Gleening insights from ‘Talking Tax’ participants during these unpredictable times

August 10, 2017

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By John Livingstone

In our continued effort to address critical issues that are pertinent to senior tax executives, we hosted the 27th installment of ‘Talking Tax.’ A primary theme of this executive webcast series  is adapting to change and managing risk in the context of tax reform. In addition to sharing insights regarding the potential of comprehensive tax reform in 2017, our panelists discussed the potential impact of proposed policy changes on tax accounting.

Issues impacting the likelihood of tax reform in 2017

During the first half of the webcast, Scott McCandless, a current Principal in our Tax Policy Services Practice and former Tax Counsel for Members of the US House Ways and Means and Senate Finance Committees, and Tony Coughlan, Tax Counsel for the Senate Finance Committee, discussed the legislative paths available for enactment of comprehensive tax reform in 2017.

Big Six statement

The Trump Administration and Congressional Republican leaders on July 27, 2017, released a joint statement outlining key principles and goals for comprehensive tax reform developed by the ‘Big Six’ working group — House Speaker Paul Ryan, Ways and Means Chairman Kevin Brady, White House economic adviser Gary Cohn, Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell, and Senate Finance Committee Chairman Orrin Hatch. Many of the key tax reform issues being discussed could significantly impact industrial products companies and the way they do business.

Timing of tax reform

The Big Six statement calls for Congress to begin moving tax reform legislation through the House and Senate tax committees this fall, to be followed by consideration on the House and Senate floors. Tony noted that letting tax reform slip into 2018 would make it harder to get the necessary votes in the highly-charged, highly-politicized midterm election year. Among our webcast attendees, 32% agreed, saying that they would be willing to wait until 2018 for tax reform, but fear the pressure of the midterm elections. Another 46% of the attendees said that they don’t care when tax reform happens, they just hope that it gets done.

Tying tax reform to budget reconciliation

Tony addressed the prospect of tying tax reform efforts to the budget reconciliation process and the effects of having temporary measures eventually sunset. House and Senate leaders previously have stated that tax reform legislation is likely to be considered under budget reconciliation procedures that allow for the Senate to approve a bill with a simple majority, instead of the 60 votes generally required in the Senate. However, budget reconciliation cannot be used to enact a measure that increases the deficit, potentially forcing legislators to sunset some of the proposed tax relief. The Big Six statement “places a priority on permanence,” but notably does not make this a requirement and avoids calling for tax reform to be revenue neutral.

Paying for lower tax rates

The Big Six statement expresses support for lowering tax rates “as much as possible,” but does not set specific targets for rate reductions. The June 2016 House Republican Blueprint proposed lowering the corporate tax rate to 20% and providing a 25% rate for pass-through businesses. The Trump Administration in its April 2017 tax reform principles renewed President Trump’s support for lowering business tax rates to 15% — seen as an ambitious goal, especially if the reform plan isn’t going to increase the deficit. It remains unclear how the House and Senate tax committees may seek to offset the cost of lower business tax rates.

The border adjusted tax (BAT) had been estimated to raise roughly $1 trillion over 10 years to offset part of the cost of lowering tax rates, but the Big Six statement announced that the BAT had been dropped from further consideration. The Big Six statement affirms that there is a ‘viable approach’ to lowering rates ‘without transitioning to a new domestic consumption-based tax system” and Speaker Ryan recently expressed confidence that there are ways to lower the corporate tax rate to 20% without the revenue associated with the BAT. Tony said that the Senate Finance Committee is looking at a partial dividends paid deduction corporate integration regime that could be combined with a rate cut to get to a reduced corporate tax rate.

Move to territorial system

The Big Six statement’s reference to creating “a system that encourages American companies to bring back jobs and profits trapped overseas” is consistent with previous expressions of support for moving the United States from its current worldwide system of international taxation to a dividend exemption ‘territorial’ tax system. Tony said that the issue of base erosion, particularly relating to the migration of intellectual property and income production outside the United States, could become worse with a move to a territorial system if proper safeguards are not adopted.

Mandatory deemed repatriation

The Big Six statement does not make any reference to a mandatory deemed repatriation of the accumulated foreign earnings of US companies, but it’s likely that deemed repatriation will be part of any reform proposal considered by Congress. Both the Trump Administration’s tax reform principles and the House Republican Blueprint propose a one-time mandatory repatriation tax — with the Blueprint calling for taxing accumulated foreign earnings at a bifurcated rate — 8.75% for cash or cash equivalents and 3.5% for non-cash holdings. Tony said that there are concerns around taxpayers migrating their holdings from cash to non-cash if a lower rate is applied to non-cash holdings.

Potential impact of proposed policy changes on tax accounting

During the second half of the webcast, Scott and Jennifer Spang, a Partner in our National Tax Practice, discussed the potential impact of these proposed policy changes on tax accounting. Sweeping tax reform has the potential to bring pretty broad financial statement impacts. With respect to any rate reduction, Jennifer explained that companies will need to remeasure their deferred tax assets and liabilities and include that impact in continuing operations in the period of enactment — regardless of effective date. If there’s a difference in the enactment and effective dates, companies will need to consider which deferred tax assets and liabilities will reverse in the period before and after the effective date. Among our webcast attendees, 10% said that — from a tax accounting perspective — accounting for a tax rate reduction would be the most challenging aspect of tax reform.

Jennifer said that if mandatory deemed repatriation is structured so that companies calculate the tax expense at a particular point in time, but have a period of time to pay the tax, the expense likely would be reflected at the date of enactment with some kind of deferred tax or non-current payable being reflected for the future payments. Among our webcast attendees, 20% said that  — from a tax accounting perspective — accounting for a mandatory deemed repatriation would be the most challenging aspect of tax reform. Jennifer said that a move to territoriality likely would diminish the significance of Accounting Principles Board No. 23. Among our webcast attendees, 32% said that — from a tax accounting perspective —  accounting for a move to a territorial system would be the most challenging aspect of tax reform.

Planning for tax reform

The Big Six statement reaffirms that pro-growth tax reform remains a top priority for President Trump and Congressional Republicans. Despite this commitment to tax reform, Congress must resolve many difficult policy issues if it is to enact sustainable tax reform that provides a more competitive tax system for business taxpayers. Industrial products companies should continue to monitor the development of tax policy, not only to mitigate risk, but also to take advantage of potential opportunities.

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