U.S. Tax Reform Inches Closer to President’s Desk

On 2 December, the United States Senate voted to approve its version of comprehensive tax reform legislation. The modified Senate version of the Tax Cuts and Jobs Act (H.R. 1), follows the measure that was reported out of the Senate Finance Committee on November 16 by providing permanent tax relief—including a significantly lower top rate—for corporations and temporary tax relief for individuals and pass-through entities, with those costs offset in part by eliminating or paring back dozens of current-law deductions, credits, and incentives.

This report offers a high-level overview of some of the more significant modifications in the revised bill.

Proposed corporate rate holds at 20 percent
The revised bill, which was released late on 1 December, retains provisions from the Finance Committee measure that would lower the top corporate tax rate to 20 percent beginning in 2019. An amendment offered on the Senate floor by Republican Sen. Marco Rubio of Florida to raise it slightly (by less than 1 full point) in exchange for a larger refundable child tax credit was subject to a point of order and fell far short of the 60 votes needed to overcome it.

Expanded passthrough, SALT benefits; higher repatriation rates
The revised bill would expand some tax benefits included in the Finance Committee legislation and add provisions that were not in the Finance package. Notable changes intended to make the bill more attractive to certain senators would:

  • Increase the deduction for passthrough business income to 23 percent (from 17.4 percent in the Finance Committee proposal). This change was made to win support from Republican Sens. Ron Johnson of Wisconsin and Steve Daines of Montana, who have been increasingly vocal in recent weeks about what they viewed as the inequitable treatment of passthrough entities in the Finance bill as compared to the rate reductions being provided to corporations.
  • Incorporate a House bill provision allowing taxpayers to deduct up to $10,000 in state and local property taxes but repealing the deduction for state and local income taxes. (The Finance Committee bill called for repealing the deduction for state and local income, sales, and property taxes alike.) This provision received especially strong backing from Maine Republican Sen. Susan Collins.
  • Retain current-law rules for domestic international sales corporations (DISCs). These would have been repealed under the Finance Committee bill.
  • Increase the deemed repatriation tax rates to 7.49 percent for noncash assets and 14.49 percent for cash and cash-equivalents (up from 5 percent and 10 percent, respectively, in the Finance Committee bill and slightly higher than the 7 percent and 14 percent rates, respectively, included in the House-passed version).

Next steps
The Senate-approved measure must now be reconciled with a competing version of the legislation approved in the U.S. House on 16 November. House Republican leaders insist there will be a formal conference and have told members they will vote to initiate the conference on 4 December.

Among the most significant differences still remaining between the two bills that will have to be worked out are the base-erosion prevention provisions that apply to international business activity and the proposed treatment of pass-through entities. Other differences in the two bills are may be easier to reconcile, such as the Senate’s proposed delayed effective date for the corporate rate reduction and the treatment of individual tax incentives for medical expenses and student loan interest. The House is also likely to be left with no choice but to accept the Senate’s sunsets on the individual side of the code at the end of 2025, since they are necessary to making the budget math work for the Senate under the Byrd Rule (which prohibits reconciliation bills from increasing the budget deficit outside the applicable budget window), and Republicans are already making clear that the expiring provisions will be extended by a future Congress.

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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