Is there a better way to international tax reform?
TAX BLOG |
Staff members from the House Ways and Means Committee recently spoke about international tax reform at an event sponsored by the Tax Section of the DC Bar Association. Discussion focused on the House Republicans’ tax policy blueprint, “A Better Way for Tax Reform,” which was released in June 2016.
Under the blueprint, the United States’ system of international taxation would change substantially.
- First, the current world-wide system of taxation would be replaced by a territorial tax system. A territorial system would only subject income earned from sources within the United Stated to US federal income tax.
- Second, previously earned but untaxed foreign earnings would be subject to a deemed repatriation tax ranging from 3.5 percent to 8.75 percent. Companies would have up to eight years to pay the resulting tax liability.
- Finally, a new destination-based cash flow tax (DCFT) would be created that would adjust business taxes at the border. Export and foreign-source profits would receive an exemption while imports would be subjected to a cash-flow based tax. This DCFT would be intended to favor U.S.-made exports over foreign-made imports in a way reminiscent of previous tax incentives that were held incompatible with certain U.S. trade agreements.
The blueprint, as the Ways and Means staff pointed out, represents a bold approach to tax reform by design. Driven by public frustration with the administration of the existing tax code, developments in the international economy since the last significant revision to the tax code, and a desire to spark economic growth, the policies outlined in the blueprint are intended to last a generation.
While the blueprint addresses business tax as a whole, and not just corporate tax reform, it is only a framework and lacks many details. For example, the blueprint does not address international tax considerations for individuals. Additionally, the new DCFT may violate current World Trade Organization rules.
Staff members stressed that it is the intent of the Ways and Means Committee, along with the Senate Finance Committee, to make tax reform a main issue in early 2017. With a new administration coming to DC the Blueprint represents the House Republican’s opening offer. Whether negotiations actually get off the ground remains to be seen.
Given the current level of dysfunction in the federal government, significant, let alone bold, tax reform seems unlikely. However, anything can happen.