For the past several months, the “Big Six”—Secretary of the Treasury Mnuchin, National Economic Council Director Cohn, Senate Majority Leader McConnell (R-KY), Senate Finance Committee Chair Hatch (R-UT), House Majority Leader Ryan (R-WI), and House Ways & Means Committee Chair Brady (R-TX)—have been meeting to outline a framework for tax reform. On September 27, 2017, they released their “Unified Framework for Fixing Our Broken Tax Code.”
The key principles at the heart of the Framework are simplification, tax reduction for individuals and businesses, and repatriation of business earnings currently kept offshore. The proposals outline extensive changes to the taxation of both domestic and international business, as well as to the taxation of individuals.
The Framework contains numerous proposals to modify the taxation of corporations:
For flow-through entities (S corporations and partnerships), the maximum tax rate would be capped at 25 percent. The Framework anticipates that Congress will adopt unspecified measures to prevent conversion of higher-rate personal income into low-taxed business income. Congress may also consider imposing limits on the deduction of interest paid by non-corporate taxpayers.
Other provisions would apply to all types of businesses:
The Framework makes a fundamental change in the international tax system by shifting to a territorial system: it provides a 100 percent exemption for dividends from foreign subsidiaries that are at least 10 percent owned by a U.S. parent corporation. Accumulated earnings are deemed to have been repatriated and taxed under a two-tier system: cash and cash equivalents would be taxed at an unspecified rate, while earning held in illiquid assets would be subject to a lower (also unspecified) tax rate. This “repatriation tax” would be spread out over an undetermined number of years. The Framework also directs Congress to enact rules to protect the U.S. tax base by combating tax arbitrage and inversions.
The Framework’s list of reforms for individual taxpayers is shorter, though similarly significant:
The Framework leaves it to Congress to develop additional measures to reduce the tax burden on the middle class, simplify the treatment of retirement benefits while increasing participation in retirement plans, and repeal numerous other unspecified deductions, credits, and exemptions.
WHAT HAPPENS NEXT?
As the above discussion indicates, the Framework leaves many important questions unanswered and delegates the details that will make or break tax reform legislation to Congress. The Republican Congressional majority is expected to avoid a Democratic filibuster by including tax reform legislation as part of the budget reconciliation process. But this process imposes severe budgetary restraints on tax reform: it must be revenue-neutral after ten years. While the Framework contains numerous tax cuts, it leaves it to Congress to find the necessary offsetting revenue raisers. This should make for an interesting legislative process in the coming months.
WHAT YOU SHOULD DO
The Framework continues the process that began in the summer of 2016 with the House Republican Blueprint for Tax Reform while adding focus to vague principles subsequently advanced by the Administration. Nevertheless, many important gaps and questions remain. Businesses should continue to monitor the legislative process and be prepared to consider options to stay ahead of the curve: planning should begin now!
HOW TRUE PARTNERS CAN HELP
True Partners Consulting’s corporate and international tax teams offer a combination of highly experienced tax advisors and an approach that puts our clients at a competitive advantage. We are prepared to work closely with clients to identify opportunities and to develop successful strategies to avoid the inevitable pitfalls that come with a once-in-a-generation tax reform package.
John V. Aksak
Northeast Managing Director
John P. Bennecke
Robert M. Gordon
Managing Director &
Assistant General Counsel
Ross J. Valenza