Trump Proposes International Tax Reform

The Trump administration on April 26 released a one-page fact sheet outlining principles for overhauling the tax code that include, among other things, lowering the top income tax rate for corporations and passthrough entities to 15 percent.

Many of the principles echo those that then-presidential candidate Donald Trump put forward on the campaign trail in 2016. The administration did not couch its principles in legislative language, nor did it provide technical descriptions explaining how specific provisions would operate. Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn explained at an April 26 press briefing that the administration would develop those details in consultation with congressional leaders and release a formal proposal later this summer.

For observers with a particular interest in how this proposal might impact the international tax provisions of the U.S. Internal Revenue Code, some of the following provisions are noteworthy:

Business provisions: Significantly lower rates and a territorial tax system. The White House is continuing with Trump’s campaign pledge to lower the corporate rate down to 15 percent (from 35 percent).

Territorial tax system: Significantly, the plan also calls for a transition to a territorial system of taxation, meaning domestic multinational businesses would only be taxed on their income connected with the US. Systems like these are much more common around the world, which explains why the fact sheet says the proposal would “level the playing field for American companies.” This was likely the biggest change from the Trump campaign proposals, which called for ending deferral but otherwise retaining the current worldwide regime for taxing offshore business income of US multinationals.

Deemed repatriation: The plan repeats a call Trump made during the campaign for a one-time deemed-repatriation tax on previously untaxed earnings held overseas. The fact sheet does not cite a specific rate for the one-time levy. (The campaign proposal called for a rate of 10 percent.) When asked about this at the April 26 press briefing, Mnuchin told reporters that the administration would work with the House and Senate to determine the appropriate rate and that the rate would be “competitive.” The plan also is silent on whether the repatriation rate would be bifurcated for cash and noncash assets, or if the tax would be paid all in one year or ratably over a longer period (as proposed in the House GOP tax reform blueprint released last June and the comprehensive tax reform proposal introduced by then-House Ways and Means Committee Chairman Dave Camp, R-Mich., in 2014).

No discussion of border adjustment tax: The plan does not address whether the administration embraces the destination-based cash flow tax included in the House Republican tax reform blueprint. That proposal, which is estimated to raise over $1 trillion to help offset the cost of a proposed corporate rate cut, provides for “border adjustments” through a not-yet-specified mechanism that would serve to eliminate US tax on products, services, and intangibles exported abroad (regardless of their production location) and impose a 20 percent US tax on products, services, and intangibles imported into the US (also regardless of production location). Rival taxpayer advocacy coalitions representing export-heavy and import-heavy interests have been active on Capitol Hill recently in an effort to rally House and Senate members to their side, and there are a number of vocal skeptics of the proposal among Republicans in both chambers.

A long way to go: At Align, our insiders on Capitol Hill believe that, while the fact sheet is a nice public relations move, genuine progress toward meaningful tax reform is far from certain. Notably, there remains a large amount of disparity between Trump’s campaign proposals and the so-called “House Blueprint” that has been promoted by Republican members of Ways and Means. What is lost in some of the discussion is that the President is not permitted to write tax law. Per the Constitution, the Origination Clause, also known as the Revenue Clause, mandates that all Bills for raising revenue shall originate in the House of Representatives, but the Senate may propose or concur with amendments on other Bills. This tends to heavily favor the intentions of the Ways and Means members. Moreover, fundamental concepts of budget reconciliation or neutrality must also be considered. In other words, would a requisite amount of spending cuts be made in order to pay for the full extent of the Trump proposals? There is also some discussion among economists as to whether the Trump proposals would have the economic impact that is claimed.

About Align Global Consulting 
With offices in London, Dublin, Research Triangle Park and Silicon Valley, Align Global Consulting is a globalization consulting and advisory firm that represents clients expanding globally or improving existing operations by providing creative legal and tax solutions to address commercial, trade, investment and regulatory matters. Align's comprehensive list of services includes global structuring, global business transactions, cross-border M&A transactions, and international tax planning for outbound and inbound investment. Align assists companies in all stages of growth, from emerging growth companies to the Fortune 100. With "big firm" credentials and experience, Align handles matters traditionally entrusted to larger firms, while maintaining a commitment to the lost art of one-on-one client service.

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