The White House, Republican leaders of the U.S. House and Senate, and the chairs of the House and Senate tax-writing committees have released a “unified framework” for tax reform.
At a speech in Indianapolis on 27 September, President Trump presented the “unified framework” for tax reform which has been officially released by the White House. The framework provides an overview that the Trump Administration and Congress will use as they “work together to produce tax reform”. The speech repeated broad policy statements such as the goal of making US businesses the most competitive in the world, introducing massive tax cuts, and effecting massive tax reform and simplification.
However, the proposal lacks significant elements of detail to allow a true assessment of its impact, along with detail as to how the tax reform will be funded and, consequently, the likelihood of its implementation.
Business taxation proposals
The main proposals relating to business taxation were:
The framework proposal to reduce US federal corporate tax rates to 20% is consistent with the Republican’s House Blueprint for tax reform (A Better Way Forward on Tax Reform) released in 2016. However it marks a move away from the 15% corporate tax rate announced by Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn in April this year.
The limitation of corporate tax deductions for interest expense was also recommended by the Republican Blueprint, although the framework refers only to a partial limitation, with the specific provisions as yet unclear.
Notwithstanding the proposal was light on detail, it is clear that the Administration is reaffirming its commitment to a dramatic US corporate tax rate cut.
Funding tax reform
The framework document does not provide details as to how the tax reform will be funded, nor the cost of it. Instead, it notes that “it will deliver a fiscally responsible tax reform by broadening the tax base, closing loopholes and growing the economy”. However, reaction from some sources was that the principles could result in an increase in the US federal budget deficit of several trillion dollars over a 10 year period, and as a consequence would not be acceptable to many members of Congress, and could prevent the change from being permanent under congressional budget rules. Furthermore, the proposal for the Border Adjustment Tax (BAT), a key revenue-raising measure originally proposed by the Republican Blueprint, was subsequently abandoned in July. As confirmed by its absence from today’s announcement, it will not be introduced in any form and other sources of income will be needed to fund the tax reform.
It is clear that bi-partisan support in both Houses will be a key factor in developing a set of legislative proposals which ultimately come to pass. As such, the timing of the legislative process and intended effective dates are unknown. The Administration appears hopeful that the legislation can be developed and enacted this year but given the complexity of the US legislative process, that would appear to be most ambitious, if not very unlikely.
Impact for Ireland
What ultimately emerges and what it might mean to Ireland is difficult to say. The framework proposal to reduce US federal corporate tax to 20% will, if implemented, undoubtedly reduce the delta between the US rate and Ireland’s corporate tax rate of 12.5%. However, adding State Taxes of circa 5%, would mean a US rate of double the Irish rate – so still a compelling difference between the two.
The framework includes a measure aimed at preventing companies from shifting profits to low-tax jurisdictions, by taxing at a reduced rate and on a global basis the foreign profits of US multinational corporations. The references to "a reduced rate" and "on a global basis" appear to contemplate a U.S. "top off" tax to ensure that combined U.S. and foreign tax rates imposed on foreign income equal a specified rate. The mechanics of the rule are left to the tax-writing committees, although the chosen language may indicate that any foreign tax rate thresholds are to be applied across all foreign subsidiaries on an aggregate basis. The specific provisions of the proposal remains to be seen, and are likely to be of particular interest to Irish companies. For example, how would this relate to Ireland’s 12.5% rate?
The proposed one-time tax on overseas earnings is unlikely to have a significant impact on the Irish operations of US companies.
It will undoubtedly be very important for companies to assess the implications of what is ultimately agreed, once those proposals become clear. Notwithstanding this, we believe that US corporates will continue to need international operations to service international customers and access talent. We believe that Ireland’s Corporate Tax Regime will continue to remain competitive. That said, US tax reform will also bring into focus the other attributes that Ireland has to offer international investors. They include our work force, long and stable track record of welcoming foreign investment, a pro-business environment and the fact that we are an English-speaking, common law EU member state.
The release of the recent review of Ireland’s corporation tax code, by economist Seamus Coffey (Recommendations for change to Ireland's corporation tax code) acknowledged the potentially wide ranging impact US tax reform could have on the Irish economy. The Irish Government has announced that implementation of the Report’s recommendations will be subject to a public consultation to be launched on Budget Day, 10 October 2017. It will be important for Irish business to ensure its voice is heard in maintaining a competitive corporation tax regime during a period of potentially significant US tax reform.
If you have any questions relating to the Tax Reform Framework or the Tax Reform Process, please do not hesitate to contact us.
Read the tax reform framework
Read a one-page overview of the framework