The release of a tax reform framework by the Trump administration and Republican leadership Wednesday 27 September represents a significant development for US tax reform efforts.
The administration, the House of Representatives Ways and Means Committee and the Senate Finance Committee have released their unified “framework” that will serve as a basis for developing tax reform legislation. Key corporate aspects of the framework include:
- Reducing the 35% corporate income tax rate to 20%
- Allowing businesses to expense the cost of certain new investments for at least five years
- Limiting net interest expense deductions for C corporations
- Eliminating the Section 199 domestic production deduction
- Replacing the worldwide taxation system with a territorial system that includes anti-base erosion measures
- Imposing a one-time tax on accumulated foreign earnings, with a lower rate for illiquid assets
Michael Mundaca, Co-director of the US National Tax Department of Ernst & Young LLP, said, “The framework released today is a welcome advance in the debate about how to reform our tax code. There are obviously a lot of details to be worked out in the legislative process but we now know the broad outlines of the reform package: lower rates, a broader base, and incentives for work, education, saving and investment. “
Mundaca added, “For corporations specifically, the framework provides for a significantly lower statutory rate of 20%, an immediately effective 100% deduction of capital investments, and a so-called territorial system that provides a 100% tax exemption for dividends from foreign subsidiaries as well as what appears to be an anti-tax haven provision that could subject some foreign earnings to immediate US tax but at a reduced rate.
“The framework also includes a partial limitation on interest deductions for C corporations only (although it notes that the appropriate treatment of interest by non-corporates will be considered), and seems to rule out special tax breaks/incentives for US manufacturing. For small and family-owned businesses, the framework limits the maximum rate on business income to 25%.
“Easily the most difficult policy development and drafting exercise continues to be how to prevent pass-through owners from recharacterizing personal income into business income that would be eligible for the new reduced rate on such income, an issue the framework recognizes,” Mundaca continued.
“Wording can be the key to predicting where discussions will focus. In several places, the document uses the terms ‘framework envisions’ or ‘framework contemplates’ or ‘aims to.’ In others, it says the framework ‘includes,’ and specifically calls for ‘rules to level the playing field’ between US companies and inbounds.
“This release will help re-focus attention on tax reform and should be a signal to taxpayers that it is time to re-engage in the debate,” Mundaca concluded.
The US Congress will soon begin legislating the framework.
Mark A. Weinberger, Global Chairman and CEO of EY and Chair of the Business Roundtable Tax and Fiscal Policy Committee in the US, commented, “It’s crunch time for Congress. The unified framework provides the necessary elements to create jobs and growth: competitive tax rates for businesses, a more competitive international tax system that would not punish businesses for bringing foreign earnings to the United States and middle-class tax relief.
“Congress needs to preserve these elements and fill in the details quickly so the proposals can become law by year’s end. This will provide greater certainty and allow businesses to increase investment in workers and capital equipment and grow the economy,” Weinberger said.
To view an EY Policy Perspectives: Rapid Response Series webcast on the framework held on 27 September, the day it was released, click here.