The US is all set to become a tax-haven for most companies wishing to save tax after the Trump administration last evening announced lowering corporate tax to as low as 15 percent from the present 35 percent.
Currently, several Indian tech startups including the likes of Flipkart, Grofers, Practo, Capillary Technologies, adNear, TonBo have migrated to nearby Singapore.
Firstly, the island nation has an attractive corporate tax rate of just 17 percent compared to India’s 33 percent. Secondly, there is zero tax on capital gains. And thirdly it is very close to India geographically. For any documentation or compliance, Singapore is just 3-5 hours away by flight, depending on the city you’re flying from.
The US has been an attractive market, for those wishing to tap the fortune 500 companies. Product software companies such as Druva, Freshdesk, Postman, Zoho, have already registered themselves there.
In the 1990s, companies such as MakeMyTrip, MindTree, Infosys, Wipro, and Cognizant incorporated in the US to be closer to their clients and to list on a NYSE or a NASDAQ to tap the capital markets.
Larger unlisted tech companies such as a TCS or HCL Technologies already have incorporated US subsidiaries ages back.
However, with the US becoming a 15 percent corporate tax nation, Prime Minister Narendra Modi will find hard to stop an out flux of India’s new generation of tech startups towards the Trump land.
Donald Trump also plans to reduce the tax on profits brought by MNCs from overseas to US shores from 35 percent to 10 percent. This could help a Paytm or Flipkart reduce its tax liability by over 25 percent. It also makes it easier to route money from foreign investors into such companies. Thirdly, India has a rule of debarring listing of companies which have not recorded profits for last three consecutive years.
Incorporating in the US will make the listing on a NASDAQ easier for any Indian Unicorn.
Already, many companies have incorporated a US arm. Shopclues India, for instance, is owned by Clues Network Inc, which has received investments from American VC firms.
The effective date of the new tax rate could be from January 1, 2018. The US is likely to become as attractive as a Mauritius, which also has a flat 15 percent tax rate for individuals and corporates alike.
The move by Trump may also bring back a lot of VC funds to US shores which now route money into Asia or elsewhere through Mauritius. The investors make a yearly trip to Port Louis, the capital of Mauritius to hold a board meeting or just to get their passports stamped.
VC firms such as Accel, Bessemer, Clearstone, Matrix, Nexus Venture Partners, Sequoia Capital, and Norwest Venture Partner, which are heavily investing India, are all registered in Port Louis.
Capitals gains tax will also be lowered by 3.8 points to 20 percent in the US in the proposed plan, making investors flock back to the US.
It could also negate the tax advantage which many US corporations such as Microsoft and Google enjoy by incorporating in the Ireland, which has a corporate tax rate of 12.5 percent.
The NASDAQ hit record highs yesterday after news of the new tax plan broke from the White House.
Clearly, as countries lower tax rates to invite investments at the same time impose immigration barriers, Asian countries such as India and China will find hard to retain their growing tech corporations inside the home.
China, which houses corporations such as Alibaba and JD has a corporate tax rate of 25 percent.
An out flux of companies would add to the IP and GDP of the western nations, even as jobs could still be created in Asia or Africa where the workforce is cheaper. Welcome to the new realm of globalisation.
(This is an opinion piece)
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