On Wednesday, September 27, 2017 the Trump Administration and select members of the House Committee on Ways and Means and the Senate Committee on Finance released a unified framework (the “Framework”) to achieve comprehensive tax reform. The Framework is intended to serve as a template for the tax-writing committees that are tasked with drafting tax reform legislation. The Framework totals a whopping nine pages with less detail provided on certain items than either the Republican Blueprint or Trump’s campaign tax reform platform. Most of the Framework consists of variations on themes included in the Blueprint and Trump’s campaign platform with a few key differences. Below is a run-down of the key items likely to impact intangible asset rich companies, especially those in the technology sector, and the potential implications to future business operations:
Tax Rate for Small Businesses
- The Framework provides for a 25 percent maximum rate on business income of small businesses operated through sole proprietorships, partnerships and S corporations.
- While the devil certainly lies in the details, a maximum rate of 25 percent could be welcome news to some startup technology companies that operate through a flow-through structure.
Tax Rate for Corporations
- The corporate tax rate is reduced to 20 percent; which is good news for technology companies but keep reading.
- Alternative minimum tax (AMT) is eliminated.
Framework for Deductions & Credits
- The Framework allows for immediate expensing of the cost of new investments in depreciable assets, other than structures, made after September 27, 2017 for at least a five-year period.
- This represents a watered-down version of the Republican Blueprint which envisioned immediate expensing for all capital expenditures. Potential beneficiaries in the technology sector may include semiconductors, server farms (equipment only, not structures) and equipment heavy biotech companies.
- The Framework indicates there will be a “partial” restriction on the ability of C corporations to deduct net interest. No details are provided beyond this but importantly, the interest expense limitation does not appear to apply to flow-through entities albeit the Framework indicates there will be further consideration of the appropriate treatment of interest paid by non-corporate taxpayers
Deductions and Credits
- The Framework vows to retain the R&D tax credit, which many technology and biotech companies hold near and dear.
- Section 199 Domestic Production Activities Deductions (DPAD) are not so near and dear and will be eliminated, according to the Framework.
Territorial Tax Regime
- Perhaps the most closely watched topic of multinational technology companies as well as those soon to be multinational is whether the border adjustment tax (BAT) and forced repatriation of foreign earnings will remain on the table, or not.
- The controversial BAT is not mentioned in the Framework and presumed dead.
- The Framework states future earnings of 10 percent or more owned foreign subsidiaries can be repatriated back to the U.S. via tax exempt dividends.
- As expected, accumulated earnings will be subject to a one-time tax as a transition to the territorial system. Unlike the Republican Blueprint or Trump’s campaign tax plan, the Framework does not indicate what the rate of tax will be. It does indicate that a two-tiered rate system will apply; one rate (presumably higher) imposed on offshore earnings in the form of cash and another rate (presumably lower) imposed on non-cash earnings.
- Notwithstanding the captioned heading “Territorial Taxation of Global American Companies”, it remains to be seen just how “territorial” the proposed new regime will be. Commentary within the Framework indicates that rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations will be included in the legislation, which does not suggest a true territorial system.
What’s at Stake
The Framework appears to advance one step closer toward U.S. tax reform by removing controversial concepts such as BAT while preserving popular concepts such as a significant lowering of the corporate tax rate. The question remains whether enough Republicans will be in favor of a tax bill reflecting the concepts summarized in the Framework. There isn’t enough detail in it to truly estimate the cost of this proposed tax reform, but if it presents an overall increase to the deficit, Republican budget hawks may oppose the tax bill outright. It’s clear the Republicans are still seeking to push tax reform through under budget reconciliation thereby allowing the Senate to pass a bill with a majority vote. With a 52-48 Republican to Democrat split in the Senate, Trump can’t afford much Republican opposition to the Framework.
In terms of overall timing to draft a bill, have it pass through Congress and hit the President’s desk, the Framework provides no hints. In a Fox News interview on September 17, 2017, House Ways and Means Chairman Kevin Brady made it known that without a budget passed this year, tax reform cannot happen. The goal is to have a budget passed by mid-October in order to leave enough time to put a tax reform bill before Congress, a process that has not been historically easy. That said, many Republicans, including President Trump, promised Americans two key reforms; (i) repeal and replace the Affordable Care Act (“ACA”) and (ii) tax reform. With the failure of the Republicans to pass a repeal of the ACA, President Trump and the Republicans are motivated to fulfill at least one campaign promise. But their failure on the ACA front raises real doubt as to whether they can accomplish anything of this magnitude without support from at least a limited number of Democrats.
Author: Jill-Marie Harding
We’d love to get your thoughts on the matter: How does the latest “Framework” affect your company’s outlook on overall effective tax rates? What do you perceive as the most significant proposed measure included in the framework for your company? Please call or aliguori [at] alvarezandmarsal.com (email us) to let us know!