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US lays out framework for tax reform

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The Trump administration has published its tax reform plans under the heading ‘Unified framework for fixing our broken tax code’. Besides cutting headline tax rates, the framework would move the existing US ‘worldwide’ tax system to a territorial model.

At the international level, the framework proposes replacing the ‘existing, outdated worldwide tax system’ with a 100% exemption for dividends paid from foreign subsidiaries in which a US parent owns at least a 10% stake. As a transitional measure, accumulated foreign earnings will be subject to a lower (but as yet unspecified) tax rate, paid over a period of years, and with a lower rate for illiquid assets. The framework includes rules to prevent erosion of the tax base, while Congress is tasked with drafting rules ‘to level the playing field’ between US companies and foreign headquartered companies.

Eloise Walker, tax partner at Pinsent Masons, commented: ‘At last, the US is moving towards a territorial tax system, although proposals to deem the significant sums held offshore to be repatriated are likely to be hotly contested by major US groups.’

The framework reduces the corporate rate from 35% to 20%, and will repeal the corporate alternative minimum tax. With effect from 27 September, for a period of at least five years, business investments in depreciable assets other than structures can be written-off immediately. The paper states that interest expense will be ‘partially limited’, although no further information is given.

Changes for individuals include repeal of the alternative minimum tax, the estate tax and the generation skipping tax. It also provides a 25% rate for business income of small and family-owned sole proprietorships (reduced from around 39%). Congress is expected to work on legislation to prevent wealthy individuals avoiding the top personal rate by recharacterising personal income into business income.

‘There is still a long way to go,’ cautioned Walker. ‘US tax reform is at a very early stage, and this framework does no more than set out some key principles.’