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16.11.2017

US Senate and US House of Representatives: Tax Reform

Key Facts
  • Tax reform does not include an excise tax on payments by US companies to foreign affiliates
  • The reduction of the US corporate tax rate from 35% to 20% is only expected to be implemented from 2019
  • Return of the Production Tax Credits for electricity production from certain regenerative energy sources is not included

10.11.2017 - Following deliberations on the Committee on Ways and Means bill, the US Senate Finance Committee submitted a conceptual legislative proposal for a US tax reform (“The Chairman’s Mark”). This is traditionally not a standard legal text during the preliminary stages, but is rather a continuous text that describes the planned changes. It does not include an excise tax on payments by US companies to foreign affiliates, as provided for by the proposal by the House of Representatives. The reduction of the US corporate tax rate from 35% to 20% is only expected to be implemented from 2019. Further details on the bill can be found in an overview of the measures planned by the Senate and the calculations made by the Joint Committee on Taxation.

After the first revision to the Senate draft, the return of the so-called Production Tax Credits for electricity production from certain regenerative energy sources (Sec. 3501 of the House Bill) is not included. Hearings in the Senate Finance Committee will begin next Monday, on 13 November 2017.

Hearings on the Committee on Ways and Means bill concluded yesterday after four days, with the Democrats criticising the rapid legislative process. Chairman Kevin Brady (R-TX) proposed changes, among other things, after considerable criticism (Annex 1 and Annex 2). In view of the controversial excise tax in particular, contrary to the version originally submitted, the possibility to offset the foreign taxes on the payments made is expected to be approved. However, the amount of credit is limited so that the excise tax would still, based on the initial assessment, in many cases lead to a significant additional burden or double taxation of payments between affiliated companies in the USA.

The tax rates for the retrospective taxation of US companies’ foreign profits were also changed from 12% to 14% (liquid) and from 5% to 7% (non-liquid).

Yesterday afternoon, members of the Committee on Ways and Means voted to bring the bill, with the amendments from Brady, to the plenary session at the House of Representatives. Majority Leader Kevin McCarthy (R-CA) confirmed that the vote should take place in plenary next week.

It is currently doubtful that it will be adopted. At least seven Republicans have already spoken out against the bill. The loudest objections come from deputies of the federal states which have comparatively high taxes (e.g. California, New York, New Jersey). They reject the changes in the deductions for the State and Local Taxes (“SALT”) from the Federal Tax; the imminent additional burden on employees is a particular priority.

After completing work on the bills from the two chambers, the Republicans will have to agree on a uniform legal text, which will be submitted to US President Trump for signature before Christmas. However, it is currently doubtful whether this schedule can be maintained.

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