After decades of false starts, the prospect for US tax reform in 2017 will be the strongest since 1986 following national elections that elevated Republican President Donald Trump to the White House and put Republicans in control of Congress.
The starting point
The starting point for the legislative effort in the House of Representatives is expected to be a proposal released by House Republicans in June 2016. The proposal includes a provision for border adjustments, which would exclude US exports from the tax base while including imports.
“Border adjustability is certainly something that’s going to be discussed.“
US President Donald Trump, in an interview with the Wall Street Journal
This represents a major departure from the current corporate tax system, transforming the current income-based tax to a destination-based tax on domestic consumption.
The proposal is not without some controversy. Proponents say it complies with World Trade Organization rules, but opponents say it might not be compliant and could prompt retaliation by other nations. While proponents emphasize the level playing field that the border adjustability would create for US firms, opponents claim it could increase retail prices and negatively affect importers, which include retailers.
Points in common
A speedy process assumes the House, Senate and White House come to quick agreement on what the overall reform should look like.
President Trump and congressional Republicans have said they favor a drop in the corporate income tax rate from its current level of 35%, which was set in 1993, and an end to most of the expenditures, exclusions and incentives that amount to base competition.
Statements also suggest some agreement about immediate expensing of capital expenditures, although Trump has proposed limiting the provision to manufacturers on an elective basis.
Recent statements suggest that the Administration does not fully agree with the House on the border adjustability proposal.
At one point, Trump signaled opposition to it, telling The Wall Street Journal, “Anytime I hear border adjustment, I don’t love it. Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”
But the next day, Trump softened his position, saying border adjustability is “certainly something that’s going to be discussed. I would say, over the next month-and-a-half, two months, we’ll be having more concrete discussions.”
There are some other differences. Trump has called for a 15% base rate for corporate income tax, and all past accumulated overseas profits deemed repatriated at a rate of 10%. A tax reform proposal from Republicans in the House, however, proposes those rates at 20% and 8.75% (3.5% for noncash equivalent repatriations).
Other issues include which specific tax breaks would end, whether the US moves to a destination-based tax system, and whether to allow 100% expensing for equipment purchases and limits on interest deductibility.
The Senate has yet to voice its preferences for tax reform.
The Treasury Department is the policy body in the US, and the Internal Revenue Service (IRS) is in charge of administering the changes.
Drafters of the tax law need to be mindful of the complexity of implementation, which will entail transition rules, as well as IRS and Treasury guidance.
“We need to have systems that can ingest information and analyze it,” says Douglas O’Donnell, Commissioner of the IRS’ Large Business and International Division. “Without ample funds to update infrastructure and make necessary changes, we will be facing more complications in what is always a difficult implementation exercise.”
Note: All information in this article was current as of the print deadline of 1 February 2017.