Blog Posts Tagged With Border Adjustments

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House Tax Bill Establishes 10% Minimum Tax on High-Profit Foreign Subsidiaries

Anti-base erosion measures in the draft tax reform bill released last Thursday include a provision that effectively imposes a foreign minimum tax on 10% U.S. shareholders of controlled foreign corporations (“CFCs”) to the extent the CFCs are treated as having earned high net income. The minimum tax would be at a 10% rate for U.S. corporations. Because the determination of a “high return” is based on a percentage of the CFC’s tax basis in tangible assets, foreign subsidiaries that have fully depreciated tangible property or intangible property may have “high returns” with only modest profits. The stated purpose of this provision is to eliminate the incentive to shift profits from the U.S.
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(Re)Setting the Stage for Comprehensive Tax Reform: Big Six Send First Signals

The Legislative Calendar: Six Months In.  With yesterday’s late night last ditch failed effort by the Senate to pass a so-called “skinny” repeal of the Affordable Care Act, the Republican controlled chamber has nearly run the clock on its strategy for passing major legislation by majority vote, which relied on reconciliation instructions under the FY 2017 budget resolution (a process we highlighted back in December). Congress will soon need to adopt budget resolutions for the 2018 fiscal year if regular order is to be readopted and any progress is to be made on the President’s budget proposals (which are traditionally only a starting point for negotiations).
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Prospects for Tax Reform in 2017?

House Speaker Paul Ryan (R-WI) addressed the National Association of Manufacturers on Tuesday in an effort to build support for tax reform, emphasizing the unique, and diminishing, window of opportunity that exists to enact permanent tax reform ahead of next year’s primaries and midterm elections. According to his press office, this speech marks the beginning of his “sales pitch” for tax reform in 2017. Speaker Ryan’s prepared remarks are available here. You can also watch his speech here (starting at 1:41:34).

Here are the key takeaways:

  • Republicans Are Aiming for End of 2017:  Speaker Ryan said that lawmakers would “begin to turn” their plan into legislation to put in front of Congress, and promised to “get this done in 2017.”

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DBCFT Still Not Dead (to Brady)

At a WSJ conference yesterday, House Ways and Means Committee Chairman Kevin Brady (R-TX) gave a few tantalizing hints as to the content of the much anticipated house tax reform bill. Most notably, Brady suggested that the bill would include a DBCFT that is phased in over a five-year transition period. This is intended to respond to a number of concerns, including the fear that currencies may not adjust immediately (click here for the Tax Foundation’s summary of the concerns alleviated by, and new concerns raised by, a five-year transition).

Brady also reaffirmed that certain industries (financial services, communications, insurance and digitally-focused businesses) would be subject to “special treatment” under the DBCFT.
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An Update on the DBCFT: A Hearing in the House and Trump’s Budget

In advance of yesterday’s House Ways and Means Committee hearing on tax reform, the Joint Committee on Taxation released its own comprehensive report on destination-based taxation and border adjustments. The report gives an overview of the current state of U.S. international taxation and then delves into the economics of border adjustments, including a summary of the academic literature on associated exchange rate (or other wage or price) adjustments such that exporters would not be advantaged and importers would not be disadvantaged (defined as “trade neutrality,” which we’ve previously explored here and here). Although the JCT ultimately does not take a view on whether the proposed destination-based cash flow tax would achieve this “trade neutrality,” the report does suggest that any currency adjustments would not happen quickly or, perhaps, evenly among importers and exporters, citing empirical studies that conclude that changes in consumer prices affected by exchange rate adjustments happen asymmetrically.
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Reactions to the Trump Tax Plan

As noted in yesterday’s summary, the basic outline of the Trump Administration’s tax plan is largely similar to the Trump campaign proposals, with fewer details and with one notable shift toward the House Blueprint’s approach – the move toward territoriality. The table below shows how this latest plan compares to the House Blueprint and the Trump 2016 campaign plan.

In the press conference to announce the “broad-strokes” plan, both Treasury Secretary Mnuchin and National Economic Council Director Cohn said that they were in agreement with members of Congress over the four driving goals of tax reform – grow the economy and create millions of jobs, simplify the tax code, provide tax relief to American families, especially middle-income families and lower the business tax rate from one of the highest in the world to one of the lowest.
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President Trump To Announce Tax Reform Principles

The Trump Administration is expected to announce its tax reform plan during a 1:30 PM press conference at the White House today. The Administration is boasting that the tax plan will be “the biggest tax cut and the largest tax reform in the history of our country.” We will be covering the press conference, so stay tuned for our summary and analysis of what is proposed. In the meantime, here are our predictions for what we may see:

  • Corporate tax rate reduced to 15%
  • Pass-through business income also taxed at 15%
  • Repeal the corporate AMT
  • Deemed repatriation of accumulated offshore earnings taxed at 10%
  • No destination-based cash flow tax
  • Shift toward territoriality?

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Tax Reform and Revenue Raisers

One of the biggest challenges facing lawmakers in the current tax reform process is finding a way to reduce headline tax rates in a revenue neutral way. Some revenue raisers (like eliminating itemized deductions) would raise significant revenue and simplify the tax code. Other revenue raisers come at the cost of increased complexity, at least in the short term (e.g., implementing a federal VAT or a new carbon tax). Closer inspection of ideas on the table reveals that politically popular reforms are not necessarily the largest revenue raisers. For example, there seems to be bipartisan support for taxing carried interest as ordinary income (more on that here), a relatively small revenue raiser.
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Mnuchin: Tax Reform Timing Likely to Slip and Other Hints at the Administration’s Thinking

Treasury Secretary Steven Mnuchin told the Financial Times yesterday to expect tax reform to slip past the August recess, stating that the previously announced timeline was “highly aggressive to not realistic at this point.” Mr. Mnuchin’s interview touched on other areas of tax reform as well, confirming that the Administration has not ruled out the DBCFT (and the ~$1 trillion of revenue it would purportedly raise) while implying that the Administration is also considering alternative revenue raisers.  When asked how the Administration would ensure tax reforms were deficit-neutral, Mr. Mnuchin also stressed the importance of economic growth in generating revenue, implying that the Administration may lean on dynamic scoring to meet the reconciliation process’s budget neutrality requirements.
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The DBCFT, Anti-Avoidance Rules and a Cartoon about Sandwiches

Earlier this week, Kyle Pomerleau of the Tax Foundation published an article highlighting the effects of the destination-based cash flow tax on the number and complexity of anti-avoidance rules otherwise required to prevent base erosion in a territorial system.  You can read the article here. On a less serious note, Vox came out with an article that explains the impact of a destination-based cash flow tax with a cartoon about sandwiches. We enjoyed both articles and thought you might too.
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Tax-Related Excerpt From Trump’s Address to Congress

Below is a transcript of the tax-related section of Trump’s address last night to a Joint Session of Congress. You can watch the full speech (and read the full transcript) here.


President Donald Trump’s Address to a Joint Session of Congress

Washington, D.C., February 28, 2017

But to accomplish our goals at home and abroad, we must restart the engine of the American economy — making it easier for companies to do business in the United States, and much harder for companies to leave.

Right now, American companies are taxed at one of the highest rates anywhere in the world.
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DBCFT Not Dead Yet

As expected, President Trump’s first speech before a joint session of Congress last night did not include any new details on the Administration’s plans for tax reform, but his remarks did include some references to tax reform, including a reference to a border adjustment tax for imported goods. Does that signal an upcoming endorsement of the House Republican’s destination based cash flow tax (DBCFT)? That remains to be seen, but it is fair to say that the DBCFT is not dead yet, and could still turn out to be the least worst alternative, given its revenue raising potential.

Some lawmakers, including Republicans in the Senate, have recently been distancing themselves from the DBCFT and momentum for the proposal seems to have stalled.
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Who’s Afraid of the WTO?

One concern voiced about the destination-based cash flow tax (DBCFT) is that the border-adjustment feature may not be compatible with World Trade Organization (WTO) rules. Although much of the current discourse on the topic is muddled, the border adjustment feature of the DBCFT proposal is not intended to be trade policy (and, as we have discussed before, many economists believe that it should have no impact on trade). Instead, it is intended to be tax policy – i.e., a means to achieve territoriality within a cash flow tax-based system, taxing only cash flows associated with consumption in the United States.

It is on this basis that House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady (R-TX) have repeatedly defended the proposition that the DBCFT is a consumption tax that meets WTO standards.
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Economist Challenges Currency Appreciation Doubters

Alan Auerbach, a University of California economist and a leading advocate for the switch from an income tax system to a border adjusted cash flow tax (or DBCFT), released a note yesterday that seeks to reinforce his prior analysis detailing why the dollar will rise in response to the border adjustments contemplated by the DBCFT. In this note, Auerbach catalogues and counters the more popular arguments against his currency appreciation predictions. The full note is available here.

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Tax Foundation Seeks to Set Us Straight on Border Adjustments

The Tax Foundation released a paper today that aims to dispel some of what it views as the common misconceptions regarding the effect of border adjustability. The paper challenges the notion that border adjustability will impact the trade balance or boost production at home, but argues that border adjustability will have other effects, including preventing profit shifting, eliminating the need for complex anti-base erosion provisions, and broadening the tax base within the budget window.

The full paper is available here.
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Challenges to Implementing a DBCFT

On TaxVox, Howard Gleckman of the Tax Policy Center highlights five challenges the House GOP will face in implementing a destination-based cash flow tax (DBCFT). In particular, lawmakers will have to decide what exemptions to offer, figure out how to distinguish imports from exports, think through exchange rate impacts and transition rules, and deal with ramifications of the DBCFT for international tax agreements.
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Economist Compares DBCFT to Retail Sales Tax

The chairman of the Council of Economic Advisors under President George W. Bush has weighed in on the destination-based cash-flow tax (DBCFT) at the heart of House Republicans’ tax reform plan. Greg Mankiw wrote on his blog yesterday that the DBCFT is “in effect” a retail sales tax on consumer goods and services that would replace the corporate income tax and finance a reduction to the payroll tax. Mankiw favors the DBCFT.
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What does “Territoriality” really mean?

“Territoriality” is one of the key buzz words in this year’s tax reform lingo, with many proposals urging a shift away from our current “worldwide” system of income taxation for business income. This post expands on what features a “territorial” system might include.

The Basics.  A worldwide system of income taxation taxes residents of the taxing jurisdiction on all of their income, both foreign and domestic (usually with a credit for foreign taxes paid). A territorial system, on the other hand, theoretically taxes only income earned in the taxing jurisdiction. In practice, however, the lines between a territorial and worldwide system are rarely, if ever, this clear.
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Simulating the DBCFT

As House Republicans and President Trump debate the merits of a destination-based cash flow tax (DBCFT), Treasury’s Office of Tax Analysis released a working paper that attempts to unpack the consequences of the tax by running a simulation. The paper, by Elena Patel and John McClelland, applies a hypothetical DBCFT to a sample of corporations for the period 2004 to 2013.
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Helpful Primers on the Practical Impact of a DBCFT

This morning, the American Action Forum released four primers on how a destination-based cash flow tax (DBCFT) would work in practice – one that sets forth an example of how a DBCFT would affect importers, one on the effect on exporters, a third on how a DBCFT would remove incentives for U.S. firms to move manufacturing and production overseas for sales back to the U.S., and a fourth that discusses how a DBCFT would diminish the use of transfer pricing by U.S.-based multinationals to shift income to low-tax jurisdictions.

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Cash-Flow Tax Systems: Five Thoughts

The European Commission contracted a study on cash flow taxes (CFT) that culminated in a 250+ page Final Report published in May of 2015. Here are five things we learned from the report:

  1. Some countries ignore simplification as a goal and apply CFT systems in parallel with corporate income tax systems.  Many countries have adopted “mixed systems” that include CFT elements, or sector-specific CFTs.
  1. No country has adopted a destination-based CFT, despite its theoretical appeal.
  1. Existing CFT systems do not show evidence of having been based on the CFT models discussed in the academic literature, but they do seem to have the desired effects of encouraging investment and eliminating the tax incentive to finance with debt rather than equity.

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And Now for Something Completely Different: A Primer on Destination-Based Cash-Flow Tax

The destination-based cash-flow tax (or DBCFT) at the heart of House Republicans’ “Blueprint” for tax reform has already attracted high-level attention, pro and con. Proponents and detractors are aligned, however, in one respect: the DBCFT would be a radical departure from the current corporate tax system.  In this post, we provide an introduction to the key distinctions by describing what a DBCFT is in broad terms. At base, a DBCFT contains two related but distinct changes to the current U.S. corporate tax: the change to a “cash-flow” tax and the change to a “destination-based” tax.

Cash-Flow Tax
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Setting the Stage for Comprehensive Tax Reform

Tax reform will be one of the top priorities for the 115th Congress. Hopes for pursuing tax reform to a successful conclusion are high, given one-party control of the government (and exuberant campaign promises). Following the 2016 election, Davis Polk laid out the background and context in which tax reform measures will be considered, with links to summaries of the leading proposals and details on the politics of tax reform. Although life in Washington has moved forward since this memo was published, the key points and players remain the same. Read on for things to watch.

Setting the Stage for Comprehensive Tax Reform, December 2, 2016

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