Time to rethink business tax (again)?

Over the last year, many businesses will have incurred significant costs in adapting to the new global corporate minimum tax, but following the US election in November 2024, there are concerns about the effectiveness of this measure without US support. 

It’s unlikely that we will see the UK or EU repeal their implementation of the global minimum tax during 2025, but they may reconsider other policy choices in light of US tax changes which will have a global impact.

On both sides of the Atlantic, the search for the right tax mix and level of taxation to cover public spending and stimulate growth will underly policy decisions. Where the US may rely on substantial business tax cuts and a potential increase in tariffs, the new European Commission’s focus is on energy taxation and further harmonisation of tax systems across the Member States. The UK’s Labour government has promised corporate tax certainty, but also announced significant employment tax increases falling on business.

One thing is clear. Multinational businesses will have to keep adapting to navigate the tax landscape to select the right investment opportunities and prevent reputational risks that arise from tax disputes.

Business tax under the UK Labour government: “pro-worker and pro-business”?

The Labour government published their “Corporate Tax Roadmap” at the Autumn Budget in October 2024, hoping to assuage concerns about its stewardship of the tax system. This publication was, however, accompanied by significant changes to employers’ national insurance contributions which are predicted to affect employment and wages.

The Roadmap emphasised that, until 2028 or 2029, the corporation tax rate would remain capped at 25%, and that the patent box and generous capital allowances remain in place. It reiterated the government’s commitment to the global corporate minimum tax, and the government emphasised that, apart from noted changes in the Roadmap due to consultation or unforeseen developments, there should not be any further surprises.

For sectors such as private equity, Labour’s personal tax measures will also be crucial. As details emerge of the proposal to tax carried interest as income (albeit at lower rates), industry may question the stability of the new regime. Other countries’ special tax regimes for new arrivals may well look attractive to highly-paid and mobile talent – just how attractive will depend on the final design of the new residence-based taxation regime that will replace the current “non-dom” rules.

The UK government has also announced that it will increase the tax authority’s compliance workforce by almost 20%, which will inevitably translate into increased investigatory activity. We expect continued scrutiny of tax deductions for debt financing and the pricing of intra-group transactions. The significant tax savings from self-employment will also lead to continued disputes over the dividing line between employment and self-employment.

US tax under Trump: make business great again?

Following the November 2024 election, the Republicans now hold the Presidency and both Houses of Congress. At a minimum, temporary tax cuts introduced during President Trump’s first term are expected to be extended or made permanent.

But the proposed tax changes may go much further. Federal corporate taxes could be reduced to as little as 15% for some US businesses making products in the US. Tax incentives for green investment, enacted under President Biden in the Inflation Reduction Act, may be reduced. President Trump has also signalled the possibility of significant increases in tariffs which would have fundamental repercussions for businesses exporting to the US.

Businesses based in countries (such as the UK and many EU Member States) that impose a digital services tax face the prospect of potential retaliatory tariffs against measures which are seen as taxing successful US businesses.

Republicans also consider elements of the global corporate minimum tax detrimental to US business. President Trump could seek to impose similar retaliatory measures against countries that have implemented the tax. The UK and EU Member States would again be amongst those jurisdictions, and the possibility of such retaliatory measures could ultimately mean that the international agreement on the global minimum tax (and its implementation) may collapse in the long-term. 

European Commission’s vision for 2025 to 2029

It appears that energy taxation and encouraging investment into clean technologies will be the top priority for the incoming European Commission from 2025. For the first time, the EU tax portfolio will fall within the remit of the new Commissioner for Climate, Net Zero and Clean Growth, Wopke Hoekstra.

If President Trump scales back comparable environmental incentives in the US, it’s possible that the EU’s policy in the area may be set with one eye to attracting investment that might otherwise have been located in the US – though one challenge will be how the EU funds the huge cost of a programme comparable to the US Inflation Reduction Act.

Despite the Commission’s high-profile win before the European Courts in the Apple State aid case, opening new tax State aid investigations is unlikely to be a high priority. The fact pattern in Apple was unique among the State aid cases, and other court decisions have been clear that Member States are free to set their own tax rules.

It’s more likely that the Commission will continue to push for the broader harmonisation of corporate tax rules across the EU. But given previous failed attempts, it would be surprising if wholesale reform happened during Hoekstra’s tenure (let alone in 2025). More promising projects would be the proposed decluttering of EU tax rules, and its continued fight against aggressive tax structuring.

Hoekstra also appears to be in favour of rolling out a digital services tax across the EU, if the US does not agree to a significant reform of digital taxation to shift tax from the US to countries using US technology. (Spoiler alert – the US will not agree to this.) Nevertheless, we would be surprised to see an EU-wide digital services tax agreed before the end of 2025. If such a tax was imposed, US trade sanctions would be likely to follow.