President Trump's administration got off to a start with a flurry of activity this week.
He also made some less publicized moves on tax policy that could affect cross-border business. Two evolving areas that we're watching closely are governance around regulations and the President's position on the border adjustment.
A series of tax regulations to help implement the new rules for partnership audits, among other tax regulations, were pulled this week after a freeze on issuing federal regulations was announced on January 20, 2017. However, these partnership audit rules, which shift responsibility for the conduct of audits (and in some cases liability for any resulting assessment) from the partner to the partnerships, are still valid. The implementing regulations that were set to be issued only affect the specific procedures outlined in the draft regulations. For more information, see KPMG Report: New Partnership Audit Rules.
President Trump also signed an Executive Order that requires two regulations to be withdrawn for each new regulation issued. It's not yet certain how this order will be applied.
This moratorium may not have a significant effect as the U.S. moves closer towards undertaking comprehensive tax reform.
Last week, President Trump also seemed to reconsider his former opposition to border adjustments outlined in the House Republican's tax reform plan. The House plan proposes moving the U.S. tax system towards a destination-based cash-flow tax. While not a VAT, this type of tax does have some similarities, such as using a border adjustment to ensure that items imported for sale or use in the U.S. are taxed, while exempting exports (which would presumably be taxed in the destination country). However, this tax would be imposed by adjusting the taxable income of the importer or exporter. The Republicans are designing a destination-based cash-flow system to take advantage of these border adjustments which, under global trade treaties, are allowed in VAT systems but not income tax systems. It's not yet clear whether such an approach complies with global trade laws and income tax treaties.
A destination-based cash-flow also differs from a tariff. While a tariff is applied on tangible goods only, and at various rates, a border adjustment could be applied to any cross-border payment, including those for services and intangibles, at a single rate (proposed to be 20%). In addition, tariffs are paid at import, while the effect of the border adjustment would be shown on the importer's income tax return by denying any deduction for the cost of imports.
For more information on the border adjustment, please attend KPMG's upcoming webcast, Understanding Border Adjustability, to be held on February 2, 2017.
For more information, contact your KPMG adviser.
Information is current to February 01, 2017. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500