PRESIDENT Donald Trump is in office for some time now. Yet, very little is known about his tax policy. All that one knows from various commentators is that the American tax system is broken and needs fixing. We certainly know that the international tax system that is largely USA driven is broken. It is also mostly the US digital MNCs that are accused of exploiting the loopholes in the current international tax system and pay little or no tax in the other market economies. Even the USA is not happy with its own multinationals that were accused of shifting profits to tax havens and accumulating trillions of dollars in these jurisdictions. It is in this connection, that we heard of the US proposing to change over to territorial system to stop inversions and possible loss of economic activities in the USA.

The BEPS work of the last four years was undertaken by the OECD as a possible answer to the depredations of some of the MNCs, many of which were American.In course of the BEPS project itself, it was clear that the USA was not whole-heartedly in the project and it took contrarian stands on many issues. Country by country reporting, common reporting standards are some of the examples. In fact, it has been widely reported that House majority leader Paul Ryan was against the CBCR. It is also interesting to note that initially the USA (under Mr. Obama) refused to be even a part of the drafting of the MLI standard and relented only subsequently. Nevertheless, there was some amount of purchase of the BEPS project in the Obama administration. But with Mr. Trump taking over as President of the USA, there are also questions of the future of the BEPS project itself. Is the Trump tax plan going to adopt BEPS or is the OECD going to meet the same fate that it faced when the administration transited from the Clinton to Bush? Anything that the USA does even domestically has international ramifications. The Obama administration was also not particularly hunky dory with the OECD. The FATCA legislation is actually a unilateral action of the USA that has affected the whole world. In this context, it becomes interesting to examine whatever little is available in the public domain about the President's tax plan particularly when he and both the Houses now belong to the same party and the current President may not face the same roadblocks that President Obama faced.

Trump campaign had put up the barebones of a tax reforms proposal the broad contours of which were as follows:

(https://assets.donaldjtrump.com/trump-tax-reform.pdf)

1. Tax relief for middle class Americans by letting people keep more money in their pockets and increase after-tax wages.

2. Simplification of the tax code to reduce the headaches Americans face in preparing their taxes.

3. Arrest the migration of companies through techniques like corporate inversions thereby adding new jobs in the USA. All these are to be achieved without incurring more debt. The campaign promised :"If you are single and earn less than $25,000, or married and jointly earn less than $50,000, you will not owe any income tax. That removes nearly 75 million households – over 50% – from the income tax rolls. They get a new one page form to send the IRS … those who would otherwise owe income taxes will save an average of nearly $1,000 each.

2. All other Americans will get a simpler tax code with four brackets – 0%, 10%, 20% and 25% – instead of the current seven. This new tax code eliminates the marriage penalty and the Alternative Minimum Tax (AMT) while providing the lowest tax rate since before World War II.

3. No business of any size, from a Fortune 500 to a mom and pop shop to a freelancer living job to job, will pay more than 15% of their business income in taxes. …

4. No family will have to pay the death tax. You earned and saved that money for your family, not the government. You paid taxes on it when you earned it. "

The campaign also promised business tax reform to encourage jobs and spur economic growth. "Too many companies – from great American brands to innovative startups – are leaving America, either directly or through corporate inversions. The Democrats want to outlaw inversions, but that will never work. Companies leaving is not the disease, it is the symptom." The solution apparently lies in cutting corporate tax to a competitive 15% making the US rate from one of the worst to one of the best.

It was asserted that there wouldn't be any fiscal implications as the tax plan is fully paid by:

1. Reducing or eliminating deductions and loopholes available to the very rich, starting by steepening the curve of the Personal Exemption Phase-out and the Pease Limitation on itemized deductions. The Trump plan also phases out the tax exemption on life insurance interest for high-income earners, ends the current tax treatment of carried interest for speculative partnerships that do not grow businesses or create jobs and are not risking their own capital, and reduces or eliminates other loopholes for the very rich and special interests.

2. A one-time deemed repatriation of corporate cash held overseas at a significantly discounted 10% tax rate . It was stated: "U.S.-owned corporations have as much as $2.5 trillion in cash sitting overseas. Some companies have been leaving cash overseas as a tax maneuver. Under this plan, they can bring their cash home and put it to work in America while benefitting from the newly-lowered corporate tax rate that is globally competitive and no longer requires parking cash overseas. Other companies have cash overseas for specific business units or activities. They can leave that cash overseas, but they will still have to pay the one-time repatriation fee."

3. Corporations will no longer be allowed to defer taxes on income earned abroad, but the foreign tax credit will remain in place because no company should face double taxation.

4. Reducing or eliminating some corporate loopholes that cater to special interests, as well as deductions made unnecessary or redundant by the new lower tax rate on corporations and business income. No details of these loopholes are available. However, interestingly, it is mentioned: "We will also phase in a reasonable cap on the deductibility of business interest expenses."

One may also note that even before Mr. Trump's nomination, the Republican Party has been deliberating its own tax reforms proposals. There are indeed some the common elements of the President's tax plan and the GOP plan. These are- reductions in tax rates (although the party's reduction of corporate tax at 20% is less dramatic than President's promise of 15%) and removal of death duty. There is also the shared concern about the deferral of corporate taxes and the untaxed accumulation of profits by American multinationals in various tax havens.

In June 2016, Ways and Means Republicans unveiled a paper titled "Better Way for Tax Reform." 

(Source: https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf

The GOP proposal is essentially known as border adjusted destination based cash flow tax in replacement of the corporate tax. Destination based cash flow tax has been receiving attention from academics for some time now but the republican proposal has heightened interest in his regard.

The main elements of the plan involves the following:

Simplification of the tax code:

In India, we often hear about the complexity of our income tax law. Therefore it is interesting to note what the GOP plan says about the US tax code. It is mentioned that while the Internal Revenue Code runs over 2,600 pages, the tax code itself represents only a small fraction of the entire body of Federal tax law; that taxpayers must navigate laws and guidance that include Treasury regulations; IRS forms, instructions, publications, and other guidance; and Federal court decisions. When all of these sources are compiled together, the Federal tax laws today fill approximately 70,000 pages. The proposal calls for a postcard size information to be submitted by individual taxpayers.

Reduction in tax preferences

It is also mentioned that the Current Code Delivers Special Interest Subsidies and encourages crony capitalism. It is stated that the tax code is littered with hundreds of preferences and subsidies that pick winners and losers and create complexity and instead of free-market competition that rewards success, the tax code directs resources to politically favored interests, creating a drag on economic growth and job creation. Accordingly, the proposal calls for limiting such special concessions.

Reduction in tax rates

It is pointed out that the overall taxation of capital in the United States is higher than all but four of the 38 countries that make up the Organization for Economic Co-operation and Development (OECD) and the BRIC countries Accordingly, the proposal calls for drastic reduction in tax rates.

It is mentioned that the US corporate income tax system imposes the highest rate in the developed world – 39 percent when the 35-percent Federal rate is combined with the average State corporate tax rate and that the corporate tax rate represents the most important tax-related factor in a company's decision to invest and locate jobs in the United States or overseas. Thus, while in 1960, 17 of the 20 largest global companies located their headquarters in the United States. By 2015, only six of the top 20 were located in the United States.

Territorial system

The report then zeroes in on a so-called disadvantage arising from the use of the worldwide tax system, which involves taxing the earnings of American companies overseas when those earnings are brought back to the United States, with a credit allowed for foreign taxes paid on those earnings. The complaint is that virtually all of the major trading partners of the USA have adopted territorial tax systems, under which these governments generally do not tax the active business income earned overseas by companies headquartered in their countries. Accordingly, there is the proposal to move to a territorial system by taxing only income arising in the USA.

In sum, the proposal states: "For families and individuals, the new tax system will simplify and lower tax rates. It also will provide for reduced but progressive tax rates on capital gains, dividends, and interest income. In addition, the changes will significantly reduce the complexity and compliance burdens of the current system. The approach reflected in this Blueprint will be simple enough to fit on a postcard for most Americans . For businesses both small and large, the focus of the new tax system will be on the growth and competitiveness of all job creators. It represents the largest corporate tax rate cut in U.S. history. It also will bring the lowest tax rate since before World War II to small businesses operated as sole proprietorships or pass-through entities such as partnerships or S corporations. And for the first time ever, all businesses will have the benefit of a full and immediate write-off of their investments in tangible and intangible assets. From the perspective of America's place in the global economy, the new tax system will focus on investment in America and investment for America . The focus on business cash flow, which is a move toward a consumption-based approach to taxation, will allow the United States to adopt, for the first time in history, the same destination-based approach to taxation that has long been used by our trading partners. This will end the self-imposed unilateral penalty for exports and subsidy for imports that are fundamental flaws in the current U.S. tax system. The new tax system also will end the U.S. taxation of the worldwide income of American-based global businesses, which dates back to the first Civil War-era income tax. Under the territorial tax approach reflected in this Blueprint, for the first time American companies will be free to bring their foreign earnings home to invest in America without tax penalty. The new international tax rules also will be significantly simpler, reducing compliance burdens and the potential for controversy."

Border adjusted destination based cash flow taxation for business:

It is true that VAT used in most of USA's trading partners is a destination-based tax and under such a system exports are tax-free while imports are taxed. . However, what the blue print is suggesting is not a VAT but a destination based cash flow tax. In this regard, this is what the report says:

"Today, all of our major trading partners raise a significant portion of their tax revenues through value-added taxes (VATs). These VATs include "border adjustability "as a key feature. This means that the tax is rebated when a product is exported to a foreign country and is imposed when a product is imported from a foreign country. These border adjustments reduce the costs borne by exported products and increase the costs borne by imported products. When the country is trading with another country that similarly imposes a border-adjustable VAT, the effects in both directions are offsetting and the tax costs borne by exports and imports are in relative balance. However, that balance does not exist when the trading partner is the United States.

In the absence of border adjustments, exports from the United States implicitly bear the cost of the U.S. income tax while imports into the United States do not bear any U.S. income tax cost. This amounts to a self-imposed unilateral penalty on U.S. exports and a self-imposed unilateral subsidy for U.S. imports. Because this Blueprint reflects a move toward a cash-flow tax approach for businesses, which reflects a consumption-based tax, the United States will be able to compete on a level playing field by applying border adjustments within the context of our transformed business and corporate tax system.

For the first time ever, the United States will be able to counter the border adjustments that our trading partners apply in their VATs. The cash-flow based approach that will replace our current income-based approach for taxing both corporate and non-corporate businesses will be applied on a destination basis. This means that products, services and intangibles that are exported outside the United States will not be subject to U.S. tax regardless of where they are produced. It also means that products, services and intangibles that are imported into the United States will be subject to U.S. tax regardless of where they are produced. This will eliminate the incentives created by our current tax system to move or locate operations outside the United States. It also will allow U.S. products, services, and intangibles to compete on a more equal footing in both the U.S. market and the global market."

Since the USA runs a trade deficit with most trading partners, it is expected that the border adjustability will ensure additional revenue generation of $ 1 trillion over the next ten years.

Reduction in corporate tax rate:

The Blueprint talks of lowering corporate tax rate to a flat rate of 20 percent . At the same time, individuals will be taxed at half the regular individual tax rate on both dividends paid on corporate shares and capital gains recognized on dispositions of corporate shares. Thus the effective double taxation of corporate income will be reduced through the reduction in the tax on dividends and capital gains of individual shareholders.

Under the Blueprint, job creators will be allowed to deduct interest expense against any interest income, but no current deduction will be allowed for net interest expense. Any net interest expense may be carried forward indefinitely and allowed as a deduction against net interest income in future years.

The elimination of deductions for net interest will help to equalize the tax treatment of different types of financing and reduces tax-induced distortions in investment financing decisions. It also eliminates a tax-based incentive for businesses to increase their debt load beyond the amount dictated by normal business conditions.

It is generally accepted that there is a need for reform of the tax system in the USA. Considering the constitution of the House, the Senate and the Presidency, it is quite likely that we may see some changes in the US tax system. But such a change will have profound effect on the tax systems of other countries. It is also likely that tax competition will intensify and there will be reduction in corporate tax at least in all parts of the developed world. Considering the importance of corporate taxes for the developing countries, this is not a welcome development. Moreover, if the destination based cash flow tax is adopted in the USA, much of the need for the BEPS action plans will also be obviated and the American commitment to the BEPS project will also be minimal. Nothing is clear at the moment. All we know is that uncertain times are ahead in the field of international taxation.