January 9, 2018
H.R. 1 – The Tax Cuts & Jobs Act of 2017, was signed into law by the President on December 22, 2017. The legislation makes the most significant changes to the United States (US) tax code since 1986. The effective date of legal authority on the majority of the bill was January 1, 2018. This includes major changes to multinational corporations, domestic business operations, as well as individual taxpayers. The final law culminates six years of work by Republicans in Congress who have prioritized tax reform since they took the majority in the US House of Representatives in 2011. Nonetheless, the statutory language, as law today, leaves businesses with a myriad of unanswered questions and legal interpretations that could have a significant impact on domestic and cross-border business operations. The year ahead presents both challenges and opportunities within the tax arena on both policy and politics.
The major substantive changes to the tax code in H.R. 1 have been widely expected for years under any Republican administration, thus most businesses have been well aware that substantial tax planning may be on the horizon. H.R. 1 achieved long-held holy grails of Republican policy orthodoxy in moving to a dividend exemption system of international taxation (“territorial”), lowering the federal corporate tax rate from 35% to 21%, allowing an immediate expense deduction for investing in capital assets, providing for a deduction for qualified business income for eligible pass-through entities, and lowering individual tax rates across the board.
To achieve their stated goal of a “globally competitive tax system”, tax writers also had to make sacrifices. The legislation includes repeal or phase outs of many preferential credits and deductions. It also creates a new international tax regime designed to prevent the US tax base from leaking to other tax jurisdictions outside the US (“base erosion” provisions). The “global intangible low tax income”, or “GILTI” tax, and the “base erosion anti-abuse tax”, or “BEAT” tax, are major substantive changes to the code that have created an initial level of heartburn among the multinational community in regards to their impact on cross-border transactions.
Initial reactions by the business community suggest that H.R. 1 is a net win for their long-term business operations, but the statutory language has left a great deal of uncertainty as to how provisions are to be interpreted, administered, and reported to US tax authorities. There are also several provisions in the law in which the scope of the language is surely to be challenged by stakeholders in the coming months and years ahead.
While it is a certainty that a significant amount of overseas earnings and profits will migrate back to the US in the coming years through the “deemed repatriation” provision of the bill, the calculation of post-1986 earnings and its mechanics with other provisions of the code, such as foreign tax credits, are already creating uncertainty for global business operations. Furthermore, the “GILTI” tax, the “BEAT” tax, and qualified business income deduction for pass-through businesses are all at a level of complexity that will require significant guidance from the Internal Revenue Service (IRS) and the US Treasury whether through notices, private letter rulings, or formal regulations.
The necessity for continued guidance on the application of H.R. 1, as well the significant amount of differing effective dates, phase outs, and expirations of what is now current law, will require a substantial amount of engagement by the business community to ensure minimal detrimental impact to short or long-term business operations. Congress has already publicly recognized the necessity of a technical corrections bill to clarify the statutory intent of H.R. 1. The US Treasury will dedicate a significant amount of time in the years ahead to issue guidance on major and minor provisions impacting domestic and cross-border transactions. Given the complexity of such an undertaking, businesses would be wise to consistently engage policymakers as well as provide their internal technical expertise on provisions of H.R. 1 which are imperative to their ability to remain globally competitive.
Our team at FTI Consulting has worked on every tax and budget measure considered by Congress over the past thirty years – the last time generational tax reform happened. We have been working with Republican Leadership and Members on the Ways and Means and Senate Finance Committees for the past several years on tax policy and have been players in the debate leading up to this moment. FTI has deep relationships with governments around the world as a result of our global coverage, footprint and operations. Overall, we have the tools to engage, advocate and influence at this critical point in the process and are ready to help you navigate this new course at a time when companies may need to throw everything they have at this issue.