US corporate tax regime could shift to territorial basis

The US corporate tax regime could be set for a major shift to a territorial basis, rather than its current worldwide basis, under plans to overhaul its system 

One of Donald Trump’s priorities as president has been to implement substantial changes in the US’s corporate tax code in a bid to invigorate the domestic economy and discourage imports in order to protect US manufacturing.

However, there are two competing models for implementing the policy: one from Trump’s team, and another from the House of Representatives, with stakeholders expecting the House’s blueprint to be the one taken forward.

House blueprint

Under the House of Representatives’ plans, the top corporate tax rate would fall from the current 35% to 20%, with a 25% top pass-through rate. Its plan is territorial, which means it would apply to income from domestic activities.

A one-off repatriation tax of 8.75% for cash, 3.5% for other assets and payable over eight years is proposed.

Tax on future foreign earnings would include a 100% exemption for foreign dividends, while for capital investments, there would be a 100% first year write-off, with no net interest expense allowed.

In order to broaden the base, deductions and credits other than R&D would be eliminated.

Trump plan

Trump’s plan is less detailed, but he initially claimed he wanted a top corporate tax rate of 15%, with the top pass-through rate also at 15%.

For those repatriating cash and assets, an even 10% would be charged, while it is unclear what the administration is proposing for future foreign earnings.

On capital investments, a 100% first-year write-off for manufacturers is proposed, or an allowance on net interest expenses. Alternatively, a ‘reasonable cap’ on interest deductions would be put in place.

Like the House of Represenatives’ plan, deductions and credits other than R&D would be eliminated.

Scott Levine, partner at law firm Jones Day, explained Trump has been ‘somewhat delayed in getting his presidential appointments announced and through the senate’, and there is a ‘skeletal crew at the Treasury’, who would be responsible for negotiating a tax proposal at congress.

‘It seems that the president is ceding most of this work to the House and the Senate,’ he said. 'It means the end result will be closer to what they [the House] proposed than some sort of compromise.’

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