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US tax reform – can two Bills become one?

US tax reform – can two Bills become one?

Justin Davis and Liam Delahunty discuss the status of US tax reform and whether a reconciled Bill can be agreed by the Senate and the House of Representatives.

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US capitol building

The United States (US) Senate and House of Representatives have now each passed their respective versions of the Tax Cuts and Jobs Act (TCJA) – representing the most far-reaching proposed tax reform in the US for three decades. Before the TCJA can be signed into law by the President, it is now necessary for the two chambers to reconcile the differences between the two Bills, and to pass an identical text.

The Bills address a number of common themes, but with some significant differences. For example, the House Bill had proposed a 20 percent excise tax on certain payments to foreign related parties, whereas the Senate Bill proposed a less draconian base erosion minimum tax.

Also, whilst the original Senate Bill proposed a repeal of corporate alternative minimum tax (AMT) similar to the House Bill, the final version that was passed on Saturday ultimately excluded a corporate AMT repeal. Finally, both Bills included a reduction in the corporate tax rate to 20 percent, albeit with the Senate version delaying commencement by an additional year to 1 January 2019.

The next step

The next step now is for Congress to find a way to pass the same Bill. Whilst there are three ways in which this could occur, it would seem that Republican leadership may be leaning towards a formal conference, as the conference report cannot be amended and debate will be limited to a maximum of 10 hours.

From an Australian perspective, the envisaged reduction in the US company tax rate would leave Australia with even fewer companions in the 30 percent or higher company tax rate club. It would also push transactions with US affiliates into the potential scope of the diverted profits tax, as the US tax rate would drop to less than 80 percent of the Australian rate (so the “sufficient foreign tax” exclusion could not be satisfied).

If the TCJA can become law before the end of the calendar year, having survived its way through the exhaustive US legislative process, it is sure to stimulate further debate in many other countries, including Australia, on whether they can also achieve corporate tax reform on a major scale.

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