Taxing Times Ahead
What does the US tax reform blueprint mean?
By Tellisa Ramadhani
Thursday, June 15, 2017
One of US President Donald Trump’s key campaign components was tax reform, and with both the executive and legislative arms of the US government now controlled by the Republicans, the questions being asked are what will this reform entail, and how will it impact on US foreign direct investment?
The Republican-led Ways and Means Committee, the chief tax-writing committee, in June 2016 unveiled a tax blueprint, “A Better Way for Tax Reform,” and it is the starting point for the discussion on drafting tax reform legislation in the House of Representatives. The goal of the blueprint is to bring US investment back home and create jobs, raise wages, and expand opportunities for Americans.
If it is passed, EY tax partners Joe Kledis and Christine Jones have expressed concern that it might shake up the global economy, with US companies given incentives to move investments onshore, reducing overseas investment.
According to the blueprint, the main objectives of the tax reform are to make it easier for employers to hire new workers and invest in their communities by cutting the tax rates on job creators, creating a simpler tax filing that would fit on a postcard, and giving taxpayers the right to quality service, privacy, confidentiality, and a fair and just tax system.
To support US investment, the US government is creating attractive incentives, such as the infrastructure plan proposed by President Trump, for example, which relies heavily on private-sector investment, not just public spending; US tax reform provisions which see 100 percent expensing of capital investment and favorable repatriation provisions that allow companies to bring cash back to the US that can be used for investment; and states in the US will compete for new investments by offering statutory and discretionary credits.
Complex current tax system
According to the blueprint, the current US tax code is a complex one, with tax laws that have nearly tripled in the last three decades. The blueprint lists the many problems often encountered and that it is trying to solve: the current code imposes burdensome paperwork and compliance costs, that leads to more issues such as waste, fraud, and abuse; delivers special interest subsidies and crony capitalism, which many of the tax preferences are special-interest giveaways that are masked as tax breaks instead of direct grants; penalizes savings and investment, with the US having one of the highest levels of taxation on capital in the world; encourages businesses to move overseas, because of the highest tax rate imposed among other developed countries; and enables a broken tax collector from the mismanagement and lack of accountability of the IRS that compromised its ability to serve taxpayers fairly.
EY’s tax partners have spoken during AmCham Indonesia’s Tax Committee meetings on how the current tax system, gives out a very complicated tax return system with a lot of complexity. Critics also say the high tax rate and complexity of the system demonstrate how difficult it is for the US to compete in global markets, with no incentives to keep jobs, manufacturing, and intellectual property onshore.
How is it going to impact Americans?
According to the blueprint, for American households it will simplify, flatten, and lower tax rates for families and individuals. In addition it will provide for reduced and progressive tax rates on capital gains, dividends and interest income, to encourage savings and investment. It will eliminate the alternative minimum tax, so that people no longer will be required to calculate their tax twice every year. Also, it will eliminate the estate tax and the generation-skipping transfer tax, so that the death of a family member or loved one no longer will be a taxable event.
Job creators will also benefit from the tax reform proposal. The blueprint says it will bring distinct reductions in the tax rates for businesses of all sizes and greater parity in the tax treatment of all businesses regardless of size or legal form. Instead of having some of the highest tax rates on entrepreneurship and business activity in the world, the US will offer globally competitive rates.
It states that, today, businesses that invest to create jobs and grow their operations cannot recover the full present value of the capital investments they make, which means they effectively are taxed on funds they reinvest in the business, which makes it harder to invest and grow and eventually affects the growth of the American economy. The blueprint says that it will provide all businesses with the benefit of full and immediate write-offs of their investments in both tangible and intangible assets. The new tax system will be a move toward taxation based on business cash flow.
The proposal also says it will eliminate the existing self-imposed export penalty and import subsidy by moving to a destination-basis tax system. Under a destination-basis approach, tax jurisdiction follows the location of consumption rather than the location of production. This could be achieved by providing for border adjustments exempting exports and taxing imports. A territorial tax system that is consistent with the approach used by the United States’ major trading partners. These two fundamental structural changes in turn allow other important aspects of the international tax rules to be simplified and streamlined significantly.
Whether the blueprint is accepted in its entirety or is watered down or amended once it is fully debated and proposed as legislation remains to be seen. As do the thoughts of President Trump. But change is coming, and will be watched carefully for its impact on US economic growth and foreign investment.
For more insight on the proposal, visit https://waysandmeans.house.gov/taxreform/