The US President Donald Trump last year announced revised corporate and personal tax rates for US companies and citizens. This changes the game for Australian businesses that either have operations in the US, or that source inputs and sales from the US. The challenge for CFOs will be to consider the wider implications of the new tax environment on their business and on their strategic planning.
Steve Healey, Partner at Grant Thornton Australia, says the new US tax regime should generally be good news for Australian middle market businesses that either have existing operations in the US or that are looking to establish a foothold in the US because they are actively expanding.
Austrade's figures show that the US, which has an annual GDP of over US $18 trillion and a population of 323 million-plus people, provides great opportunity for Australian businesses due to its sheer size. For comparison, Australia's GDP is US $1.3 trillion and the population is 24 million.
Those figures alone are enough to pique the interest of CFOs with their sights set on growth, even considering the reduced tax rate in the US.
Benefits for Aussie firms with US links
The tax changes will be a key consideration for Australian businesses with operations in the US or those developing export strategies and perspectives, Healey says.
“We have seen a shift from the US having one of the highest corporate rates in the world to it having a corporate tax rate at 21 per cent - that's considerably lower than Australia's at 30 per cent," he says.
The top US personal tax rate is now 37 per cent. In Australia it is 47 per cent, when including the Medicare levy.
“On one hand, this disparity creates an opportunity for Australian businesses thinking about expanding into the US. But at the same time, it's also important to remember in the US there are state taxes to pay," Healey adds.
Healey believes CFOs will need to also consider carefully how international tax laws, that ensure businesses pay the right tax in the jurisdictions in which they operate, come into play when doing business in the US.
“On the face of it, new US tax laws are good news for Australian businesses wanting to invest in the US. But there are a myriad of details that need to be worked through, including the impact of international anti-avoidance measures," he adds.
Changing the global supply chain
While relaxed tax rules may be good news for businesses with existing US operations — and for those with US ambitions — it's potentially a different story for businesses that don't have the opportunity or appetite to expand into the US.
Public policy in the US is currently focused on strengthening its domestic economy. From a competitive perspective, this means that businesses that are focused solely on Australia might need to consider the relative advantage enjoyed by their US counterparts on a lower tax rate.
“US companies will have greater profits they can retain in their business to become more competitive or return to shareholders. Australian businesses must recognise this, and they need to be agile when looking at their supply chains," says Healey.
This is because even if an Australian business isn't on the ground in the US, it may have suppliers or customers located there. Consequently, the cost of goods from the US may reduce due to lower tax rates and that could help the bottom line for local businesses.
However, US businesses will also have the same advantage and this competitive dynamic is something for Australian CFOs to further consider.
“The situation warrants very careful consideration. It's not just the US's headline tax rate that changes, it has significant impacts on any supplier or customer with a US nexus. So, the onus is on Australian businesses to be as efficient as possible," he says.
Promote your advantages
Healey believes that the changes could prompt Australian businesses to look at how they differentiate their offering and to find a niche to occupy to reduce competitive threats.
There could also be other benefits available in the Australian economy to explore. The federal government-supported research and development grants available for businesses with an annual turnover below $20 million are an example. Export Market Developing Grants are another possible option for exporters.
“We're still going to see research and development activities undertaken here in Australia by foreign and domestic corporations. We need to continue to encourage innovation to help businesses develop their intellectual property. And even though there may be a tax rate differential, Australia is still a country where it's relatively easy to do business," Healey says.
“It's pretty simple to transact across borders from here and that's something Australian businesses should bear in mind. We also have a number of multilateral trade agreements in place. These will still continue, notwithstanding tax changes that are happening," he adds.
While some may view changing events in the local or global economy a potential threat, it may also be an opportunity to make the business more robust, agile and responsive to market trends so the company can continue to survive and thrive. Resilient businesses are set up to withstand change, be it from digital disruption or the significant tax reform of the world's largest economy.
- Australian firms with US operations could benefit from the reduced US tax rate.
- The new tax rate is likely to change the global supply chain as businesses recalibrate to the new tax environment.
- Australian firms might look to compete globally through greater efficiencies or to leverage local advantages such as Australia's R&D tax concessions.