There is a general consensus that the November 2016 US elections have made the enactment of tax reform significantly more likely, but not certain. As a result, I am now spending substantial time assisting clients in understanding the potential impact of various tax reform proposals on their current and anticipated business operations. Clients based outside the US, which have US operations or invest in the US, are likewise enquiring about the impact of potential US tax reforms.
How likely is it that major corporate tax proposals will be enacted?
The last major structural US tax reform legislation was enacted in 1986. In the intervening 30 plus years, the US corporate income tax has become increasingly out of step with international norms, in terms of matters such as rates and the treatment of income from offshore operations. Although ‘Candidate’ Trump made tax reform a major element of his campaign’s fiscal proposals, we are still awaiting the release of ‘President’ Trump’s corporate tax proposals; however, we hope to have them in hand in the next several weeks to a month.
The tax reform ‘blueprint’, tabled by the House of Representatives Republicans in 2016, is currently the most comprehensive tax reform proposal outstanding. It would convert the US corporate income tax into a border adjustable cash flow (or destination based) tax. This would be a profound change: capital expenditures generally could be written off immediately; there would be no deduction for net interest expense; income from exports would not be taxed; and imports would be subject to tax. The border adjustable feature of this proposal, in particular, has produced a split in the position of key members of the American business community. It remains to be seen whether or not President Trump will support that approach.
The Senate position on corporate tax reform generally, and border adjustability in particular, will emerge only over time, as the year unfolds. In short, if US tax reform is enacted, there will be a corporate component, but it is uncertain whether the basic current architecture of the corporate tax will or will not be fundamentally changed.
How will the deemed repatriation of corporate offshore earnings work?
Most observers expect that any such legislation will generally provide that prior years’ unrepatriated offshore earnings will be subject to a one-time immediate ‘deemed repatriation’ tax (the blueprint would generally impose an 8.75% rate), which would be imposed whether or not the earnings are actually repatriated. The treatment of future offshore earnings remains uncertain, but the blueprint would generally exempt active business foreign earnings from US tax. Moving to a territorial system for future offshore earnings would be significant, but more profound changes would arise from the enactment of the destination based corporate tax, which would (in theory) make the location of production irrelevant in determining the tax liability of a US business group; for example, goods sold to non-US customers would not be subject to US tax, irrespective of whether they were produced in the US and exported, or were produced by a non-US affiliate of the group.
What is the US view on the EU state aid rulings?
The EU ‘state aid’ cases have generated a not insubstantial concern among US policymakers and businesses. At a narrow level, there is concern with the perceived retroactive application of the rulings to prior years. More generally, there is concern that these cases, if allowed to stand, would effectively reduce US revenues. If, as appears likely, back taxes paid to EU countries, pursuant to the state aid rulings, generate credits, this would reduce the level of offshore earnings potentially subject to US tax upon actual or deemed repatriation.
Can you comment on your experience as chief counsel (Republican) to the Committee on Finance of the United States Senate?
My experience as member of the Senate Finance Committee’s professional staff was a highlight of my career. Then, as now, comprehensive tax reform was a major item on the Committee’s agenda. I spent countless hours working with the senators to whom I was principally responsible, ensuring that they had before them suitable analyses of the policy options available to them. The work covered the myriad of issues arising under the US individual, corporate and wealth transfer taxes; and thereafter working with staff colleagues to draft the legislative texts intended to reflect accurately the Congressional decisions made during the legislative process. The days (and nights) were long, but the experience of participating in a process resulting in the enactment of significant tax legislation was more than well worth it.
There is a general consensus that the November 2016 US elections have made the enactment of tax reform significantly more likely, but not certain. As a result, I am now spending substantial time assisting clients in understanding the potential impact of various tax reform proposals on their current and anticipated business operations. Clients based outside the US, which have US operations or invest in the US, are likewise enquiring about the impact of potential US tax reforms.
How likely is it that major corporate tax proposals will be enacted?
The last major structural US tax reform legislation was enacted in 1986. In the intervening 30 plus years, the US corporate income tax has become increasingly out of step with international norms, in terms of matters such as rates and the treatment of income from offshore operations. Although ‘Candidate’ Trump made tax reform a major element of his campaign’s fiscal proposals, we are still awaiting the release of ‘President’ Trump’s corporate tax proposals; however, we hope to have them in hand in the next several weeks to a month.
The tax reform ‘blueprint’, tabled by the House of Representatives Republicans in 2016, is currently the most comprehensive tax reform proposal outstanding. It would convert the US corporate income tax into a border adjustable cash flow (or destination based) tax. This would be a profound change: capital expenditures generally could be written off immediately; there would be no deduction for net interest expense; income from exports would not be taxed; and imports would be subject to tax. The border adjustable feature of this proposal, in particular, has produced a split in the position of key members of the American business community. It remains to be seen whether or not President Trump will support that approach.
The Senate position on corporate tax reform generally, and border adjustability in particular, will emerge only over time, as the year unfolds. In short, if US tax reform is enacted, there will be a corporate component, but it is uncertain whether the basic current architecture of the corporate tax will or will not be fundamentally changed.
How will the deemed repatriation of corporate offshore earnings work?
Most observers expect that any such legislation will generally provide that prior years’ unrepatriated offshore earnings will be subject to a one-time immediate ‘deemed repatriation’ tax (the blueprint would generally impose an 8.75% rate), which would be imposed whether or not the earnings are actually repatriated. The treatment of future offshore earnings remains uncertain, but the blueprint would generally exempt active business foreign earnings from US tax. Moving to a territorial system for future offshore earnings would be significant, but more profound changes would arise from the enactment of the destination based corporate tax, which would (in theory) make the location of production irrelevant in determining the tax liability of a US business group; for example, goods sold to non-US customers would not be subject to US tax, irrespective of whether they were produced in the US and exported, or were produced by a non-US affiliate of the group.
What is the US view on the EU state aid rulings?
The EU ‘state aid’ cases have generated a not insubstantial concern among US policymakers and businesses. At a narrow level, there is concern with the perceived retroactive application of the rulings to prior years. More generally, there is concern that these cases, if allowed to stand, would effectively reduce US revenues. If, as appears likely, back taxes paid to EU countries, pursuant to the state aid rulings, generate credits, this would reduce the level of offshore earnings potentially subject to US tax upon actual or deemed repatriation.
Can you comment on your experience as chief counsel (Republican) to the Committee on Finance of the United States Senate?
My experience as member of the Senate Finance Committee’s professional staff was a highlight of my career. Then, as now, comprehensive tax reform was a major item on the Committee’s agenda. I spent countless hours working with the senators to whom I was principally responsible, ensuring that they had before them suitable analyses of the policy options available to them. The work covered the myriad of issues arising under the US individual, corporate and wealth transfer taxes; and thereafter working with staff colleagues to draft the legislative texts intended to reflect accurately the Congressional decisions made during the legislative process. The days (and nights) were long, but the experience of participating in a process resulting in the enactment of significant tax legislation was more than well worth it.
