President Trump’s decision to withdraw from the Paris climate change accords has been well-publicized. However, less than a week later, in early June, Trump abstained from a lesser noticed worldwide tax treaty, developed by the Organization of Economic Co-operation and Development (OECD). This treaty, known as a MLI Convention (for multilateral instrument), is tax-related: its avowed purpose is to trim tax avoidance by multinational corporations. The accord’s primary purpose was to try to attempt to put a halt to treaty shopping, the practice of shifting income from tax haven countries to those with attractive tax treaty networks.
What will the U.S. absence from this treaty mean for American businesses with significant foreign operations? As Pascal Saint-Amans, director of the center for tax policy and administration at the OECD, pointed out, the U.S. already has robust anti-abuse provisions in place, so companies may have little opportunity to set up local operations in order to reduce taxes on their foreign activities.
That said, many nations have signed the MLI, so major corporations around the world will be covered by its provisions. Domestic multinationals should be aware of how international tax treaties may be modified as a result, because such modifications could impact the tax obligations of U.S. enterprises doing business abroad.
You’ll see it in September….
Later in June, Gary Cohn, director of the National Economic Council, revealed that Trump plans to introduce his tax code overhaul during the first two weeks of September. Cohn said that Trump calls him or Treasury Secretary Steven Mnuchin every day, checking on progress, and the President “could not be more excited about what we’re doing.”
The objective, according to Cohn, is to bring a finished tax bill to the House and Senate, in order to jump start the process. Both Vice President Mike Pence and House Speaker Paul Ryan joined the verbal support for timely tax revision.
The Trump administration’s goals, Pence reiterated, include reducing income tax rates, abolishing the federal estate tax, and eliminating various tax breaks that make the system complex while impeding tax collection. “We're going to pass the largest tax cut since the days of Ronald Reagan,” he said. “We will get them done this year.”
Ryan sounded the same theme. "We cannot let this once-in-a-generation moment slip by," he stated, promising that tax reform would be enacted during 2017.
Additional encouragement came from a group of centrist Democrats in the House of Representatives known as Blue Dogs. They met with Mnuchin, Cohn, and Marc Short, the president's director of legislative affairs, to offer possible support for a tax bill that is “efficient and works for everybody.”
Small business, large hopes
Meanwhile, Trump’s proposed tax changes are widely anticipated by some people, including small business owners. In a CNBC/SurveyMonkey Small Business Survey, released in June, respondents said that taxes were their No. 1 concern. Of the business owners surveyed, 42% felt that tax changes such as those proposed by Trump would help their business, versus 24% who expected they would hurt.
Driving this optimism is the hope that the income tax rate paid by freelancers, sole proprietors, unincorporated small businesses, partnerships, S corporations, and LLCs would drop to 15%, the rate proposed for regular corporations’ income taxes. Such small businesses pass through income to their owners, which would be taxed at the much higher personal income tax rates. While this provision very well could provide significant tax breaks for small business owners, the details still need to be worked out including the double tax element of distributions to the owners ( most likely to be taxed at qualified dividend rates with a maximum rate of 20%).
Other aspects of the Trump plan could appeal to business owners. Lowering the top capital gain tax rate, by eliminating the 3.8% Net Investment Income tax could help baby boomers who intend to sell their closely-held C corporation—perhaps at a sizable profit—and retire. Eliminating the federal estate tax also could benefit families where a business owner passes on substantial net worth to the next generation.
Moreover, Mnuchin recently told a Congressional committee that Trump would not necessarily veto a tax bill that helps the wealthiest Americans. Previously, Mnuchin had said that Trump’s tax plan would benefit middle-class taxpayers, not the highest earners. Business owners might be considered to be among the “wealthiest Americans” after a profitable year or a successful sale of the firm, so Mnuchin’s remarks could indicate that business owners won’t be shut out from tax savings under the Trump plan.
Some business owners and other taxpayers may be looking forward to Trump’s tax code overhaul but there’s no certainty legislation will be enacted. Currently, Senate Republicans seem focused on efforts to repeal and replace the Affordable Care Act (“ACA”). In fact, a bill to repeal and replace the ACA was unveiled on June 22nd. The bill has been criticized by Democrats and certain Republicans. The Senate and House might not turn to income tax proposals until this issue has been resolved.
In addition, the issue of global taxation of corporate profits may be difficult to address. Pence recently stated that “our outdated system of worldwide taxation penalizes companies for being headquartered here in America. But not for long.” The potential fix could be the adoption of a territorial tax system, as embraced by most other countries.
Finding a substitute arrangement, though, could be difficult. “There are so many different ways of achieving this,” Ryan said. “We in the House have our own idea, and that is one of the ways we're discussing with the administration.”
Beyond melding those ideas, other differences might arise as the Trump tax plan is formed into a bill. Some observers believe that a possible outcome is lower tax rates, without extensive tax code revisions; others believe that no major tax bill will pass in 2017.
In any case, the legislative struggle may go on well into the fourth quarter. We’ll continue to keep our clients updated.
Citrin Cooperman’s Federal Tax Policy Team
As this Trump tax plan moves through the legislative process, Citrin Cooperman’s Federal Tax Policy Team (FTPT) will continue to keep our clients abreast of the constantly changing legislative and political landscape. This team will examine new tax legislation as it is enacted, in order to identify strategies to help our clients best manage the complexities of their tax situations.
With a highly knowledgeable and experienced team, the FTPT is uniquely qualified to assist as our clients tackle key tax issues. The team’s primary focus is on President Trump’s administration, subsequent legislation, and helping our clients learn about, understand and plan under any new tax legislation.