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Corporate tax cuts at centre of US tax reform 'framework'

The headline corporate tax rate in the US would be cut from 35% to 20% under plans aiming to improve competitiveness and deliver "fiscally responsible" tax reform.29 Sep 2017

The 'unified framework' on tax reform (9-page / 176KB PDF), which will be used to develop draft legislation, also proposes a one-off tax charge on foreign assets which are "repatriated" back to the US, as well as a radical simplification of the tax code for individuals.

National Economic Council director Gary Cohn described the framework as "a once-in-a-generation opportunity to give American workers and businesses the level playing field they deserve and make us competitive once again on the world stage".

"The [Trump] administration and Congress have worked together to develop this unified framework for tax reform, which will grow our economy, create jobs and provide relief for working families," he said.

The framework document contains few details of how the plans would be delivered, other than by "closing special interest tax breaks and loopholes". Legislation will be developed by various tax-writing committees through a "transparent and inclusive process", and will include "additional reforms to improve the efficiency and effectiveness of tax laws", the White House said in a statement.

"US tax reform is at a very early stage, and this framework does no more than set out some key principles – there is still a long way to go," said tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com. "The emphasis on simplifying the tax system is interesting, although it remains to be seen whether this can be achieved."

"At last, the US is moving towards a territorial tax system, although proposals to deem the significant sums held offshore to be repatriated are likely to be hotly contested by major US groups," she said.

The framework proposes transforming the existing 'worldwide' taxation model to a 'territorial' model, under which foreign profits offshore will be exempted when they are repatriated to the US. To transition to this new system, foreign earnings that have accumulated overseas under the old system will be treated as repatriated, and any accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Companies will be able to spread this new tax liability out over several years.

The headline rate of corporate tax would be reduced from 35% to 20%, while the rate for small companies whose profits double as the owners' personal income would be cut from 39% to 25%. Companies would also be able to further reduce their tax liability over a five-year period by writing off the cost of any capital expenditure in the year of purchase, rather than spreading the deductions over a longer period of time as at present. The framework also proposes "partially limiting" net interest expense deductions for C corporations and ending many other permissible deductions and tax credits, although those for research and development and low income housing will be preserved.

Walker said that the reference to reducing interest deductibility "probably reflects the OECD's proposals in their Base Erosion and Profit Shifting (BEPS) project", which the US has agreed to implement along with other OECD member states.

"However, note that full expensing of capital expenditure - effectively 100% capital allowances - will significantly soften this blow," she said.

For individuals, the framework proposes reducing the number of personal tax brackets from seven to three, which would be taxed at 12%, 25% and 35%. Congress would also have the power to impose an additional tax surcharge on the wealthiest individuals. The plan also roughly doubles the standard tax-free allowance to $12,000 for individuals and $24,000 for married couples, and proposes repealing inheritance tax.