U.S. Tax Reform Framework Released

On 27 September, the negotiating team of congressional Republican leaders and White House officials released a long-awaited tax reform framework (https://waysandmeansforms.house.gov/uploadedfiles/tax_framework.pdf) that calls for sweeping tax cuts for corporations, passthrough entities, and individuals. Highlights of the plan include the following:

Individuals:
  • Create a larger “zero” tax bracket by increasing standard deductions to $24,000 married filing jointly, and $12,000 for single taxpayers
  • Consolidate current seven tax brackets to three brackets of 12%, 25% and 35%, but leaves congress the option of creating an additional higher bracket for higher income taxpayers
  • Repeal personal exemptions for dependents and increase the Child Tax Credit
  • Repeal Alternative Minimum Tax
  • Eliminate most itemized deductions, but retain tax incentives for home mortgage interest and charitable contributions
  • Retain tax benefits that encourage work, higher education and retirement security 
  • Repeal death tax and generation skipping transfer tax
Corporations:
  • 25% maximum tax rate applied to business income of small and family owned businesses conducted as sole proprietorships, partnerships and S corporations
  • 20% corporate tax rate
  • Eliminate Corporate Alternative Minimum Tax
  • Immediate expensing of the cost of new investments in depreciable assets other than structures made after September 27, 2017 for at least five years
  • Limit deduction for net interest expense incurred by C corporations
  • Retain Research and Development and Low-Income Housing Credits
  • “Modernize" rules related to special tax regimes for specific industries
International taxation:
Of particular interest to our clients and countless US multinationals, the framework proposes switching from a worldwide system, where all profits are subject to the US statutory rate upon repatriation regardless of where they were earned, to a territorial system that provides for a 100 percent exemption for dividends paid by a foreign subsidiary to a US parent with at least 10 percent ownership.
 
To transition to the new system, accumulated overseas earnings would be deemed repatriated and taxed over an unspecified period at one of two rates (one for earnings held in illiquid assets and one for cash or cash equivalents). The framework does not specify the rates, but presumably, as in prior proposals, the rate for cash and cash equivalents will be higher.
 
The framework calls for “rules to protect the US tax base by taxing at a reduced rate on a global basis the foreign profits of US multinational corporations,” but leaves the specifics of those rules – including the applicable rate – to the taxwriting committees.

Still a long way to go: 
Notably missing from the framework is its overall net impact on the US federal budget. Specifically, it is likely that the revenue-losing policies in the plan would cost several trillion dollars over the next decade. Under a special legislative process, Republicans are hoping to move a tax bill through the Senate on a simple-majority basis. It should be noted that legislation generally cannot increase the deficit in any year beyond the budget window (typically 10 years) without being subject to procedural hurdles under the so-called “Byrd Rule” that require 60 votes to waive. Because Republicans currently control only 52 of 100 Senate seats, Byrd Rule waivers seem unlikely at this time. This means that Republicans will need to find several trillion dollars worth of revenue-raising provisions if they want to enact the framework’s tax cuts on a permanent basis. Alternatively, they could scale back their tax-cutting ambitions to something they are, in fact, able to fully finance over the long-run.
 
The framework will now move to the congressional taxwriting committees to turn the high-level guidance into legislative language. At Align, our insiders on Capitol Hill believe that this process will begin with the House Ways and Means Committee. The Committee is expected to act first, meeting the requirement that all revenue measures must originate in the House. While there is no official timeline, a legislative product is expected sometime in October and complete a mark-up and vote in the committee before the Thanksgiving recess in late November. We will continue to monitor these developments and will apprise our clients accordingly.
 
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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