Tax Implications of a President Clinton or a President Trump

By Nicholas Wesley Yee, CPA
Director of Research at Gradient Analytics

With the 2016 U.S. Presidential Elections coming into the final stretch, Gradient Analytics (a forensic accounting research firm, and a wholly-owned subsidiary of Sabrient Systems) recently published a tax issue commentary for its institutional clients. Included was discussion of the possible impact of each of the two major candidates on the tax code.

The U.S. Tax Code has evolved, in part, as a mechanism to shape economic and political agendas. Similar to the “code” in a computer program, over the years the U.S. Tax Code has experienced numerous modifications, additions, and pet projects of politicians that were built upon the existing code. And similar to a computer program, the continuous accretion of line items to the original code can cause issues that reverberate throughout the entire program. There comes a time when it is more beneficial to scrap the old code and start from scratch so that the entire program can be built harmoniously in nature. While easy enough for a programmer to achieve, the political obstacles that would have to be dealt with in a complete tax code rewrite would likely prove to be too much to overcome. Which leads us to the current presidential candidates and their thoughts on the situation.


Clinton v Trump ;

Hillary Clinton plans to use executive authority to punish companies practicing “earnings stripping” and is also calling for a general crackdown on companies attempting to avoid taxes through various tax strategies. Mrs. Clinton intends to achieve this through a reclassification of intercompany debt as equity, effectively removing its tax benefits.  She also intends to require a foreign entity purchasing a U.S. firm to control 50% of the combined entity (presently 20%), effectively preventing U.S. companies from merging with a smaller foreign firm to minimize their corporate tax liabilities. Moreover, Mrs. Clinton would go forward with implementation of an “exit tax” to capture undistributed foreign earnings of firms undertaking an inversion.  Mrs. Clinton’s inversion reform plan does not explicitly outlaw inversions, but rather makes them a forward-looking managerial decision, which considers both the (higher) costs and benefits of such an action.  Additionally, she introduced a plan to incentivize profit sharing by providing a two-year tax credit equal to 15% of the profits shared.   
Donald Trump, unlike his opponent, has a specific target for corporate income tax rates. Mr. Trump would like to see the top corporate rate fall to 15%, which would cut 20% from the present statutory rate and place the U.S. a meager 2.5% higher than the inversion friendly 12.5% rate found in Ireland. His plan for indirectly targeting tax inversions is based on his belief that companies leaving the U.S. for lower tax jurisdictions is the symptom rather than the disease. His tax plan also includes a one-time tax holiday wherein repatriation of UFE would be taxed at 10% in conjunction with the termination of foreign earned income tax deferral. His plan calls for the repeal of the alternative minimum tax (AMT).  Additionally, his plan also involves a decision for U.S. manufacturers in which the company can elect to expense capital investments or maintain deductibility of corporate interest expenses. This provision would be made once and would become irrevocable after three years. Generally, Donald Trump’s tax plan revolves around closing loopholes and simplifying the application of tax law.  
It appears for now that corporations may be reluctant to pursue tax inversions over the near-term due to the aforementioned U.S. Treasury statement and increased political scrutiny. However, this does not resolve the current problem of billions of capital being stored overseas. Without a tax holiday, there is a built-in disincentive for U.S. firms to repatriate funds for use in domestic operations.  Gradient believes that increasingly global operations of larger U.S. companies with significant foreign cash reserves will lead to a heightened risk of international funds being shifted into high growth markets or to pet projects that need not be carried out domestically. We find that industries reliant on intellectual property for profitability, such as pharmaceuticals and technology firms, are the most aggressive in shifting earnings overseas.

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