As President Donald Trump takes office in conjunction with a Republican-controlled House and Senate, there has been widespread discussion around potential changes to federal tax policy. Some have speculated that the Trump administration and the GOP legislative majority will move to lower corporate taxes and could make changes to individual tax rates. No matter what form they take, changes to current tax laws and codes could have implications for financial advisors and their clients. I recently discussed the issue with Caroline Harris, Vice President, Tax Policy, and Chief Tax Policy Counsel for the U.S. Chamber of Commerce.

Tax reform has been a contentious issue for past administration and Congresses. Do you think tax policy and tax reform will be addressed by the Trump White House?

Harris: I’m more optimistic than I have been in the past. I think anyone you talk to will say that when you have single-party control of the House, the Senate, and the White House it makes doing any kind of legislation more feasible. One of the first questions you should ask about tax legislation in the new congress is, are they going to try and do a bipartisan approach? The second option is partisan tax legislation, which [could use] the reconciliation process to move legislation and wouldn’t [require] Democrats to move legislation forward.

How do the tax policy proposals of the House, Senate, and White House differ?

Harris: If you look at the House, you have the GOP blueprint. It has some traditional Republican tax policy items; lower rates – both on the corporate and individual side – a repeal of the death tax [and] estate tax. In the Senate, we’re more mystified as to what [shape tax reform will take]. Senator Orrin Hatch, Chairman of the Senate Finance Committee, has been working on [a tax] integration proposal for quite some time, but no one’s ever seen legislative language on it, so it’s very hard to tell what it is. The third component is President Trump. He does line up with the House proposal, particularly on the individual side, [including] a reduced number of brackets at reduced rates. He talks about potentially modifying the death tax – not quite a repeal, but certainly close. He talks about a 15% corporate tax rate. He’s vague about international [tax] provisions. I think there are very big questions about the scope of tax reform [and] the revenue goals of tax reform. There’s a lot of moving pieces. It remains to be seen if those moving pieces can all get in sync and move across the finish line.

What do you see happening around the issue of repatriation1 and changing the tax policy around U.S.-based companies earning money overseas?

Harris: I think there is a realization in the United States across parties that there is money that has been earned overseas that is not being brought back to the U.S. because of our tax system [and] because we have a very high rate, unlike our world competitors. The repatriation discussion has a couple facets to it.

First, is deemed [repatriation] versus voluntary repatriation. In 2004, we did a voluntary repatriation. We said, ‘Hey, you have all this cash sitting overseas. You’re welcome to bring it back to the United States, and the amount that you bring back will be taxed at a significantly reduced rate.’ [Companies] brought it back, and they did stock buybacks, they put money into pockets of taxpayers. But they didn’t do some of the things they [previously] talked about, which was creating more jobs, or investing in more capital, plants, or equipment. Some people got upset.

The second option is a deemed repatriation. A deemed repatriation says, “We don’t care if you bring the cash back. We’re just going to look at whatever you have overseas and we’re going to tax it at a certain rate.” There’s a couple issues there. Number one, a lot of that cash sitting overseas because that’s where 95% of the world’s consumers are [and] that’s where [the] market potential is. A lot of it has already been reinvested. It’s not liquid – it’s in property, plants, and equipment. It’s not cash that [companies] can liquidate and pay taxes on easily, so it creates a problem, in terms of this deemed repatriation.

What can you share with us on debt equity rules – rules around the proportion of shareholders’ equity and debt used to finance a company’s assets?

Harris: In April [2016], the Internal Revenue Service and the U.S. Treasury put out rules to thwart these inversion deals [relocating a corporation’s legal domicile to a lower-tax nation]. The debt equity rules, instead of being narrowly targeted, were extremely broad. They impacted not only inverted companies doing business in the U.S., but historically foreign companies, U.S. multinational companies, as well as purely domestic companies. We saw those curtailed a little bit and finalized in October. I think the question is, what happens to those in the new administration? Can they just go in and sort of pull those rules? President Trump has talked about financing infrastructure [and] that’s potentially a catalyst to the administration wanting to get engaged [on debt equity rules]. They are certainly on the radar.

Investment professionals can download the NatixisTalks app to hear the full discussion with Caroline Harris on our Politics and Policy podcast. Stay up to date on market and industry trends on our Latest Insights page.

1 Repatriation: For companies domiciled in the United States, this term refers to the process of returning foreign earnings to the U.S. by converting them to US dollars and paying taxes on them. In order to lessen their tax liabilities, some U.S.-domiciled companies chose not to repatriate offshore earnings. “Voluntary repatriation” refers to when a U.S. domiciled company independently elects to return its foreign-earned profits to the U.S. “Deemed repatriation” refers to when a company’s foreign-earned profits are required by law to be repatriated to the U.S. and accounted for tax purposes.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

Natixis Global Asset Management does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decisions.


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