US Republican leaders today unveiled a framework for crafting US tax reform, which includes a cut in the corporate tax rate to 20 percent, a move to a territorial tax system, and a global minimum tax.
The Unified Framework for Fixing Our Broken Tax Code, jointly released by the Trump administration, the House Ways and Means Committee, and the Senate Finance Committee, would replace the US’s existing worldwide tax system with a territorial tax system, granting a 100% exemption for dividends received from foreign subsidiaries in cases where the US parent owns at least 10 percent stake in the subsidiary.
To transition to the new system, the plan calls for a deemed repatriation of US multinationals’ foreign earnings accumulated overseas. The tax rate to be applied to such earnings is not specified, though the framework establishes that a lower tax rate would apply to deemed accumulated foreign earnings held in illiquid assets as compared to earnings held in cash or cash equivalents.
Moreover, the plan provides that payment of the tax liability on a deemed repatriation would be spread out over several years.
Minimum tax
To prevent companies from shifting profits to tax havens, the framework also proposes taxing, at a reduced rate and on a global basis, the foreign profits of US multinational corporations.
An senior administration spokesperson said that the details of this provision, designed to prevent US tax base erosion, would be worked out by the tax-writing committees.
“We are going to go to a pure territorial model. It will be a 100 percent dividend received deduction, so that is a pure territorial system. But for companies that are operating in tax haven countries, we do want to make sure that there is at least a certain level of tax on a global basis for companies that are operating overseas,” the official explained.
The tax-writing committees intend to incorporate other rules to level the playing field between US-headquartered parent companies and foreign-headquartered parent companies, the framework states.
Corporate rates
For corporations, the new tax rate drops from 35 percent to 20 percent and the corporate AMT would be eliminated.
Businesses may immediately write off or expense the cost of new investments in depreciable assets other than structures for at least five years. Interest deductibility for C corporations will be partially limited, though.
While some credits will be eliminated, the framework would retain both the research and development and low-income housing credits.
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