Low corporation tax as a means of differentiation and “national competitive advantage” is in the news. Hungary’s government is to cut its corporate tax rate to the lowest level in the EU in a sign of increasing competitiveness among countries seeking to lure foreign direct investment. The country’s Prime Minister Viktor Orban says a 9 per cent corporate tax rate would be introduced in 2017.
Hungary currently taxes companies at a rate of 10 per cent on profits up to 500m forints ($1.74m) and 19 per cent above that level. The government stated the new single band would apply to all businesses.
In the US, President-elect Donald Trump has proposed lowering the Federal Corporation tax rate to 15 per cent from 35 per cent in an effort to put more money into the hands of businesses to hire, innovate and expand.
More importantly, he has advocated a special corporate tax repatriation holiday rate, whereby corporations with money stashed overseas would be able to pay a tax rate of just 10 per cent on that income in order to bring it back into the US.
This proposal is thought to be a major attraction for some of the largest US multinationals.
There are five companies in particular – Microsoft, Apple, Pfizer, GEC and IBM – that would stand to benefit the most, since they alone account for more than a sixth of the almost $2.5trn estimated amount of cash held overseas.
We are also hearing about the importance of corporate tax competiveness here in the UK. Ahead of the Autumn Statement, Prime Minister Theresa May stated she was committed to keeping the UK’s corporation tax rate the lowest in the G20, despite Trump’s pledge outlined above.
Former chancellor George Osborne had said he would cut the rate to 15 per cent, having already cut it to 17 per cent from 28 per cent when he took office. That said, the Treasury has since indicated the rate is unlikely to fall any further past the current 17 per cent.
It is worth noting the UK’s rate is already dramatically lower than its competitor countries.
Aside from the US (with its current rate of 35 per cent), Germany’s is 29.9 per cent, Japan’s is 32.3 per cent and France’s is 33.3 per cent.
For UK SME owners, the lowering of the corporation tax rate is a useful counter to the increased tax on dividends
For UK SME owners, the lowering of the corporation tax rate is a useful counter to the increased tax on dividends.
Self-evidently, the lower the corporation tax rate falls compared with personal tax (and National Insurance contributions), the more attractive trading through a company looks to reasonably successful businesses.
Advisers will be aware of this trend and should be equipped to have discussions with clients on the optimum ways of investing and extracting corporate funds.
For SME owners, while business and personal financial planning are distinct, they also need to be considered together, especially in relation to funds not needed for the business. The value of informed advice on how to best deploy these funds is substantial.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn