ECB experts: US tax law could erode Europe’s tax base

ECONOMISTS AT the European Central Bank (ECB) say that the United States’ corporate tax cut should lift the world’s largest economy in the short term, but warn it could erode the tax base in European countries by intensifying global competition for lower rates.

In a short article released Monday, the ECB’s economists say that the cut in business taxes will provide a “significant fiscal stimulus” to growth in the US in the short term. It warned that long-term effects were less clear, especially if the cut leads to larger US budget deficits.

Effects on the 19-country Eurozone were “highly uncertain and complex” but could include an erosion of the tax base if countries around the world compete by lowering their tax rates to attract businesses.

“Lower US corporate tax rates raise the tax attractiveness of the United States relative to other countries,” the report said. “Prior to the reform, the US corporate tax rate stood above the rates of all large euro-area countries, while, after the reform, it is close to the lower end of rates in those countries.”

The legislation, which was pushed by US President Donald Trump and signed into law in December, lowers the corporate tax rate from 35 to 21 per cent, among other changes. The changes took effect January 1.

Meanwhile, the United Nations’ trade and development agency said that as multinational companies return an estimated US$2 trillion to the United States because of the tax law, there could be “sharp reductions” in foreign direct investment worldwide.

The UN Conference on Trade and Development (UNCTAD) noted in their own preliminary report that the tax law includes a one-time tax on accumulated foreign earnings that could free up funds overseas to be repatriated.

UNCTAD Secretary General Mukhisa Kituyi said the impact on investment in the developing world remains unclear.

The agency says nearly half of all global investment is in the United States or owned by US multinationals, which have kept about US$3.2 trillion in earnings overseas.

Agency officials said the main impact could come over the longer term, as multinationals reassess their foreign investment portfolios and the effects of the tax reform play out.

UNCTAD says much will depend on how big multinationals respond. It said five technology companies — Apple, Microsoft, Cisco, Alphabet and Oracle — together hold over US$530 billion in cash overseas, or about one-fourth of the total “liquid assets” believed to be available for repatriation.