Significant Changes in US Tax System Likely -

In the short time since the surprising election of Donald J. Trump as the 45th president of the United States, much already has been written about the likelihood and likely direction of changes in US tax law. Clues primarily are drawn from the policy proposals of candidate Trump, the "House Blueprint" and the Portman-Schumer proposals.

In broad terms, likely changes include significant reductions in both individual and corporate tax rates (with corporate tax rates potentially to be set markedly lower than individual tax rates), coupled with some broadening of the tax base, and an overhaul of the US international tax system: abandoning the current worldwide taxation of US multinationals in favor of a territorial or “modified” territorial system that in general exempts active foreign earnings from US taxation (subject to safeguards against base erosion). The House Blueprint would include an even more fundamental change, moving to a destination-based corporate cash flow tax that would exempt exports and disallow deductions for imported inputs. There is likely to be a tax—at a heavily discounted rate and payable over a period of years—on the previously accumulated offshore earnings of US multinationals under a “deemed repatriation” regime. Some form of “Innovation Box” taxing qualifying income at highly preferential rates may be enacted. It is possible capital investments generally will be rewarded with full expensing (as suggested in the House Blueprint, which proposes moving towards a “cash flow” system of taxation), albeit at the potential price of an elimination of the deduction for net interest expense. Some interesting twists in the taxation of the income of pass-through entities may be introduced.