While much of our attention this year has been on trade issues, of which more later, you may have become aware more recently of a major tax challenge as media reports have focused on certain provisions in the ‘One Big Beautiful Bill’ (OBBB) that is being considered by Congress. BAB wrote to the Senate Finance Committee earlier in June to highlight concerns that our members have raised with us and which we, in turn, have raised with the UK Government.
You can see our letter here, but, in short, section 899 as drafted, gives the US administration the right (although not the obligation) to impose progressively higher withholding taxes on the US subsidiaries of foreign companies from countries which impose certain taxes on American Companies which are deemed by the US to be discriminatory. These taxes include the Digital Services Tax (DST), the Undertaxed Profits Rule (UTPR) and the Diverted Profits Tax (DPT), all of which the UK has.
Whatever the motivations behind section 899, and they could be genuine anger at what are considered to be unfair targeted taxes on US companies, or to raise revenue, to give leverage in other negotiations or to encourage overseas companies to domicile in the USA (or, indeed, all of the above), the potential for disruption of these provisions, if used, is enormous. Estimates for new taxes that might need to be paid by UK companies, that I have seen, are very significant, and certainly big enough for companies to have to consider restructuring options and changes in legal domicile; an inversion going across the Atlantic in the opposite direction to what we saw a decade and more ago to Ireland in particular.
We know that the UK government is deeply engaged with this issue at the most senior level, as is the international financial services sector and we will keep you posted as we hear of developments. For what it is worth, and everyone will have their own view of course, BAB was not supportive of the DST when it was introduced as it created the precedent of taxing revenues rather than earnings. On the other issues, tax really is a zero sum game; a dollar paid in the UK or anywhere else, is a dollar that won’t be paid in the USA and in the global competition for tax revenue, the US feels it has been disadvantaged because of the international success of its companies.
And back to trade: BAB was pleased that the UK and US were able to announce they had reached agreement on the general terms of an Economic Prosperity Deal on May 8th and all credit should be given to the UK government for being the first country to reach such an agreement. It is a little disappointing that the two signature tariff reductions that were committed to in this agreement, on cars and steel, are not yet in place but we remain optimistic that they will happen. In fact, recent comments from the US Commerce Secretary and more optimistic noises from the UK side, suggest an announcement may be imminent.
If you read the agreement, it is clear that there are issues on both sides that needed to be resolved, with particular concerns from the US side around supply chain security in the steel sector. Our sense, for planning purposes, is that the 10% ‘reciprocal’ tariff is here to stay for the foreseeable future and it is no surprise that the numbers released on June 12th for UK exports to the US, showed the sharpest decline on record.
The terms sheet also includes a much broader and more ambitious commitment to address non-tariff barriers, build on Mutual Recognition Agreements and look for equivalence in each other’s regulatory regimes; there is a further commitment to negotiate an ‘ambitious set of digital trade provisions’ and to strengthen the partnership on economic security issues. Sharp eyes may also have spotted the commitment by the UK to ‘improve the overall operating environment for pharmaceutical companies operating in the UK’, a major issue that BAB has highlighted on several occasions. All in all, there is a lot to like in the scope and breadth of the ambition, and we hope that both sides will make the resources available to negotiate the details, which is no small task. BAB will provide a detailed analysis of the agreement in the next few weeks.
Since starting this newsletter at the end of last week, events have accelerated in the Middle East, and geopolitical risk continues to cast a major shadow on business confidence. In times like these, the US UK partnership has historically been a source of stability, and we should hope this still holds true.
Our convening program continues through June with our big celebration of US-UK investment with the TransAtlantic Growth Awards in London on June 19th and the launch of our latest Trade Guide to the UK in New York on June 26th. You can find details on these and all other BAB events at www.babinc.org or from your BAB contact.
All good wishes
