The new administration has stated that comprehensive tax reform to lower business taxes will be one of its top priorities. This goal of reforming the tax code may be made easier by the fact that Republicans control the House of Representatives and the Senate in 2017. The changes that the administration has proposed largely reflect the Republican Party’s philosophy of lowering tax rates while simultaneously broadening the base through limiting, or in some cases eliminating deductions and credits.
In addition to these tax proposals, House Republicans unveiled a tax reform ‘blueprint’ in June 2016; they intend to develop this blueprint into a formal legislative proposal during 2017. It is likely that the administration’s proposals and the House blueprint will serve as the starting points for negotiating changes to current U.S. tax law.
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The Current Administration’s Tax Proposals
During his campaign, the President proposed the following major changes to business income taxes:
- Reduce the corporate income tax rate from 35% to 15%
- Eliminate the corporate alternative minimum tax
- Allow companies engaged in manufacturing in the U.S. to choose between the full expensing of capital investment and the deductibility of interest paid
- Eliminate most deductions and business credits, except the research and development credit
- Enact a deemed repatriation of currently deferred foreign profits at a tax rate of 10%.
House Tax Reform Blueprint
Under the House blueprint, the corporate tax rate would be reduced to 20 percent. Like the administration’s proposal, the House blueprint would eliminate the corporate alternative minimum tax. Under the blueprint, interest expense could be offset against interest income, but there would be no current deduction for net interest expense.
The administration’s proposal to provide full expensing of capital investments in year one is narrower than the House blueprint, which does not limit its proposal to companies engaged in U.S. manufacturing. Similar to the administration’s proposal, the House blueprint calls for eliminating most current law business deductions, credits, and incentives, but not the research and development credit.
The Senate has not yet put forth specific tax reform proposals; however, Senate Majority Leader Mitch McConnell has said that any tax changes should not add debt to the federal deficit. He did note that decisions about such revenue neutrality should also factor in the broader economic effects of tax changes.
Taxation of Foreign Income of U.S. Companies
The administration’s tax proposals do not discuss how to tax active foreign sources of income of U.S. multinationals. Unlike most other developed countries, the U.S. taxes companies on worldwide income, but generally allows companies to defer paying taxes on offshore earnings until those earnings are repatriated to the U.S. In the past, some U.S.-based companies have worked around current taxes by keeping roughly $2.5 trillion in profits offshore. These profits can be used to support foreign operations.
Thus far, the administration’s discussion of international tax issues has focused largely on a call for a one-time deemed repatriation of accumulated deferred foreign income at a rate of 10%. The Republican blueprint has a similar proposal with an 8.75% tax rate, but would go further by moving the U.S. from an international tax system, which imposes taxes on worldwide income, to a territorial system, which only imposes taxes on income earned in the U.S.
The results of the 2016 U.S. elections and the Republican control of the White House and Congress can have a significant impact on the direction of tax reform over the next few years. The U.S. administration and the Republican-led Congress are expected to push for large corporate tax cuts designed to promote economic growth and domestic investment. Still, prospects for the enactment of such legislation remain in question given the concern among some Republicans about increasing the federal debt, as well as the belief by many Democrats that corporations, and in particular multinational companies, pay too little in taxes. Furthermore, unlike House Republicans, who hold a large majority, Senate Republicans only hold a slight majority; this fact may make the passage of any tax legislation more challenging—and more subject to compromise.
The content contained herein is intended for general informational purposes only and does not constitute legal advice. Companies and individuals should not solely rely on the information or suggestions provided in this article for the prevention or mitigation of the risks discussed herein.