Elliot Burman author from Mexico News Network, explains how the US may be about to set off an international tax war, as it moves to slash the corporate rate and overhaul the treatment of multinational firms.
The bill looks set to mark the party’s first major legislative triumph under President Donald Trump.
Trump’s corporate tax reforms could spell big trouble for Mexican exports from multinationals. EU members are also going on the offensive citing that Trump will incite an international tax war if the bill passes the US senate on Wednesday.
Tuesday saw 12 Republicans and all Democratic members of the House oppose the bill, which passed by 227 votes to 203, to loud cheers and applause from Republicans in the chamber.
The first issue is the decrease of the US corporate tax rate to 20%. The rate that the United States charges today to companies is 35%, while in Mexico it remains at 30%. If the rate is 10% lower in the United States, the only competitive advantage in Mexico would be lower wages.
The second economic threat is the Zero Rate in repatriation of capital. The current rate is 18%. Siller believes that if Donald Trump manages to get the rate lowered to 10%, there would be capital outflows of between 9 and 11 billion dollars.
Thirdly, Trump intends to levy a new 20% tax on the money that parent companies invest in their subsidiaries outside the United States, which would of course disincentivise FDI into Mexico.
A combination of these three factors could bury Mexico’s export model of high-value merchandise. Together, these measures would cost the US more than $1.4tn in revenue.
To offset the revenue losses, the US is imposing a one-time tax on profits held abroad, levied at 15.5% for cash and 8% for illiquid assets.
To face a new fiscal framework in the United States, Mexico would have to undertake a new fiscal reform that contemplates lower corporate tax burdens and lower spending, which is complex because it is an election year.
