Opinion: Corporate Tax Reform in 2016?

The elections could make it a pivotal year to achieve needed change

By Douglas S. Stransky, partner, Sullivan & Worcester

Will 2016 be the year that U.S. corporate tax policy is finally overhauled? Will it be the year our corporate tax rate no longer is the highest among the world’s industrial nations? And will it be the year when U.S. corporations bring home trillions of dollars in overseas profits to invest in the U.S. and, as the government would like, pay U.S. corporate taxes on those profits?

Probably not.

In an election cycle and the final year of President Obama’s presidency, the odds are slim that the president and leaders in Congress will reach any agreement on corporate tax reform, including changes to the international tax rules. But 2016 could be the year when the groundwork is set for substantive change in 2017. Several of the leading contenders for the Republican presidential nomination have offered up corporate tax reform plans that would slash the rate and make other policy changes that would bring the U.S. in line with other nations.

A comparison
The top U.S. federal corporate rate is 35%, compared to an average of only 20%among European countries. Senator Marco Rubio would cut that rate to 25%, as would New Jersey Governor Chris Christie. Former Florida Governor Jeb Bush would reduce it to 20%. Donald Trump would go even lower to a maximum of 15%, while allowing for a one-time 10 percent tax on repatriated dollars held by U.S. companies overseas.

Any of those reductions would make the U.S. more competitive with other industrial nations. Rather than losing tax revenue due to a lower rate, we’d be gaining income on money that would otherwise remain parked overseas. But it’s also likely a lower rate would be part of more comprehensive reform. Our policy of taxing corporate income regardless of where in the world a U.S. company earns it might end, for example. Other countries tax only what is earned within their borders.

With the proper discussion in presidential debates or candidate forums, 2016 could be the year when the public becomes more aware of the distorted approach the U.S. has been taking to tax our global corporations and the consequences of that policy. Consider the following:

• To avoid paying the onerous 35% rate, U.S. corporations hold more than $2.1 trillion in profits offshore in low-tax countries such as Ireland, Luxembourg and the Netherlands. That is money that could be used for business expansion and increased employment if brought home.
• Multinational companies such as Apple, Amazon and Google have reduced their effective tax rate far below 35%, prompting many members of Congress and a large segment of the public to accuse them of questionable practices. In truth, they’ve applied legal tax strategies passed by Congress.
• The U.S. Treasury Department has proposed new rules to make it more difficult for companies to complete tax inversion deals, in which a U.S. company merges with a foreign business and moves its headquarters to another country, to benefit from more favorable tax laws. Tax inversion deals are perfectly legal under U.S. law.
• In its zeal to retrieve the funds corporations are holding overseas, the Obama administration has made heavy-handed proposals such as imposing a 19%minimum tax on foreign income, whether the companies bring the money back to the United States or not.
• The inability of Congress to agree on tax reform—for individuals as well as businesses—has meant years of passing increasingly costly temporary tax breaks. In December 2014 Congress approved a package of 50 “extenders” at a cost of about $42 billion to the government. But their long-term cost will be nearly $1 trillion during the next decade because Congress has not offset those tax breaks with spending cuts or other tax increases, as they would if they were permanently in the tax code.

Can anything be accomplished?
Of course 2016 could also be the year when the split among the Republicans in Congress becomes so bitter they can’t cooperate enough to approve something that has long been a Republican priority. In that case, nothing would change. Multinational companies would continue to hold money overseas and establish headquarters outside the U.S. Hopefully that won’t occur, for many reasons, including tax reform.

For 50 years the corporate tax structure, including the international tax rules, has gone relatively unchanged. On October 5, 2015, the Organisation for Economic Co-operation and Development (OECD) released its final reports on recommended changes to global tax rules to attack corporations’ base erosion and profit shifting (BEPS). The BEPS initiative is likely to spur the most significant changes to the taxation of international business in nearly 30 years, resulting in multinational companies having an increased tax burden around the world as OECD countries begin to follow the BEPS’ recommendations and make law changes. Although the U.S. Treasury disagrees with a number of issues addressed in the final BEPS reports because, in general, current U.S. tax rules are consistent with the reports’ recommendations, Congress will at least consider implementing some BEPS-related law changes.

An overhaul could update obsolete laws, boost the economy and provide tax fairness. No doubt immigration reform, gun control and the war in the Middle East will be major issues in the election campaigns. But voters also care about jobs and their standard of living. If they understand that the consequences of our corporate tax policy have been less job growth, slower income growth, and a less vibrant U.S. economy, then 2016 will begin the process for real change one year later.

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Douglas S. Stransky is a U.S. international tax partner for the law firm of Sullivan & Worcester in the firm’s Boston office. He concentrates his practice on international tax planning for clients in a wide range of industries, with a particular emphasis on U.S.-based clients investing in foreign jurisdictions. He is a former co-chair of the International Tax Committee of the Boston Bar Association, a member of the Board of Advisors for Practical U.S./International Tax Strategies, an author on U.S. international tax topics, and a member of the adjunct faculty at the Boston University School of Law.