Plans for a dramatic reform of the US tax system
As of friday 20 January 2017, Donald J. Trump is the 45th president of the United States of America (US). With the election of Trump and the victories of the Republican party (GOP) in both the House of Representatives and the Senate, a dramatic reform of the current tax system seems inevitable. Both Donald Trump and the GOP have published tax proposals. Currently, it is not clear whether or not the proposals will be implemented. Because of the protectionist nature of the proposals, it is not yet unclear if the World Trade Organisation (WTO) will deem the proposals legal. As tax reform is top priority for both Donald Trump and the GOP, we hereby inform you about the most important plans.
Both Trump and the House GOP have proposed a reduction of the corporate income tax rate. In Trump’s Tax plan the tax rate will be reduced from 35% to 15%. In the tax plan of the GOP the tax rate will drop to 20%. In addition, both Trump and the GOP proposed to reduce and/or eliminate several deductions (such as the deduction for interests) and fix corporate loopholes. Another proposal of both Trump and the GOP is to “bring cash home”. In the proposal of Trump this is achieved by a one-time deemed repatriation of corporate cash overseas at a significantly reduced tax rate of 10%. The GOP proposes a 100% exemption for future dividends from foreign subsidiaries. Additionally, foreign earnings that have accumulated overseas could be brought home to the US at a a reduced tax rate.
Another important and rather controversial point in the GOP’s tax plan is that that businesses will be allowed to fully and immediately write off the costs of investements, rather than writing off the costs over several years depending on the period over which the asset may be depreciated or amortized.
Finally, the GOP proposes a shift towards a so-called “destination-basis tax system”, under which the taxation follows the location of consumption rather than the location of production. Part of this proposal is the application of “border adjustments”. In a nutshell, this means that products, services and intangibles that are exported outside the US will not be subjected to US corporate income tax. On the other hand, imported products, services and intangibles will be subjected to US corporate income tax. Therefore, the place of production of products or incorporation of the company is no longer relevant for taxation. This plan in particular is very controversial. Donald Trump has been critical of this plan as he thinks it will lead to unnecessary complexity.
Our expectation is that a hybrid tax plan will likely emerge early in Trump’s presidency as tax reform is a top priority for both Donald Trump and the GOP. We will keep you posted.