1. Something to Be Called Tax Reform Cometh
Something to Be Called Tax Reform Cometh
June 1, 2017
Pam Olson
US Deputy Tax Leader & Washington National Tax Services Leader |

2. Business tax reform is an economic imperative
Note: The 2012 amount was based on tax return data gathered and reported by the Statistics of Income Division of the IRS. The JCT made assumptions regarding ordinary growth of the world economies and corporate earnings and profits to estimate the amount for 2015.
There are two important caveats to the estimated $2.3 trillion.
The undistributed earnings may include more than just cash holdings (e.g., reinvested earnings – buildings, equipment, etc.)
The $2.3 trillion includes only CFCs and only the amount attributable to an 10 percent or greater US shareholder (however, JCT believes this captures >99% of undistributed, non-previously-taxed earnings)
Sources: “Evolution of Territorial Tax Systems in the OECD,” April 2, 2013; OECD Tax Database, “Part II. Taxation of Corporate and Capital Income. Table II. 1. Corporate income tax rate: Combined Central and Subcentral”.
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3. Worsening federal budget outlook favors difficult revenue-neutral tax reform over simply cutting taxes Spending and revenues as a percentage of GDP
2016
2046
The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2026 and then extending most of the
concepts underlying those baseline projections for the rest of the long-term projection period.
a. Consists of all federal spending other than that for Social Security, the major health care programs, and net interest.
b. Consists of spending on Medicare (net of offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize
health insurance purchased through the marketplaces established under the Affordable Care Act and related spending.
c. Consists of excise taxes, remittances to the Treasury from the Federal Reserve System, customs duties, estate and gift taxes, and miscellaneous fees
and fines.
Source: Congressional Budget Office, The 2016 Long-Term Budget Outlook (July 2016).
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4. Looking back to past reform efforts
Tax Reform Act of 1986 (H.R. 3838)
Treasury I - November 1984
Treasury II – May 1985
Ways and Means hearings – 30 days of hearings between February and July 1985
Ways and Means markup – 26 days of markup sessions between September and December 1985
House passage of H.R on December 17, 1985
Finance Committee hearings – 36 days of hearings between May 1985 and April 1986
Finance Committee markup – 17 days of markup sessions between March and May 1986
Senate passage of H.R. 3838, as amended – on June 24, 1986, after 12 days of floor action
House/Senate Conference Committee – 4 days of formal conference committee meetings between July and August 1986
House final passage of H.R on September 25, 1986
Senate final passage of H.R on September 25, 1986
President Reagan signs H.R into law – October 22, 1986
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5. House Ways and Means Chairman Dave Camp Tax Reform Act of 2014
In brief
Reduce the top corporate tax rate from 35% to 25% over a 5-year period
Shift from a worldwide to a territorial-based system
Anti-base erosion provision applicable to foreign profits
Mandatory one-time deemed repatriation of foreign profits
Reduce the individual rate structure to two brackets – 10% and 25%
A 10% surtax applies to income above certain thresholds
Broaden the tax base by eliminating the majority of corporate and individual tax credits and slowing business cost recovery
Repeal the corporate and individual AMT
Intended to be revenue neutral during the 10-year budget window
Intended to be distributionally neutral
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6. Key elements of the House Republican tax reform blueprint
Full expensing with limits on interest
Border adjustment
Deemed repatriation
Territorial taxation
Lower business and individual tax rates
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7. A completely different approach to the tax base
Current US tax system
Worldwide system with tax applied to both domestic and foreign sales on current or deferred basis
Deferred taxation for unremitted active foreign income, with repatriated dividends subject to 35% corporate rate
House Republican Blueprint
Destination-based system with tax limited to sales within the United States
100% dividend exemption for active foreign income, “deemed” repatriation tax (8.75% cash / 3.5% other) on remitted foreign profits
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8. Outline of House Republican Blueprint goals for comprehensive ‘pro-growth’ tax reform
Cut business tax rates and limit disparity between corporate and pass-through rates
20% top corporate tax rate
25% top rate for pass-through business income
Reduce top individual tax rate to 33%
50% exclusion for capital gains, dividends and interest (16.5% top individual rate)
Eliminates most individual itemized deductions; except charitable contributions and mortgage interest; also retains education and retirement savings incentives (with modifications TBD)
100% expensing for equipment and real property (excluding land)
No deduction for business net interest expense
Border adjustable destination-based cash-flow system: no deduction for cost of imported goods and services; no tax on receipts from exported goods and services
Territorial tax system, with 100-percent dividend exemption
Mandatory ‘deemed’ repatriation
8.75% for cash / cash equivalents and 3.5% for other accumulated foreign earnings, payable over eight years
Repeals corporate and individual AMT
Special rules TBD for banks, insurance, and leasing
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9. Why doesn’t the United States just adopt a VAT?
US more reliant on income/profits taxes; other OECD countries more reliant on goods and services taxes (e.g., VAT)
Only OECD country without a national-level VAT or goods and services tax
Andy Stern (fiscal commission member): Graetz-type tax reform with 10-15% VAT
Use revenue to finance individual reform and lower corporate tax rate
Domenici-Rivlin (BPC task force): 6.5% “debt reduction sales tax” (3% in 2012)
Estimated to raise $3 trillion/9 years ( )
HBC Chairman Ryan: 8.5% subtraction-method VAT (i.e., business activity tax)
Replacement for corporate income tax
Advantage: border adjustable (i.e., imposed on imports and refunded on exports)
Disadvantage: encroaches on traditional source of state and local tax revenue
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10. Trump Administration tax reform principles (4/26/17 outline)
Individuals
Reduce individual rate brackets from 7 to 3 (10%, 25%, 35%)
Maximum 20% tax rate on long-term capital gains and dividends, with repeal of 3.8% ACA net investment income tax
Double the standard deduction
Eliminate targeted tax breaks for wealthiest taxpayers
Protect home ownership and charitable gift deductions
Tax relief for child and dependent care expenses
Eliminate estate tax and AMT
Businesses
15% business tax rate – corporate and passthrough
Eliminate tax breaks for special interests
Territorial international tax system
One-time repatriation tax on overseas corporate profits (unspecified rate)
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11. Recent GOP tax reform proposals Corporate provisions
Current Law
Camp 2014 tax reform act (H.R. 1)
House GOP 2016 tax reform ‘Blueprint’
President Trump tax reform proposals
Corporate tax rates
35% rate
25% rate (phased in over 5 years)
20% rate
15% rate
Border adjustments
(No provision)
‘Destination-based cash- flow’
Exempt exports & tax imports
(TBD)
International tax regime
‘Worldwide’ system
Foreign tax credits to mitigate double taxation
‘Territorial’ system
95% foreign dividend exemption
100% dividend exemption system
‘Territorial’
Cost recovery (full expensing)
Expense investment over the investment’s applicable life under MACRS or ADS
Repeal MACRS
Implement ADS type system, with inflation
Full expensing for investments (tangible & intangible) excluding land
Campaign: manufacturers may elect full expensing for investments (revocable within the first 3 years), but…
Business interest expense
Deductible as incurred
Limit for thin capitalization
Deductible only against net interest income
Special rules for financial services
…if electing full expensing for investments must forego interest expense deductions
Repatriation ‘toll tax’
Currently no provision.
Previously untaxed foreign earnings:
35% corporate rate when repatriated
8.75% cash & cash- equivalents
3.5% non-cash assets over 8 years
3.5% non-cash assets over 8 years
Previously untaxed foreign earnings:
Subject to US income tax at rate TBD
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12. Recent GOP tax reform proposals Corporate provisions
Current Law
Camp 2014 tax reform act (H.R. 1)
House GOP 2016 tax reform ‘Blueprint’
President Trump tax reform proposals
Pass-through entities
Income is passed through to the owners to be taxed at the individual rates (see below)
(No change)
25% maximum (combined entity and individual)
15% maximum (within individual income tax regime)
Carried interest
Taxed at capital gains rates
Taxed at ordinary rates for partnerships engaged in certain stated trades or businesses
(Not stated)
Taxed at ordinary rates
Anti-base erosion regime (Subpart F)
Subpart F anti-deferral regime includes CFC’s insurance income, foreign base company income, among others
Subpart F generally maintained; New tax on ‘intangible’ income: 15% for foreign market sales, 25% for US market sales
Subpart F reduced to foreign personal holding company income provisions
Domestic production
Deduction up to 9% of qualified income for items manufactured, produced, grown, or extracted in US
Phase out and repeal Section 199 deduction
Repeal Section 199 deduction
R&D
Regular credit – 20%
Make alternative simplified credit permanent
Business credit to encourage research and development
(TBD)
AMT
AMT imposed on indiv., estates, trusts (up to 28%) & corps (20%) on tentative min tax liability in excess of regular tax liability
Repeal corporate and individual AMT
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13. Recent GOP tax reform proposals Individual Provisions
Current Law
Camp 2014 tax reform act (H.R. 1)
House GOP 2016 tax reform ‘Blueprint’
President Trump tax reform proposals
Individual rates
Seven rate brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%)
Three rate brackets (10%, 25%, 35%)
Three rate brackets (12%, 25%, 33%)
Three rate brackets (12%, 25%, 35%)
Capital gain/ QDI rates (Individuals)
Maximum 20% rate for long-term capital gains and QDI
Tax as ordinary income with 40% exclusion
Tax as ordinary income with 50% exclusion; exclusion also applies to interest
Maximum 20% rate
Individual – standard deduction
$6,300 for single filers/ $12,600 joint returns (2016)
$22,000 joint returns/ $11,000 other tax payers
$18,000 for single filers with a child/$24,000 for joint returns/$12,000 for other tax payers
Double the standard deduction
Individual – itemized deductions
Itemized deductions phase out begins at $311,300 for joint filers and $259,400 for single filers (2016)
Itemized deductions would look similar to current law with several stated exceptions
All itemized deductions except mortgage interest and charitable contributions deductions to be eliminated
All itemized deductions except mortgage interest and charitable contribution deductions to be eliminated
Estate tax
Maximum 40% rate for taxable estates exceeding $5.45 million (2016 indexed amount)
(No provision)
Repeal estate tax
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14. Chairman Hatch’s study of corporate integration Likely SFC specifications assuming current law
DPD—C-corps. may deduct dividends paid
Withholding tax—35% rate on dividends
Shareholder taxation of dividends:
Individuals—Taxed at ordinary rates with nonrefundable credit for w/h tax
Corporations—DRD is repealed? Carryover excess withholding tax credits?
Foreign shareholders—Override treaties?
Tax exempts, pension funds—W/h tax is not creditable against tax on UBTI
Redemptions and sale of shares–Same as present law
Net investment income tax—Same as present law
Interest withholding—To pay for DPD, a 35% nonrefundable withholding tax could be imposed on interest paid by C-corps
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15. Tax reform is always difficult
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16. Republican control increases odds of comprehensive tax reform
President Trump has multiple priorities, including health care, trade, immigration, and regulatory reform, competing for attention
But he has clearly communicated tax reform goals:
Lower rates, simpler system
Focus on tax reform to promote domestic manufacturing
Republican tax reform focuses on increasing US economic growth
Democratic tax reform focuses more on income inequality
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17. Tax reform points of agreement / disagreement
Tax Reform Design Points
White House
House Republicans
Senate Republicans
House Democrats
Senate Democrats
Top individual rate reduction C
D/s
Corporate rate reduction
Special pass-through rate s
Territorial
Deemed repatriation
Border adjustment
C/s D
Anti-base erosion
Expensing / interest
Cap gains / dividend rate relief
Estate tax repeal
Dynamic scoring
Current policy baseline
Revenue neutral
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18. This document is provided by PricewaterhouseCoopers LLP for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice under Circular 230 or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult with a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided ‘as is’ with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties or performance, merchantability, and fitness for a particular purpose.