Stateside Kiwi companies could benefit from US tax overhaul

Friday 6th October 2017

US President Donald Trump's tax overhaul could benefit New Zealand business operating in the world's biggest economy although the devil lies in the unknown detail.

Trump aims to enact a package of tax cuts for corporations, small businesses and individuals before January, pledging that sharply lower taxes will boost US economic growth, jobs and wages. Among other things, the nine-page tax reform - unveiled last month - would drop the corporate income tax rate to 20 percent from the current 35 percent in a bid to make US companies more competitive. According to the tax plan, the average in the industrialised world is 22.5 percent. New Zealand's is 28 percent.

It also includes a one-time, low tax rate on wealth already accumulated overseas to remove incentives to keep money offshore rather than repatriating it, with the New York Times reporting that as much as US$2.6 trillion in such profits sits in offshore subsidiaries of US corporations.

Both of these proposals have the potential to affect New Zealand businesses operating in the US although John Cantin, a tax partner at KPMG, warned there is a great deal of uncertainty about what the final package will look like as "there are no guarantees about any legislation changes in the US. This is certainly high-level and very much subject to implementation," he said.

While Trump may hope to push the reform through this year the expectation may be that it happens next year and the reality could be even later, Cantin said.

The Republican-controlled House of Representatives this week narrowly approved a fiscal 2018 spending blueprint containing a legislative tool enabling a tax bill to pass by a simple majority vote in the Senate, where they hold 52 of 100 seats, according to Reuters.

However, the tax reform plan has already come under fire.

Democrats argue it benefits the wealthiest Americans while raising taxes on the middle class and cutting spending on social programmes while some Republicans question the elimination of certain deductions and have raised red flags about increased debt levels.

Mainfreight chief financial officer Tim Williams told BusinessDesk the move was positive but that the company wasn't banking on it being implemented swiftly. "It is a benefit to us if it does occur ... but until it gets passed in legislation you can't count on it because it has a lot of hurdles to get over in the meantime," he said.

The Auckland-based transport and logistics firm has global operations and currently pays around 41 percent or 42 percent taxes in the US, a combination of the 35 percent federal tax and 6 percent-to-7 percent state taxes. If the reform gets through it could potentially pay around 26-to-27 percent, which represents savings of $2 million to $3 million tax per year, he said.

The company generates around 25 percent of its $2.33 billion of annual revenue in the US and the US market contributes around 5-to-10 percent of its profit.

While on the face of it lower taxes should be positive, KPMG's Cantin noted it will depend on how the package is funded - something that is not yet clear. According to the tax plan it will be fully or mostly paid for with a combination of economic growth and reforms that broaden the tax base, and by eliminating special interest tax breaks. In some cases, if certain deductions are eliminated, that might have an offsetting impact, said Cantin. Also, companies will need to look at their imputation credit positions, he said.

"If you are paying out dividends and you’ve got mainly New Zealand shareholders, you will still want to be paying tax in New Zealand as opposed to the US," he said, adding there is still a bit of balancing to think through. "It's not as straightforward as thinking: 'the US tax rate is going to be 20 percent, it's 28 percent in New Zealand, so I'll pay tax in the US'," he said.

Another result might be that US companies would see if they can have more income in the US rather than less and "there would be an encouragement to produce in the US rather than elsewhere." While this could create more competition in that market, potentially putting New Zealand companies at a disadvantage, Cantin said companies will need to assess all their costs, not just tax. "If it's possible to produce something for half or less, whereas doing it in the US doubles your prices, that has a profit impact before tax," he said.

Other New Zealand companies are also taking a cautious stance. A spokeswoman for Xero said the company "closely monitors tax matters in jurisdictions where we operate but note that this is only at the proposal stage".

"I think the message for New Zealand businesses is that it is very interesting, they do need to keep an eye on it, and give some thought to what differences it might make to their businesses but it's early to act on it and say: 'this is what I should be doing next'," Cantin said.

(BusinessDesk)

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