Beyond U.S. Tax Reform: Assessing the Long-Term Value of a Lower CIT

Reducing the corporate income tax (CIT) rate is often framed as a surefire way for a country to fuel economic investment. However, some tax and transfer pricing experts are less certain of this correlation, which they say is significantly more complex than is typically portrayed in political debates and most media outlets.

Jeffrey Owens, a former OECD director and the current director of the WU Global Tax Policy Centre at Vienna University of Economics and Business, explains in a recent piece in TP Week, “the evidence is ambiguous: some high-tax countries are growing significantly and some low tax countries are not,” he tells TP Week. “It’s a much more complicated argument than what’s generally presented in the political debate.”

“Ultimately, companies will look at the bigger picture of all tax implications within a jurisdiction before deciding to invest. It is not just the corporate tax rate - payroll, property, VAT, etc. all come into play” explains Vertex Chief Tax Officer Bernadette Pinamont in the TP Week article.

Pinamont and Owens are just two of a number of executives, economists and academics cited in the article (subscription required; free trial available), which takes a thorough look at the impacts that can occur when a country lowers its CIT.

Copenhagen Business School Fellow Rasmus Christensen cautions that some OECD countries may respond to the lowering of the U.S. CIT by lowering their corporate tax rate to compete for foreign investment. Indeed, some countries, including China, already appear to be considering this type of response, according to The Wall Street Journal. “There is a question in my mind about how low a country can go with their corporate income tax rate and will they just offset this revenue loss with other new taxes or a broadening of their tax base?” Pinamont says.

Furthermore, “There are also other business factors that can drive investment in a country like proximity to customers or raw material suppliers, so again, the tax rate alone is not the sole answer to spur location in a jurisdiction,” Pinamont says in the article.

Fortunately, tax and transfer pricing experts like Christensen, Owens, Pinamont and others offer more nuanced insights about the global tax and trade impacts of CIT reductions and how businesses might respond to a lower CIT.

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.