Tariffs, investment and deglobalisation: KPMG tax expert Tim Sarson takes us through what Trump’s second presidency means for UK businesses and their tax bills
Two political events in the last fortnight are likely to shape the tax landscape UK businesses face in the coming years: the Budget and the election of Donald Trump.
Surely what Rachel Reeves does here is more relevant than events across the Atlantic? Trump and his party might hold the future of Ukraine and the NATO alliance in their hands, but they don’t get much say over the future of Agricultural Property Relief or the rate of Employer’s National Insurance.
That may be so, but if you’re a British business with exposure to the US market then what happens there in the coming months might be many times more important even than your business rates bill or the cost of the national living wage.
What do we know? First, Trump has been elected as President and his party now controls the US Senate and the House of Representatives. Tariff decisions are de facto the prerogative of the President but most tax policy has to pass through Congress. Trump does have some authority but it’s not unfettered, so the Republicans’ lock over the so-called “trifecta” is important because it means they can enact a lot of what’s on their to-do list.
Trump’s tariffs
First out of the blocks possibly as early as next January are those threatened tariffs of up to 20 per cent on all goods imported into the USA. Tariffs, or customs duties, are a type of indirect tax. You pay them when you import goods across a customs border – “you” being whichever person or company happens to own them at the time. Tariffs make the retail price of goods behind the border more expensive, and they make it harder for importers to compete on price with local manufacturers.
We’re already seeing firms accelerate deliveries into the US in anticipation. But if it does happen as sweepingly as has been implied then not only will we inevitably get retaliatory tariffs here in Europe, with the UK having some awkward decisions to make about side-deals and whose side we’re on, but we may see supply chains shifting. It happened before Brexit, and it’ll happen again next year.
But it’s not just about tariffs. US tax policy could further ratchet up the pressure on international business models.
Potential US tax reforms
American governments have a habit of introducing massive tax reform packages that directly influence international trade flows. The Republicans pushed through the Tax Cuts and Jobs Act (TCJA) in 2017, and more recently Biden’s Democrats presided over the biggest green tax giveaway ever, the Inflation Reduction Act (IRA). Since 2017 the rate of US foreign direct investment into Europe has slowed notably. At least some of the earlier rapid growth was down to tax differences.
Many provisions of the TCJA come to an end in 2025. Renewing them all is estimated by the Congressional Budget Office to cost a cool $4 trillion over 10 years. The Democrats planned to use the corporate tax system to plug some of the gap, but Trump seems to be talking up the opposite: he’s suggested cutting the corporate rate to 15 per cent on domestic production, possibly paring down parts of the IRA to pay for some of it. That combined with tariffs equals radical re-domestication of production. The deglobalisation we’ve seen since the 2008 financial crisis could be set to accelerate.
And finally, the world of international taxation and consensus may become a very challenging environment. The US right is lukewarm about the OECD’s Pillar 2 global minimum tax and is not a fan of the Under Taxed Profits Rule (UTPR) that’s due to come into force here next year, as well as the unilateral digital services taxes that are likely to spring up if BEPS Pillar 1 (which adjusts the amount of profits taxed in market jurisdictions) fails. One thing that may have slipped under the radar is that the GOP (Republican Party) could seek to fund some of the tax bill with UTPR retaliatory tax measures against foreign-headquartered companies.
Expect a range of measures over all of these, which will make international taxation yet more complicated in the coming years.
Tim Sarson is head of tax policy at KPMG UK