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Update: Unified Framework for U.S. Tax Reform
Update: Unified Framework for U.S. Tax Reform
Hong Kong Tax Alert - Issue 16, September 2017
Last night, the Trump Administration and Republican leadership in Congress released a tax reform framework that will be used to craft U.S. tax reform legislation. Here is a summary of key provisions:
Corporate and international tax provisions:
- Corporate tax rate to be reduced to 20%; corporate AMT (alternativeminimum tax) may be eliminated
- Full expensing of the cost of new investments made after 27September 2017, for at least five years
- Net interest expense of C corporations will be partially limited (rulesnot specified)
- Domestic manufacturing (Section 199) deduction and numerous otherspecial exclusions and deductions to be repealed or restricted (detailsnot specified)
- Deemed repatriation of earnings held offshore in foreign subsidiaries,subject to reduced tax rates; earnings held in illiquid assets will besubject to even lower tax rates (rates not specified)
- Full exclusion of dividends paid by offshore subsidiaries in which theU.S. parent owns at least a 10% stake
- Foreign profits of U.S. multinational corporations to be taxed at areduced rate on a global basis (rates not specified)
- Rules yet to be specified to “level the playing field” for both US-headquartered parent companies and foreign-headquartered parentcompanies
US individual and small business tax provisions:
- The current seven tax brackets will be reduced to three – 12%, 25%and 35% – with the potential for an additional top rate for the highest-income taxpayers (rate not specified)
- The standard deduction will be increased to $12,000 (single filers) and$24,000 (married filing jointly) but personal exemptions for taxpayerand spouse will be repealed
- Many itemized deductions primarily used by the wealthy will be eliminated but tax incentives for home mortgage interest and charitable contributions will be retained
- Tax incentives for work, higher education and retirement security will be retained
- Child tax credits will be significantly increased but personal exemptions for dependents will be repealed
- Estate tax and generation skipping transfer tax to be repealed
- Individual AMT (alternative minimum tax) to be repealed
- The framework limits the maximum tax rate for small and family-owned businesses conducted as sole proprietorships, partnerships or S corporations to 25%
- Section 199 deduction to be eliminated
What the legislation will actually say, and whether and when it will pass, are not clear. It is expected the U.S. Senate will be a major hurdle because 60 votes are needed, but Republicans hold only 52 votes. If U.S. Senate Republicans want to pass the proposed tax legislation with a simple majority, then the tax legislation will need to be “revenue neutral” under the budget reconciliation process, and it is not clear whether that will be the case.
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