‘No-one can tell you what will happen in the future. But some people can really give you vision about what might happen’ (David Lifson CPA, introducing former House Ways and Means Committee Chairman Mr Dave Camp at the 2015 AICPA National Tax Conference).
Mr Camp delivered an enlightening and insightful speech on the future of U.S. tax reform at the November National Tax Conference in Washington DC. The speech focused on the key drivers for U.S. tax reform underpinning the Tax Reform Act of 2014.
He said that there are three key drivers for tax reform, being the tax extenders, the economy, and international pressure.
‘We are the only nation in the world that lets a huge chunk of its tax code expire, often for a year, and then retroactively puts in back in place’.
‘That whole process is really unacceptable to me, and it puts us out of place with the rest of the world’ he told conference delegates.
‘If something has been extended for 40 years, or 30 years, or 15 years, I think it’s pretty much policy’.
Moves to make tax extenders permanent, he said, especially the obvious ones, have received bipartisan support but have been rejected by the White House.
Commenting that the economy is not where it needs to be, Mr Camp observed that the unemployment figures are understated and are more likely to be around 10 per cent.
This is due to a large extent, to people having left the workforce, and Mr Camp expressed his personal concerns around growing the economy, keeping jobs in the United States, the issue of ‘substantive presence’ becoming increasingly significant, and the difficulties that school-leavers face in finding employment.
On the international front, Mr Camp talked extensively about the pressure that the United States is experiencing from overseas due to having the highest statutory corporate rate in the world and the second highest effective statutory rate – second only to France.
This is severely affecting the United States’ ability to compete on the global stage.
The United States is one of only a few countries left with a worldwide system of taxation – both corporate taxes and individual taxes. Most other countries, including New Zealand, have moved to a system of a territorial basis for taxation of incorporated entities.
Accordingly the phenomena of ‘lock up’ has some 2.3 trillion U.S. dollars stranded overseas, whereby corporations reinvest profits rather than repatriate these to the United States.
As the United States has the highest corporate statutory rate in the world, lock-up occurs to avoid additional tax due in the United States due to foreign tax rates not being sufficient to meet the U.S. tax liability on repatriated profits.
The OECD average statutory corporate income tax rate is now around 24%, a steady and dramatic decline from 50% in the 1980s, and Mr Camp stated that there is unanimity that the U.S. corporate rate needs to come down, citing that the United States is a ‘takeover target’ due to its lack of global competitiveness.
Impacting to a great extent on the future of U.S. tax reform is the OECD BEPS project. Mr Camp observed that worldwide there has been a dramatic shift in focus yet it is currently unclear how uniformly the recommendations will be implemented. It appears that the United States is taking a back seat approach, as he went on to say that the United States lost some leverage at the start of the BEPS project.
Another consideration is an international tax treaty being negotiated with 80 countries, of which the United States is not a participating country.
From a budgetary perspective, there is a two-year agreement on how much money should be spent.
U.S. debt now stands at $19 trillion and has increased. The next default deadline is March 2016. Either a continuing resolution or an omnibus bill will need to be passed by mid-December to address this.
The issue of U.S. tax reform has been on the cards since 2007, with recent tax reform efforts from House Ways & Means Committee, and the Senate Finance Committee Bipartisan Tax Working Group’s International Tax Bipartisan Tax Working Group Report issued on July 7, 2015.
Under the former, the recent effort to link international reforms with federal highway legislation has stalled over highway funding differences. International reform ideas include a mandatory repatriation tax, a minimum tax and an innovation box. Comprehensive reform has been put on the back burner due to the individual rates under the Obama administration not up for negotiation as they form a hallmark of the current administration.
Under the latter, general support for reform, including international reform, is expressed.
Mr Camp said that comprehensive reform would be best and he is of the mind that revenue neutrality and distribution neutrality are important.
Key elements of the 2014 Tax Reform Act are
- Revenue neutrality
- Reduce the top corporate tax to 25% over a five year period.
- The shift from worldwide taxation of incorporated entities to a dividend exemption system.
- Reduce the individual rate structure to two brackets: 10% and 25% with a 10% surtax applying to income over certain thresholds.
- Eliminate the majority of corporate and individual income tax credits.
- Repeal Alternative Minimum Tax (corporate and individual).
There remains the threat of job losses if the tax system doesn’t change. Inversions are the problem if the business substantial presence shifts offshore.
Trying to predict what will happen with tax reform is like trying to predict who the next President of the United States will be, and so tax reform is shrouded in uncertainty.
The Administration takes the lead and Congress should oversee it with consultation. There has not been as much consultation on the OECD process with Congress as there should have been.
In Mr Camp’s opinion, it is unlikely that the worldwide system of taxation of individuals will change any time soon. Closing comments included that the future of U.S. tax reform needs to take a bipartisan approach. How do you get the right policy and how do you move it forward? Some of it is regional, some of it is by sector, regardless, it needs the best ideas from both sides.
NZ US Tax Specialists would like to acknowledge the American Institute of Certified Public Accountants and Mr Dave Camp for the material used in the production of this article.