International Tax Alert – October 2017

International Tax Proposals Included in the Tax Reform Framework

Summary

On September 27, 2017, the White House and congressional Republicans released their tax reform framework, the Unified Framework for Fixing our Broken Tax Code (the “Framework”). The nine-page document outlines their objectives for tax reform, which they hope will stimulate the economy and promote job growth. An overview of the international tax proposals included in the Framework are discussed below. 
 

Details

From a corporate income tax perspective, the Framework includes a number of proposals, including reducing the corporate tax rate to 20% and eliminating corporate AMT. From an international tax perspective, the Framework incorporates certain proposals that were seen previously in the GOP House Blueprint and the President’s “one-page” tax reform proposal.  For instance, the Framework proposes a shift from our current worldwide tax system to a territorial system.  In particular, the Framework proposes to “replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).”
 
In conjunction with moving to a territorial system, the Framework also includes a transition tax, which has been a common thread in moving to a territorial system.  Specifically, the Framework “treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.” It is worth noting that the Framework did not provide specific rates for the two types of earnings (cash/cash equivalents and illiquid assets) or a specific number of years for payment of the tax liability the way the previously released GOP House Blueprint did. Specifically, the GOP House Blueprint provided that accumulated foreign earnings would be subject to tax at 8.75 percent to the extent held in cash or cash equivalents, and otherwise would be subject to tax at 3.5 percent (with companies able to pay the resulting tax liability over an eight-year period).
 
One item notably not included in the Framework was the border adjustment tax that previously was included in the GOP House Blueprint.  For a discussion of the prior proposal relating to border adjustment see our February Tax Alert. The fact that such proposal is not included in the Framework is not surprising, given that on July 27, 2017, the “Big Six” group of senior Republicans issued a joint statement specifically abandoning the proposed border adjustment tax that was included in the GOP House Blueprint. 
 
However, there was a global minimum tax type proposal included in the Framework that was not included in the GOP House Blueprint or the President’s one-page tax reform proposal.  This new proposal is designed to stop corporations from shipping jobs and capital overseas.  Specifically, the proposal states the following:
 
To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.^[1]
Unfortunately, the Framework does not provide specific details relating to the new proposals or how such proposals will operate under the new system.  The details of such provisions will likely be provided when an actual bill is proposed reflecting the new tax reform framework.
Another item that was included in the Competitiveness and Growth for All Job Creators Section of the Framework that can impact cross border transactions and base erosion is the interest expense limitation proposal, whereby the deduction for net interest expense incurred by C corporations will be partially limited.^[2] The Framework does not elaborate on what “partially limited” may mean.  Details likely will be provided when an actual bill is proposed reflecting the new tax reform framework.
 

BDO Insights

Given the emphasis placed by certain Congressional leaders and the White House on tax reform, U.S. multinational companies should be evaluating the potential tax impact of the proposals included in the Framework if such Framework moves forward.   BDO can assist U.S. multinational companies in reviewing how the proposals included in the Framework can impact them. Specifically, BDO can assist U.S. multinationals in planning for possible tax reform by helping them model the potential implications of certain proposals included in the Framework (such as the transition tax discussed above) by analyzing and reviewing certain tax attributes, such as earnings and profits, foreign tax pools, tax basis, and loss carryforwards.