EY commentary on Unified Republican Framework on tax reform

Washington, 27 September 2017

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Michael Mundaca, Co-director of the National Tax Department of Ernst & Young LLP, comments on today’s release of the Unified Republican Framework on tax reform:

“The Framework released today is a welcome advance in the debate about how to reform our tax code. There are obviously a lot of details to be worked out in the legislative process but we now know the broad outlines of the reform package: lower rates, a broader base, and incentives for work, education, saving, and investment.

For corporations specifically, the Framework provides for a significantly lower statutory rate of 20%, an immediately effective 100% deduction of capital investments, and a so-called “territorial” system that provides a 100% tax exemption for dividends from foreign subsidiaries as well as what appears to be an anti-tax haven provision that could subject some foreign earnings to immediate US tax but at a reduced rate.The Framework also includes a partial limitation on interest deductions for C corporations only (although it notes that the appropriate treatment of interest by non-corporates will be considered), and seems to rule out special tax breaks/incentives for US manufacturing. For small and family-owned businesses, the Framework limits the maximum rate on business income to 25%. Easily the most difficult policy development and drafting exercise continues to be how to prevent pass-through owners from recharacterizing personal income into business income that would be eligible for the new reduced rate on such income, an issue the Framework recognizes.

Wording can be the key to predicting where discussions will focus. In several places, the document uses the terms “framework envisions” or “framework contemplates” or “aims to.” In others, it says the framework “includes,” and specifically calls for “rules to level the playing field” between US companies and inbounds.

This release will help re-focus attention on tax reform and should be a signal to taxpayers that it is time to re-engage in the debate."

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This news release has been issued by Ernst & Young LLP, a member firm of EY serving clients in the US.