Not since the Reagan era have we seen any meaningful attempt at corporate tax reform in the US. However, in Trump, the US now has a pro-business President with hugely ambitious plans for unprecedented changes which will have implications for multinationals both in the US and overseas. Still, there are significant missing pieces in the puzzle and a unified house of representatives will be essential if any significant tax reform is to be achievable for President Trump.

The Republican control of both houses of congress as well as the White House that resulted from the elections of last November gives the allusion of an alignment of the legislative stars, although it does provide Republicans with a very real opportunity to push through reform, albeit in a tight timescale.

It is a critical time-period for Republicans to capitalise on their opportunity. The mid-term elections in November 2018 could mean the Republican control of Congress could shift and the wheels of the cart could come off in pushing through reform.

History tells us though that tax reform is achievable in this window, with the last significant reform in 1986 moving from proposal stage to signed law in under a year. If both the house and senate come on side, then we might expect an agreement to be signed by the end of this calendar year and come into effect in January 2018. 

Options

Currently there are a different proposals for tax reform floating around in congress, many of which are controversial on the world stage. The two serious contenders are the Trump administration’s proposal and the Republican Blueprint, the latter of which has a much greater level of detail than Trump’s current ‘one pager’.

But both proposals are consistent in three main aims. Firstly, seeking to aggressively lower the tax rate; secondly, allowing a one-time movement of offshore cash and, finally, in the future, seeking to move the US to a territorial tax system.

Cost of implementation is the most notable difference in the plans, with the Republican Blueprint forecast to raise revenue by $1 trillion versus Trump’s which is estimated to come at a cost, of an eye watering $2 trillion over a period of ten years (although some analysts indicate it would in fact be much more expensive).

Questions are therefore arising about how Trump’s proposal will create value in the US. While Trump argues it will be paid for by the economic stimulus that will come following reform, current projections of growth indicate that there would be a huge economic mountain to climb.

On the other hand, the blueprint is forecast to be revenue positive, but only because it includes the highly controversial border adjustment tax (BAT) which cannot be ignored because it would result in significant winners and losers amongst importers and exporters, further complicating the political process.

For now, as we await the draft proposals, US multinationals need to consider how they could be impacted, particularly importers which could be impacted negatively should the Blueprint, with the BAT, be adopted.

Companies need to wait and see how the US tax debate evolves however we are talking about a very short timeframe. There is much horse-trading to play out, but if the stars align, reforms will come into effect in 2018 and corporates therefore need to have in place a variety of plans for whatever the eventuality is. 

About the author

Tim Wach is managing director of Taxand