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Treasury & Taxation

Tax Reform Now More Than a Dream?

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November 18, 2016

Tax reform momentum builds and repatriation may be first in line.

trapped cashTreasurers considering the repatriation of overseas cash but without a dire need for it may want to think twice. That’s because the president-elect is likely to unleash Republicans’ long held desire to reform the tax code, and that may happen sooner rather than later.

Republican tax-reform goals were laid out by the Hoover Institution in June in a document titled Blueprint for America. Such reform would aim to reduce both individual and corporate tax rates as well as impose on corporates a one-time requirement to repatriate cash held overseas at a significantly lower rate than today’s 35%.

“The reality of this getting passed has increased dramatically” with Donald Trump’s election, said Kathleen Dale, principal, international tax at KPMG, who spoke at the NeuGroup’s recent Treasurers’ Group of Thirty meeting sponsored and hosted by Chatham Financial.

Barriers remain, but international tax reform and more specifically repatriation is more likely and more able to pass on its own, without the two other legs of the stool. “I think it’s even more likely there will be some form of repatriation passed,” she said.

Nevertheless, such reform will be complex, since it would be a shift in the tax system from income-based to one based more on consumption. In other words, the taxing jurisdiction for business income would be based on the location of consumption—where the goods are sold or services rendered—rather than the location of production. In addition, the new system would provide a 100% exemption for dividends from foreign subsidiaries

To bridge the transition, Congress would have to pass a law requiring repatriation of cash and cash-like assets and imposing a one-time tax.

The Trump campaign proposed a 10% repatriation tax, while the Hoover blueprint, supported by House Speaker Paul Ryan, formerly chairman of the House Ways and Means Committee that writes tax legislation, proposed a repatriation tax of 8.7% for cash or cash-equivalent assets, and 3.5% for illiquid assets.

“The point here is it’s a mandatory repatriation—the cost of transitioning into the territorial system,” Ms. Dale said, adding that a territorial system would eliminate the problem of trapped offshore cash, and those offshore earnings could be brought back to the US without facing a tax hit.

Given the number of transitional rules that would have to be put in place to effect the change the reform could be enacted within a year, but it could also take longer, Ms. Dale. That may create a quandary for some treasury executives, whose firms foresee a need to bring overseas cash back to the U.S.

“Do I try to repatriate the cash, perhaps using a highly structured transaction, and risk the IRS coming in and saying, ‘We don’t think this works,’ she said. “So the company ends up paying the 35% rate, when in the meantime Congress passes the mandatory repatriation where it could have paid 10%.”

In terms of the corporate income tax, the Hoover blueprint would lower the corporate tax rate to 20% from the current 35%, and there would be a special rate of 25% for business income earned by pass through entities, such as partnerships, and they would be backstopped by a reasonable compensation requirement. The Trump campaign, on the other hand, has called for a 15% business rate for all businesses.

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