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Republicans Reveal US Tax Reform Law

by Mike Godfrey, Tax-News.com, Washington

03 November 2017


On November 2 the US Government released the Tax Cuts and Jobs Act, setting out in legislation its plans for comprehensive reform of the US tax code.

For businesses, the bill will bring about a landmark shift to a territorial corporate tax system, replacing the current worldwide tax basis regime and therefore subjecting companies to tax only on US-source profits, and establishing a 20 percent corporate income tax rate, in place of the current high 35 percent federal rate.

The plan also provides that firms will be able to immediately expense capital investments for five years and limits interest expense deductions to 30 percent of a group's earnings before interest, taxation, depreciation, and amortization.

In addition, for pass-through businesses, such as S corporations and partnerships, whose shareholders or partners are taxed under the personal income tax regime, their tax rate will be capped at 25 percent, subject to anti-avoidance provisions to ensure that individuals can't inappropriately reduce their effective income tax rate.

The plan imposes a "modest" tax on unrepatriated foreign earnings held offshore, of 12 percent for cash and similarly liquid assets and five percent for illiquid assets.

The plan also includes numerous provisions to tackle US base erosion and profit shifting. The US Government's summary of these provisions provide that they are intended to eliminate tax incentives for companies to locate intellectual property, risks, and related manufacturing jobs overseas by taxing US companies on half of their foreign subsidiaries' low-taxed "excess returns." About such, the summary explains the following:

  • The law defines such excess returns as any income in excess of a "routine return" on the business's foreign investments in depreciable property;
  • "Routine return" is a proxy for income that is attributable to the foreign jurisdiction for real business activities separate and apart from income generated by risks and IP that US companies may have chosen to assign to that jurisdiction for tax – not business – reasons;
  • The bill allows a foreign tax credit to mitigate double taxation and limit the provision to profits shifted to tax havens; and
  • These provisions will apply on a global basis to take into account the globally integrated nature of modern US companies.

In addition, other provisions eliminate existing tax incentives for companies to move income-generating IP, risks, and related manufacturing jobs overseas by recapturing tax benefits claimed for payments from US companies to their foreign affiliates. The summary says these rules will apply equally to US- and foreign-parented businesses to create a level playing field and reinforce the arm's length standard by removing the incentive to artificially inflate outbound related-party payments.

For individuals, according to the House Ways and Means Committee, a typical middle-income family of four, earning the median US household income of USD59,000 per year, will receive a USD1,182 annual tax cut.

Some key points of the Act include:

  • Lowered individual tax rates for low- and middle-income taxpayers to zero, 12, 25, and 35 percent. The 39.6 percent top rate remains unchanged;
  • An increase in the standard deduction from USD6,350 to USD12,000 for individuals and from USD12,700 to USD24,000 for married couples;
  • A new Family Credit, including an expanded Child Tax Credit from USD1,000 to USD1,600 and a credit of USD300 for each parent and non-child dependent;
  • A continued deduction for charitable contributions;
  • A continued deduction of up to USD10,000 for the cost of state and local property taxes;
  • The preservation of retirement savings plans including 401(k) and Individual Retirement Accounts;
  • Safeguards to distinguish between individual wage income and "pass-through" business income; and
  • The preservation of the Research and Development Tax Credit.

"If we are serious about growing the economy, creating jobs and increasing wages for all Americans, this country needs a modernized tax code. It is that simple," said Jamie Dimon, Chairman of the CEO association Business Roundtable. "While the tax reform bill released today deserves close analysis, it is significant progress toward achieving these goals."

Commenting on the plan, John Gimigliano, principal-in-charge of federal tax legislative services, KPMG LLP, said: "Today's House GOP tax bill is the opening bid on tax reform, not the final one. Now taxpayers, advisors and lobbyists will all move into high gear to evaluate and support or oppose the proposal."

"Recent history suggests that the first version of legislation is always the most ambitious version. And that ambition is diminished as the bill makes its way through each stage of the legislative process. So the next question is how much of today's proposal can stick."

"As the bill moves through the legislative process, the shape of reform will become clearer in the coming weeks and months –but only slowly, and perhaps frustratingly so."

"The Chairman's mark will likely get modified in Committee mark-up and the Senate will produce its own bill subject to more changes. A House and Senate product must get reconciled in conference. It's possible that any final conference report won't bear a strong resemblance to either the House or Senate bill."

Jeffrey C LeSage, Vice Chairman-Tax, KPMG Americas, said: "Odds for passage of a tax bill have never been higher, but that's not the same thing as saying tax reform is a certainty, even with this first effort now in hand. Whether the final result–after all the negotiations that lie ahead–is true, permanent tax reform or some of other form of tax relief remains to be seen."

TAGS: individuals | tax | investment | business | proprietors | property tax | tax incentives | interest | law | retirement | offshore | legislation | transfer pricing | tax rates | United States | tax reform | Retire | Retirement | Tax | BEPS

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