With much publicity, the Senate passed an amended version of its Finance Committee’s version of the Tax Cuts and Jobs Act over the weekend. Corporations now face a challenge: where to find the resources to react. Expect a scramble around year-end planning and preparing for provisions.
This edition of Tax Advisor Weekly highlights the notable corporate amendments since the Senate Finance Committee version was first released (previously summarized here); although the amendments are few in number, their impact may be significant.
Next step: The House-Senate Conference Committee is expected to begin its process of reconciling their respective bills this week. Republican Party leadership intends and appears to be on track to deliver a bill to the President for signature before year-end.
Our Key Take-Aways:
- Raise your expectations of passage.
The Senate is the greater hurdle for tax reform, with a significantly lower percentage of Republican legislators than the House. Passage of the Senate bill with all but one Republican vote demonstrates impressive party unity and flexibility. Knowing the House has even greater room for flexibility with a higher percentage of Republicans, it’s hard to imagine irreconcilable differences. Further, many of the amendments show the Senate pushing its bill closer to the already-passed House version. Even before Conference Committee, the Senate is trying to find common ground. Since the House’s strong Republican majority allows for even greater flexibility, it’s hard to see irreconcilable differences scuttling the joint legislation.
- Look to the Senate bill as the road-map.
Given the slim majority in the Senate, House Republicans will be reluctant to override the Senate bill. Republican leadership is highly motivated to pass successful legislation ahead of the upcoming midterm elections, so expect the House to coalesce around the Senate bill so as not to disrupt the delicately woven Republican coalition in the Senate.
- Accept that corporations will likely face divergent and complex rules.
The Conference Committee will likely focus on reconciling non-corporate provisions, which represent the biggest cost differences between the House and Senate bills. Since the corporate provision differences largely net-out, we do not anticipate significant revisions on the corporate side of the legislation.
The Senate bill adds layers of unintuitive and complex calculations for corporates. Given the increased likelihood of a bill becoming law before year-end, the Senate’s vote raises the stakes for calculations, with little time for computation.
Alvarez & Marsal Taxand Says:
With higher chance of enactment and minimal likelihood for major revisions to the corporate provisions, we strongly recommend companies undertake proactive measures in anticipation of passage prior to year-end. Immediate action items should include year-end planning, year-end calculations and determining ways to maximize the advantages of tax reform. In doing so, companies should anticipate that the corporate rate might not drop until 2019, but most of the other major provisions (notably the toll charge) could be effective in a matter of weeks. Anticipate year-end needs, schedule the cash-flow impacts, and determine potential structuring alternatives in order to optimize post-reform tax positions.
Notable amendments from the Senate Finance Committee bill:
(see an updated matrix of House vs. Senate provisions)
- Reinstates corporate alternative minimum tax
- Increases toll charge on offshore earnings to 14.5% on liquid assets and 7.5% for illiquid, with first year’s payment due next year
- Phases in the global debt cap limitation
- Extends the capital expenditure deductibility period, but begins to phase it out after five years
- Retains the Section 199 domestic production activities deduction for one more year
- Reduces the pass-through entity tax rate (deduction from income increased from 17.4% to 23%)
Reminders of other key provisions:
- Reduces corporate rate to 20% but not until 2019
- Applies a minimum tax on companies that use related-party imports (goods and services)
- Provides certain exporters a further-reduced 12.5% rate
- Immediately adopts a territorial approach to dividends
- Applies new limits to net operating loss utilization
- Keeps Subpart F and controlled foreign corporation rules in place
- Adds new tax on global intangible low-taxed income (GILTI) against IP-rich U.S.-based companies