President Donald Trump has stated that tax reform is a priority for his administration. While on the campaign trail, he outlined a tax plan that borrows heavily from the Republican Party’s “Blueprint on Tax Reform” released in June 2016. This suggests that the blueprint will be the likely starting point for his tax reform. While the blueprint and President Trump’s proposed tax reform policies are closely aligned, there are differences between the proposals.
The blueprint proposes a number of dramatic changes to the tax code, pushing the tax system closer to a consumption-based tax and away from an income-based tax. These changes are intended to encourage GDP growth but could have significant implications for U.S. multinational businesses and foreign companies doing business in the U.S. or with U.S. companies.
The following is a summary of key proposals common to both the blueprint and the President’s proposed reforms.
Border adjustments were not originally part of President Trump’s reform plan, although recent reports suggest he may be considering it. The issue is controversial. The border adjustment seemingly intends to promote U.S. growth and encourage domestic production by exempting income from U.S. exports from tax and taxing imports (including all products, services, and intangibles). While not certain, it appears that the proposed import tax may not allow for deductions for all or part of imported inputs. This could mean greater taxes for U.S. companies selling imported products to U.S. buyers. Conversely, net exporters in the US would likely benefit from such change.
While this type of border tax is commonly seen in conjunction with VAT systems, it is typically not used in conjunction with income tax. It is unclear if this type of income tax arrangement is allowable under World Trade Organization rules, so this proposal may be challenged.
Nothing has been finalized yet. If prior tax reform efforts are of any indication, the process will not be fast moving. However, President Trump has stated that tax reform is a priority for 2017 and the political climate is favourable for changes to be made.