COMPREHENSIVE TAX REFORM: A HIGH PRIORITY IN EARLY 2017 Evan Migdail, Partner December 8, 2016 If you cannot hear us speaking, please make sure you have called into the teleconference: US participants: 1 800 909 4795 Outside the US: 1 212 231 2913 The audio portion is available via conference call. It is not broadcast through your computer. *This webinar is offered for informational purposes only, and the content should not be construed as legal advice on any matter. 0 www.dlapiper.com
Speaker Evan Migdail Partner Washington, DC 1 www.dlapiper.com
The stage is set for tax reform/key players in alignment for action in 2017 House Republican Tax Reform Blueprint (“A Better Way”) released summer 2016, is expected to be the starting point/staff working on more detailed presentation and legislative language for early 2017 Tax reform in 2017 a top priority for Speaker Ryan and Chairman Brady Trump Tax Reform Plan moved closer to the House Blueprint as the campaign progressed through the fall/tax reform central to Trump Economic Program Senate Finance Committee – considerable prior work on tax reform but not as advanced as the House with comprehensive reform legislation; Senate will likely react and modify House bill/Senate Finance has been working on corporate tax “integration” 2 www.dlapiper.com
Key provisions in House/Trump proposals - business rate reductions and international House proposal is “destination based/cash flow” system – a major change in the US tax system and more dramatic than 1986. Trump proposals are generally consistent with the House approach Reduction in corporate rate – Trump proposes 15%/House 20%. Both would eliminate the AMT House would tax active business income from pass-throughs at 25%; if the income however is reasonable compensation for services it would be taxed at the highest individual rate, 33% Both would impose a “deemed repatriation” of retained offshore profits/Trump would impose a 10% rate payable over ten years; House a 8.75% rate over eight years Going forward, the system would become territorial, with a 100% exemption for dividends from foreign subsidiaries. Possible base erosion provisions? House proposes border adjustability/destination based system – likely to be one of them most controversial proposals in the package 3 www.dlapiper.com
Domestic business provisions House would permit businesses to expense investments in tangible and intangible property except land (cash flow element). Trump plan would allow manufacturers to expense capital investments House would allow interest expense against interest income; amounts not used up would be carried forward indefinitely against future interest income. Trump would eliminate the interest deduction House would allow NOLs to be carried forward indefinitely and increased by an inflation factor but could not be carried back Both plans would eliminate many tax expenditures (Trump plan term) and “special interest deductions and credits” (House plan) both to simplify the Code, broaden the base, and offset the cost of lower rates. House specifically keeps the research credit Some tax expenditures may survive – must be consistent with tax reform/public policy goals House may approach tax expenditures differently than the Senate 4 www.dlapiper.com
Individual tax reform House and Trump would compress current seven brackets into three, 12% for married filers with taxable incomes below $75,000; 25% for incomes between $75,000 and $225,000; 33% for income above $225,000 (the brackets for single filers would be on half the income thresholds) Trump would increase the standard deduction for joint filers to $30,000/House at $24,000 ($15,000 for individuals/House at $18,000 for single with children, $12,000 without children) and would eliminate the personal exemptions and head of household status. Itemized deductions would be capped at $200,000 for joint filers, $100,000 for single filers. The deductions would be indexed Trump would keep the current system for taxing capital gains with a maximum rate of 20%. House would allow a 50% exclusion of net capital gains, dividends, and interest income resulting in their being taxed at 6%, 12.5%, and 16.5% depending on the taxpayer’s bracket Many individual tax expenditures would be eliminated but House keeps mortgage and charitable deductions. Trump would tax carried interest as ordinary income 5 www.dlapiper.com
Process House Ways and Means detailed discussion draft and/or legislative language expected to be released in January. Chairman Brady has advised his members to be prepared to work on reform early in 2017 Key issue is whether to proceed under budget reconciliation; Republican leaders would prefer to find some common ground with Democrats and proceed under regular order Advantages and disadvantages of reconciliation There could be two reconciliation bills in early 2017; one for FY2017 for ACA repeal and replace; one for FY2018 and tax reform Senate likely to change House tax reform bill in order to accommodate Senators under reconciliation Ultimate goal: complete tax reform by August recess Will bill be revenue neutral? Impact of dynamic scoring? Using current-policy baseline and assuming ACA revenue raising provisions are repealed could help stay within neutral territory 6 www.dlapiper.com
Trump infrastructure program Proposal by incoming Commerce Secretary Wilbur Ross and Professor Peter Navarro $1 trillion credit facility for infrastructure development. Private sector approach $167 billion is an equity cushion to help attract lenders Proposes that Congress enact an 82% tax credit to reduce cost of financing and protect the equity lenders No mandate to invest deemed repatriated funds, but the tax credit creates an incentive to do so Conflict with House tax writers, who need revenues to lower rates 7 www.dlapiper.com
Closing considerations US is closer to tax reform than at any time since 1986 Many details yet to be worked out; some area not covered at all in House Blueprint may be filled in using the Camp draft Business rates will come down; how low and overall scope of the reform will depend on whether it is bipartisan and how successful tax writers are at base broadening Debate will be long and protracted, especially in the Senate. Final product likely to have some significant variations from House Blueprint Rate cuts could be phased in with phasing out of tax expenditures. Tax debate likely to dominate the national debate in 2017; ACA may take longer to replace 8 www.dlapiper.com
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