Global Tax Alert (News from Washington Council Ernst & Young) | 27 September 2017

US Administration, Congressional Republicans release tax reform framework

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Executive summary

On 27 September 2017, the Trump Administration and congressional Republican leaders released a “Unified Framework for Fixing Our Broken Tax Code” that would reduce the statutory corporate tax rate to 20% and move toward a territorial system of taxing foreign earnings. It would also limit the tax rate applied to the business income of pass-through businesses to 25%, and contemplates that committees will adopt anti-abuse measures to ensure personal income is not characterized as business income.

The consensus on a framework for tax reform follows months of negotiations between Administration officials and Republican leaders in the House and Senate. Many of the details related to the framework will be left to the congressional tax-writing committees to decide, and some tax issues are not addressed in the document, including carried interest and tax rates on investment income. “This unified framework serves as a template for the tax-writing committees that will develop legislation through a transparent and inclusive committee process,” the document said. “The committees will also develop additional reforms to improve the efficiency and effectiveness of tax laws and to effectuate the goals of the framework.”

Detailed discussion

Business

For businesses, the framework explicitly preserves the research and development tax credit and Low-Income Housing Tax Credit, and “envisions repeal of other business credits,” with the caveat that tax-writing committees may decide to retain some to the extent permitted under budgetary limitations. The Internal Revenue Code Section 199 domestic production deduction will no longer be necessary, the framework stated. In addition to the 20% statutory corporate tax rate, the framework “aims to eliminate” the corporate Alternative Minimum Tax, and said committees also may consider methods to reduce the double taxation of corporate earnings, which appears to refer to Senate Finance Committee Chairman Orrin Hatch’s interest in corporate integration.

Immediate expensing would be allowed “for the cost of new investments in depreciable assets other than structures made after 27 September 2017, for at least five years,” though the committees are invited to further enhance expensing. Under the framework, the deduction for net interest expense “incurred by C corporations” will be partially limited, with tax-writing committees instructed to consider the appropriate treatment of interest paid by non-corporate taxpayers.

The framework also includes the statement: “Special tax regimes exist to govern the tax treatment of certain industries and sectors. The framework will modernize these rules to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.”

International

The territorial system under the framework would provide a 100% exemption for dividends from foreign subsidiaries (in which the US parent owns at least a 10% stake). The transition to such a system includes treating accumulated foreign earnings as repatriated and subject to a mandatory tax to be paid “over several years.” Earnings held in illiquid assets will be subject to a lower rate than earnings held in cash or cash equivalents, though neither rate is specified.

A minimum tax appears to be included, along with an instruction for committees to develop additional rules. “To prevent companies from shifting profits to tax havens, the framework includes rules to protect the US tax base by taxing at a reduced rate and on a global basis the foreign profits of US multinational corporations,” the document stated. It also stated: “The committees will incorporate rules to level the playing field between US-headquartered parent companies and foreign-headquartered parent companies.”

Next steps

President Trump’s speech in Indiana on 27 September continues his advocacy for the benefits of tax reform and is his first event to follow the release of the framework document detailing consensus between the Administration and congressional Republican leaders. The release of the framework likely marks the end – at least for now – of negotiations and discussions among the so-called “Big Six,” and moves the tax reform debate more squarely into the House Ways and Means Committee and Senate Finance Committee.

Ways and Means Committee Chairman Kevin Brady has said a Chairman’s Mark of tax reform legislation will only be released when an FY 2018 budget resolution is completed by the House and Senate. “Now it’s time for the Ways and Means Committee to build on this momentum and deliver legislation that President Trump can ultimately sign into law,” Brady said today. “We are closer than ever to finishing what we have started for the American people – and 2017 is our year to make it happen.”

Both chambers must approve the same budget resolution in order to provide reconciliation instructions that will allow Senate passage of a tax reform measure with the votes of 50 senators (and the Vice President breaking the tie). The House Budget Committee passed an FY 2018 budget resolution in July that provides for deficit-neutral tax reform under reconciliation, but it has not been put to a full House vote.

Senate Majority Leader Mitch McConnell yesterday said the Senate Budget Committee will mark up an as-yet-unveiled FY 2018 budget resolution next week, and cited an agreement between Senators Bob Corker and Pat Toomey, which others have said paves the way for reconciliation instructions to provide for tax reform legislation that results in a net tax cut of US$1.5 trillion over a 10-year period.

For additional information with respect to this Alert, please contact the following:

Washington Council Ernst & Young, Washington, DC
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