United States

The ball is in the Senate's court?

Jun 09, 2017
From the Tax Governance Institute

Is the Blueprint on a collision course with political reality?

By John Gimigliano, Principal in Charge, Federal Legislative & Regulatory Services, Washington National Tax, KPMG LLP

Read more Tracking Tax Reform blog posts

We’ve contended that as long as there was no viable alternative to the House Blueprint, it would remain the only tax reform game in town for Congress to work with (see Tracking Tax Reform, April 7, 2017 and April 28, 2017). But now there may be another contender taking the field. With the House Blueprint encountering considerable opposition, we’re hearing that the Senate is making real progress in developing a viable alternative plan.

While the Senate hasn’t released any tax reform plan to the public, Senate tax writers and staff have been working for months on an alternative to the Blueprint. This effort appears to be gaining momentum. Last week, Senate Finance Chairman Orrin Hatch outlined his goals and priorities for tax reform, suggesting that he’s aware that the tax reform ball is now in his court.

Questions remain whether the Senate can develop a politically viable tax plan. We expect the Senate plan would have provisions similar to the Tax Reform Act of 2014 (proposed by a previous chair of the House Ways and Means Committee), but could include a number of key differences.

The Senate plan might feature:

  • A lower corporate rate. Perhaps not as low as the House Blueprint’s 20 percent, but rather in the 25 percent range proposed in 2014.
  • A version of a territorial tax system. This could include a 95-100 percent exemption for foreign-sourced dividends.
  • Mandatory repatriation. Similar to the Blueprint, there might be a one-time tax on old foreign earnings subject to a yet-to-be-determined lower tax rate.
  • A minimum tax. A minimum tax on foreign earnings might be implemented to address anti-base erosion effects. It’s possible that the rate could be under 15 percent.
  • Continued modified accelerated cost recovery (MACRS). The previously proposed Tax Reform Act of 2014 would have replaced the current MACRS system with a version of straight-line recovery; this was highly unpopular with domestic businesses and proved to be part of the plan’s undoing. So it’s possible that the Senate proposal will keep MACRS, and also might make 50 percent, or even 100 percent, bonus depreciation permanent.
  • Limits on interest deductions. It’s unlikely the Senate would completely eliminate interest deductibility; but the tax reform math almost mandates that some revenue be raised from interest deductions. It’s possible that the Senate might limit deductibility, depending on the amount of revenue needed, ranging from a modest tightening of the earnings stripping rules to a robust thin capitalization regime.
  • An intellectual property (IP) strategy. With a minimum tax and a version of territoriality established, the Senate might include an additional “sweetener” to mitigate tax base erosion and keep IP domiciled in the United States. This could mean applying a lower tax rate to income derived from domestic intangibles.

Still, keep in mind—the Senate “proposal” discussed above is not a proposal at all. It’s just an educated guess at where a blending of the 2014 plan with the politics of 2017 might lead. 

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This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.