US tax cut could hit advanced manufacturing

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A lower corporate tax rate in the US is likely to have negative implications for investment in Australia, particularly for advanced manufacturing.

President Donald Trump recently released his range of tax reform proposals in October, headlined by a dramatic reduction in the US corporate tax rate, from 35 per cent to 20 per cent, bringing it largely into line with the UK.

The Australian Treasury recently published its analysis of the proposal, describing it as part of a global trend towards lower corporate taxation, noting it is the latest to make Australia's "current corporate tax rate increasingly uncompetitive internationally."

The Australian corporate tax rate, which currently sits at 30 per cent for large companies, is being progressively lowered to 25 per cent for small to medium enterprises. 

AstraZeneca CEO, Pascal Soriot, has previously described Australia's corporate tax rate as a "real problem" for investment in the country. 

“We have quality in Australia and productivity is good but corporate tax is a real problem. The UK has reduced their tax rate to 20 per cent and they have an IP patent box of 10 per cent. Sweden has dropped their tax rate to 20 per cent, and they want to drop it further. Australia is still about 30 per cent. They’re talking about reducing it to 28 or 29 per cent by 2022, and 25 per cent 2025, but by then the world will have moved on,” he told PharmaDispatch.

US-based pharmaceutical industry leaders, led by Pfizer's Ian Read, have become increasingly outspoken about the need for lower corporate taxation in the US.

Several companies including Pfizer have engaged, or attempted to engage, in mergers designed to shift their corporate headquarters to lower taxing jurisdictions, notably the UK and Ireland. Former US President Barack Obama changed the country's tax laws to block these mergers, called 'tax inversions', while President Trump's proposals appear designed to encourage US-headquartered companies to invest further in the country.

According to Treasury, the proposed cut in corporate tax could result in an investment boom in the US, with the rest of the world "likely to experience reduced foreign investment and, as a consequence, lower GDP and real wages than might otherwise be the case."

It says the negative impact on Australia could be permanent unless government takes action to maintain the country's competitiveness, particularly for advanced manufacturing, a potential outcome that would concern industry and government.

"Industries like advanced manufacturing do not tend to rely on fixed factors. Rather, such industries tend to be located in countries with skilled workforces and strong institutional settings – features shared by many OECD countries. As such, location decisions for these sorts of industries are susceptible to changes in the level of tax that a country applies to an investment."

It adds that, with history as a guide, other countries will respond to any changes in the US by lowering their own rates of corporate taxation.

"Such responses would increase the potential negative impact on investment in Australia," it says, adding the "cumulative effect" would ultimately depend on how Australia responds.