The Trump Tax Bill: What it means in Switzerland (Part I)

Hey, anyone hear the one about the new tax rules enacted by the US Congress in late 2017? Of course, we all did. Inevitably, unavoidably, somewhere, sometime in December, we read or heard something about the new US tax bill signed into law just before Christmas. However, what you have heard about it might be irrelevant to your circumstances or, worse, might generate “white noise”, distracting you from what is in fact relevant to your circumstances. Even more worrisome, the distinction may not be clear. The modification of an organism as vast, complex and ungainly as the US Internal Revenue Code is like dredging an ocean harbor to install port facilities: From the perspective of the harbor, the entire ocean is now different; from the perspective of the ocean, nothing much has changed at all. Therefore, a beneficial analysis of tax code revisions must understand when its readers are in the ports and when they are in the middle of the ocean.
 
Accordingly, this blog (or rather set of blogs) will seek to do just that, concentrating on the elements of the new tax laws that are relevant – either directly or indirectly – to its core readership: Swiss financial institutions and Swiss (or other non-US) investors in US financial assets. Thus, it will de-emphasize the parts that have little impact on an international readership (even the…. drumroll please… HEADLINE political news). Finally, it will seek to present a three-dimensional view of the package of changes that affect a specific type of non-US taxpayer or industry, rather than simply listing each changed provision while expecting the reader to integrate the various parts into a comprehensive understanding of the new US tax landscape.
 
As I am a tax specialist, you’ll not be surprised when I begin with caveats. The blog will not cover the following topics in detail, though some or all may be critical to the impact of the new tax bill:

• Opaque and hasty negotiations over tax legislation tend to result in loopholes and/or leeway for self-serving interpretations by taxpayers. As such, we will almost certainly see technical amendments designed to patch up unintended results as the new rules settle and the bill’s defects emerge.
• Concurrently, the IRS may draft their regulations in order to preemptively thwart certain interpretations or adjust their trajectories in unforeseen ways. In certain circumstance (or to certain interested observers), the IRS may appear to exercise more authority than granted to it by congress. Such overreach – especially, where disfavorable to taxpayers – may lead to litigation and thus further uncertainty.
• Typically, new tax provisions need to percolate through the various cogs in the tax system before unforeseen consequences are identified and remedied. Thus, normally, we would expect to wait for new rules to be applied across a few tax cycles before abuses emerge. That may not be the case here though; possible loopholes and sheltering techniques (along with proposed remedies) are already being mooted openly in the tax press.
• The reactions of America’s tax treaty and trade organization partners may compel further alterations as – fairly or not – the recent revisions are perceived to violate various treaty obligations and norms of international tax comity. As a result, these partners may seek agreement with the US to moderate the effects of certain provisions or (more likely) enact unilateral changes to their own tax codes designed to counteract aggressive US tax policy-making.
• Furthermore, the domestic political response – so far, abnormally negative for a bill reducing many people’s taxes – may persuade Congress to amend swathes of the code, especially if that Congress is no longer a Republican-majority one and a material reason for the incoming Democratic-majority is the adverse reaction to this tax bill.
• Monetary policy may restrain the desired economic growth. It is highly unusual (and decidedly anti-Keynesian) to enact a fiscal stimulus following a decade of continuous (albeit sluggish and fitful) economic growth. As such, the intended stimulus may be blunted by a dampening reaction from the Federal Reserve Bank.
• Although the tax rate cuts and certain reforms are undeniably business-friendly (more on that later), it ought to be assumed that some portion of the anticipated tax benefits are already priced into current stock valuations by Wall Street and investment calculations ought to be discounted accordingly.
• The following topics were not touched by the changes to the tax code despite rampant speculation that they would be included:
  • FATCA and the OECD Common Reporting Standard (CRS) – Despite a repeal amendment tabled by longtime FATCA foe, Senator Rand Paul of Kentucky, FATCA remains in force and OECD CRS remains highly unlikely to be enacted into US law anytime soon.
  • Section 871(m) regulations – The roundly criticized regulations were not addressed by the tax bill, though that may reflect a Treasury Department impulse to restrain the regulations at the agency level (see my earlier blog, entitled “Is a tactical retreat on §871(m) coming?”, for further elaboration.)
  • A so-called “border adjustment” tax or other form of neo-tariff – An initiative to tax imported goods in hopes of bolstering domestic manufacturing, a topic of heated debate over the summer, fell into disfavor long before the bills were enacted and is not contemplated in the final statute.
  • Interest deduction limitation – Earlier versions of the bill restricted claims for interest expense deductions based on a worldwide group’s overall debt amount per §163(n).

 
And thus, we move onwards to Part II, the actual analyses of the bill, which will be posted over the coming days and feature the following themes:

• The renovation of the US corporate tax regime, including:
  • The sharp reduction in tax rates (as noted above, it’s a business friendly set of new rules)
  • The virtual elimination of taxation on income earned abroad
  • Sourcing of inventory sales
• The further complication (and attractiveness) of non-corporate business entities, including:
  • Deduction of pass-through income
  • Sales of partnership interests with Effectively Connected Income (ECI)
  • New ECI withholding regime
• A shift to reliance on set thresholds, rather than on market forces, for the determinations of factors prone to manipulation, including:
  • The limitation on the interest deduction
  • New base erosion provisions

 
Part II of this blog series dissecting the new US tax code provisions will be published in a few days’ time. If you wish to be automatically notified when it’s posted, please send an email to blog@millentaxandlegal.ch and you will be added to our subscriber list