22 Dec 2017
Congress Could Soon Approve Final Version of New Tax Reform Legislation
The Senate on 2 December approved comprehensive legislation to reform the U.S. tax code. Senate Finance Committee Chairman Orrin Hatch (Republican-Utah) described the effort as a historic tax overhaul “that will deliver more income, more jobs, higher wages and more opportunities for all Americans.” While the Senate version of the legislation differed from the version approved by the House of Representatives on 16 November, a bi-cameral conference committee was able to reach an agreement on a final package in mid-December. The House and Senate were expected to vote on the conference deal, which includes a number of modifications to the previously approved bills, as early as 19 December.
According to a fact sheet released by the House and Senate conference committee, the final version of the tax reform legislation includes the following provisions.
- Lowers the corporate tax rate to 21 percent (compared to the 20 percent rate that had been previously approved) beginning on 1 January 2018, down from 35 percent currently (which is the highest in the industrialised world). This would be the largest reduction in the U.S. corporate tax rate in history.
- Offers a first-ever 20 percent tax deduction that would apply to the first US$315,000 of joint income earned by all businesses organised as S corporations, partnerships, limited liability companies and sole proprietorships. For companies with income above this level, the bill generally provides a deduction for up to 20 percent on business profits, reducing their effective marginal tax rate to no more than 29.6 percent.
- Establishes strong safeguards so that wage income does not receive the lower marginal effective tax rates on business income.
- Allows businesses to immediately write off the full cost of new equipment to improve operations and enhance the skills of their workers.
- Protects the ability of small businesses to write off interest on loans.
- Retains the low-income housing tax credit that encourages businesses to invest in affordable housing.
- Preserves the research and development tax credit as well as the tax-preferred status of private-activity bonds that are used to finance valuable infrastructure projects.
- Eliminates the corporate alternative minimum tax, thereby lowering taxes and eliminating confusion and uncertainty.
- Modernises the U.S. international tax system so America’s global businesses will no longer be held back by an outdated “worldwide” tax system that results in double taxation for many U.S. job creators.
- Makes it easier for American businesses to bring home foreign earnings to invest domestically.
- Prevents American jobs, headquarters and research from moving overseas by eliminating incentives that now reward companies for shifting jobs, profits and manufacturing plants abroad.
- Lowers individual taxes and sets the rates at zero, 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
While a comprehensive analysis of the final version of the legislation would be required to begin to speculate on its likely impact, shifting the United States to a territorial tax system and allowing U.S. multinational corporations to repatriate foreign earnings at one-time low rates, together with a substantial reduction in the corporate tax rate, could persuade a number of U.S. corporations to repatriate past and future profits from foreign operations, potentially reducing overall U.S. investment in Asia (including Hong Kong) as well as in other regions. Some foreign companies may also be encouraged to shift their headquarters to the United States to take advantage of a more friendly tax regime. Moreover, overall investment flows into the United States could potentially increase under the tax reform plan, although the U.S. fiscal deficit would likely increase significantly. Foreign governments may also come under pressure to provide more favourable tax conditions to be able to retain or attract multinational companies to their jurisdictions.