside of the US.
Over the last few years, US citizens living in Australia have had to deal with the introduction and complexities of the onerous FATCA regime, under which they have had to disclose foreign financial assets and have faced significant penalties apply for noncompliance. The number of US citizens relinquishing citizenship in the last 3 years has increased by over 42 percent. The Trump policy proposals to cut tax rates, remove estate taxes and repeal the Obamacare tax will provide some considerable and welcome relief to them.”
*The US Tax Policy Centre (TPC) in conjunction with a Penn-Wharton modelling team have concluded that Mr Trump’s tax program will cost about $6.2 trillion over the first 10 years in lost revenue. This is before additional interest costs from the increased deficit and macro-economic effects. About three quarters of this loss of revenue is from the business taxation measures.
Senior Communications Manager, KPMG
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