United States: Interview

The tax changes that Congress passed and President Trump signed into law in December 2017 are the most significant overhaul of the US Tax Code in three decades. These changes lowered the tax rates on corporations, pass-through entities, individuals and estates and moved the United States towards a participation exemption-style system for taxing the foreign-sourced income of domestic multinational corporations. To help offset the revenue impact of these changes, the new law also scaled back or eliminated longstanding deductions, credits and incentives for businesses and individuals.

The changes have to be viewed holistically, which means that corporations and other organisations have to carefully consider how the new laws could affect their business plans and performance. They have to re-evaluate their tax structures, review their capital allocation plans and take a comprehensive view of enterprise value as well as their supply chains. These are significant, complex changes that require serious thought and scenario analysis at the C-suite level, informed by specialised expertise and state-of-the-art modelling.

Deloitte Tax will continue to help clients navigate through the uncertainty created by tax reform. Our modelling tools allow Deloitte US Tax professionals to provide robust scenario analysis and customised reporting for new and existing tax provisions, including global intangible low-taxed income (GILTI), foreign derived intangible income (FDII), base erosion and anti-abuse tax (BEAT), interest expense limitations and changes for unincorporated businesses and individuals.

The new tax law, which lowered the corporate tax rate and reduced income tax on income related to US based intangibles, has also made some US corporations more attractive targets for M&A by foreign companies. Moreover, the deemed repatriation provision has given many US multinational firms access to a significant pool of cash to make investments. So, it is not surprising that a Deloitte US Tax webcast poll earlier this year found that 42% anticipated that their company is likely or very likely to make an acquisition in 2018, and 26% expect their company to be acquired.

Congressional leaders recognise that their work is not finished. Up next, in the House at least, appears to be what is being referred to as Tax Reform 2.0. Generally, this initiative is focused on making permanent those aspects of the 2017 law that were, by necessity of the process of their enactment, made temporary. Tax Reform 2.0 might also include new and expanded efforts for families to save for retirement and education, as well as some yet-to-be-defined incentives to promote start-ups and innovation. However, it's unlikely that the centrepiece will be the permanency of the individual provision from 2017.

The latter part of 2018, may also see the House and Senate work on "technical corrections" legislation to help address drafting errors in the 2017 law; this could be paired with legislation to extend some of the many other temporary provisions in the tax code, colloquially known as "the extenders".

Of course, the tax world needs to look beyond Congress to understand its future workload. There is also additional guidance and regulatory action coming out from the Internal Revenue Service and Treasury around the new law, which is typical of the implementation of a legislative change that is this complex, and much needed by the taxpayer community in search of certainty. Specifically, on August 1, the US government issued proposed regulations under section 965 on transition tax calculations. Soon after that, on August 3, it issued proposed regulations under section 168(k) providing awaited guidance regarding the 100% bonus depreciation provisions of the tax law. And on August 8, new regulations for the section 199A pass-through deduction were issued. This burst of activity is unusually heavy, but additional tranches of rulemaking are expected for several months.

These significant new provisions will require certain companies and individuals to quickly understand and plan for the impact of the updated tax law.

Deloitte US Tax is helping companies navigate the potential impact of an international tax system for the modern economy. Nearly a quarter (24.1%) of respondents in a recent Deloitte US Tax webcast poll stated that a digital tax has the potential to have a significant impact to their organisation, depending on how rules are adopted.

Provisions intended to encourage the repatriation of earnings currently held overseas, as well as new provisions relating to the taxation of the income of non-US affiliates of US multinationals, could lead to a shift in how US and non-US headquartered companies assemble their value chains, in which jurisdictions they choose to perform research and development activities, and where they invest in organic and inorganic expansion.

Rochelle Kleczynski, Deloitte US Tax Partner, and National Tax Reform Leader

Katherine M. Scherer, Deloitte US Tax Managing Partner, Business Tax Services

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