International tax in flux: with more changes coming, what's your game plan?

• Author: Maydew, Jeff
• Position: Cover story

At this writing we are in the middle of some of the most significant changes to the international tax landscape in a generation. Many of the coming changes are well reported and obvious, others less so. Although busy professionals have precious little time to consider trends and to plan for changes, now is a good time to do so. Tax executives would do well to find a moment to pause, take in the big picture, and think through potential adjustments to their approach in running the tax function. This article is intended as an aid to start that thought process. In it we note some of the ongoing developments in international tax and some steps that are worth considering in response.

Legislative Developments

In almost every major economy and region, governments are revising their tax laws to meet their revenue needs, encourage growth, adjust to increasing tax competition, and respond to concerns about base erosion.

For U.S.-based multinationals, the most significant changes are, of course, being proposed in the United States. After years of stalled legislative proposals, Republicans now control both chambers of Congress and the Oval Office, leading many to speculate that the long-awaited overhaul of the U.S. federal income tax system will finally come to fruition. Although budget reconciliation puts the Republican-controlled Congress on something of a fast track to move legislation without bipartisan support, the question remains as to which reform proposals are most likely to survive the lobbying gauntlet and receive a signature from President Donald Trump.

The "A Better Way" white paper, released June 24, 2016, by House Speaker Paul Ryan (more widely known as the "Blueprint"), broadly outlines several individual and business tax reform proposals and has been generally viewed as the package most likely to form the starting point, at least, for legislation. The Blueprint's most significant corporate tax proposals include: (1) reducing the corporate tax rate to 20 percent; (2) changing the corporate income tax to a border-adjustable, destination-based cashflow tax, whereby corporate taxpayers (wherever organized) exclude revenues from exports but do not deduct costs for imports when calculating their taxable base; (3) granting an immediate deduction for capital investments (other than land) while denying interest expense deductions to the extent that they exceed interest income; (4) moving from a worldwide to a (mostly) territorial taxation system; (5) requiring a one-time deemed repatriation of earnings accumulated in foreign subsidiaries of U.S. owners, taxed at 8.75 percent for earnings held in cash or cash equivalents and at 3.5 percent for non-cash assets; and (6) repealing the corporate alternative minimum tax (AMT).

President Trump's own high-level business tax reform plan contains some features similar to those of the Blueprint--e.g., reducing the corporate tax rate to 15 percent, elective immediate expensing coupled with denial of interest deductions, repealing the corporate AMT, and imposing a one-time deemed repatriation of accumulated offshore earnings, taxed at 10 percent for cash and cash equivalents and 4 percent for noncash assets. As of this writing, it is unclear to what extent the Trump administration also supports two of the most significant elements of the Blueprint, namely, border adjustability and territoriality. (1) While it would seem that the Blueprint's incentives for firms to expand U.S.-based manufacturing and jobs align with Trump's campaign platform of bringing industrial vigor back to America, the president in the earliest days of the administration issued statements suggesting that he may not be sold on the Blueprint. More recent statements, however, have suggested the administration's openness to the idea.

While the United States seems poised to make its tax system more competitive, the European Union has made a series of moves in the other direction. The European Commission (EC) has been at work developing new rules that take aim at perceived taxpayer abuses, particularly hybrid mismatches. In an early step, the EU Council, in 2015, amended the EU Parent-Subsidiary Directive to include a binding de minimis general anti-abuse rule (GAAR) and required member states to adopt similar anti-abuse provisions as domestic law.

In January of last year, the EC presented a series of proposals intended to prevent tax avoidance and evasion within the EU. These proposals included an anti-tax avoidance directive, recommendations on tax treaties, a revised administrative...