In the first of our two-part video series on the 2020 US election and its effects on Canadian cross-border businesses, Tara Benham, National Tax Leader, is joined by Julia Klann, Partner, US Corporate Tax, to discuss Trump's Republican party platform and how it relates to Canadian companies.
0:43: What is the Republican Party platform and how could a win impact tax policy?
4:18: What is the impact of COVID-19 on US tax?
6:20: What is the impact of the proposed changes on Canadian companies operating in the US?
- Hi, my name is Tara Benham, and I'm the National Tax Leader for Grant Thornton Canada. This is the first in our two part series where we discuss the U.S. election and how it will impact Canadian businesses who are operating in the U.S. I'm joined by Julia Klann, U.S Corporate Tax Partner in our greater Toronto area. Julia is going to give us some insight into Trump's Republican party platform and how it relates to Canadian companies. Welcome, Julia.
- Thank you for having me.
- So to frame the landscape on our conversation, the U.S. saw significant changes with the Tax Cuts and Jobs Act at the end of 2017. My first question to you, Julia, is can you give me an overview of the platform for the Republican party and how the outcome of the election could impact this tax policy?
- As we look at this upcoming election and the Republican tax platform, it's important to step back and take a look at what happened three years ago when tax reform legislation was first introduced. In order to pass the legislation, and I'll say quite a short period of time, the Republicans were bound by, well, we'll say a budget reconciliation rule, which limited the total tax cuts that they could introduce to $1.5 trillion over a 10 year period. So whereas the Tax Cuts and Jobs Act saw a lot of different tax cuts for a variety of taxpayers, a lot of those tax cuts had what we call sunset provisions, or basically expiration dates, where they get phased out or it reverts back to what the previous role was. So there were a lot of rules that the Republicans introduced in the Tax Cuts and Jobs Act that their current platform would like to see extended or made more permanent just because they were bound by the nature of those provisions the first go around. So one of those provisions is bonus depreciation, and in order to provide some incentive for businesses to expand in the U.S. and invest in capital property, the Tax Cuts and Jobs Act introduced bonus depreciation provisions, which allows for an immediate expensing of capital assets in the year that they're purchased as opposed to capitalizing them and depreciating them over their normal useful life. The bonus depreciation provisions are set to phase out beginning in 2023. The Republicans have said that they would like to extend that to 2025 or perhaps even beyond that to make it more permanent in nature. Another provision that we saw that gave a great tax break or tax cut to U.S. corporations was the foreign derived intangible income rules or FDII or F-D-I-I rules. Under these rules, a U.S. corporation gets a deduction for foreign revenues or foreign export or licensing of IP outside of the U.S., and that deduction brings that U.S. corporate rate on that type of income from 21% to 13%. That 13% rate is slated to increase to 16% in 2025, and the Republican platform has said that they'd like to extend that 13% rate, so leave the deduction as is beyond that 2025 window to bring that corporate tax rate down for companies that are exporting outside of the U.S., probably as part of bringing jobs back to the U.S. and bringing more business back to the U.S., give a tax break for companies that are exporting. Another thing to look at is the corporate tax rate as a whole. Prior to U.S. tax reform, the U.S. corporate tax rate was 35%, which was among the highest in the world. Part of the Republican platform in the Tax Cuts and Jobs Act, and as passing tax legislation was reducing that corporate tax rate, and the first cut of legislation had said that the corporate tax rate would be reduced to 20%. Because there was that limitation with the budget reconciliation rule, in order to get the legislation passed, the corporate tax rate became 21%, and that rate is permanent. So there is some certainty with respect to what the corporate rate will be going forward, absent a change in legislation, but it remains to see whether the Republican platform would want to further reduce that rate and try to achieve the 20% rate that they were looking at three years ago.
- Thanks, Julia. That was a really clear and informative summary. So my next question is a little bit more current, and what it is is how does COVID-19 impact the policies that we've been talking about?
- In times of economic downturn in the U.S., the U.S. typically looks at various economic stimulus packages and various tax cuts, whether it's increasing net operating loss carryback provisions, or introducing the concept of bonus depreciation. If you follow along the history of bonus depreciation, typically, whenever there is an economic downturn, we have bonus depreciation provisions, then they expire, and whenever there's another economic downturn, bonus depreciation comes back, and then it expires again. So with respect to COVID-19, earlier, U.S. introduced or passed the CARES Act, which was over $2 trillion in various tax incentives, credits and cuts, basically designed to stimulate the economy and keep the economy moving despite the global pandemic. So with respect to COVID-19 and making an investment in the economy, what we may see is that there is a lot of support for the Republican party platform to make some of these provisions permanent. These in times of economic downturn when bonus depreciation rules tend to be at the forefront of tax legislation to stimulate the economy, there may be some incentive to actually extend the bonus depreciation provisions beyond 2023, alike the Republicans would like to do, and the Republicans have also spoken about some Made in America tax credits or what that would be with respect to bringing jobs back to the U.S., keeping Americans employed and providing much more business opportunities for American corporations. That might go hand-in-hand, in addition with the FDII rates, if they can keep that rate at 13% and promote businesses to manufacturer and have operations in the U.S. and then export abroad.
- Thanks, Julia. Looking back 12 months ago, who would have thought that this is where we would be. So finally, my last question, and the one that I think that the business owners will really want to hear about is how will these proposed changes impact Canadian companies who are currently operating in the U.S. or who are thinking of expanding into the U.S.?
- In some ways, a Republican win will provide a little bit more certainty for Canadian taxpayers that have U.S. operations. So three years ago, when the U.S. corporate tax rate was 35%, a lot of Canadian businesses that were expanding into the U.S. would try to minimize their U.S. footprint. A Canadian business was paying 25, 26, 27% in Canada, depending on its province and its type of income, paying 35% plus state taxes was not that appealing. So a lot of Canadian businesses would expand into the U.S. and try to minimize their activity in the U.S. so they weren't subject to U.S. tax on a wide range of their income or a lot of their income. with U.S. tax reform, the rate went down to 21%. Once you factor in state taxes, a lot of Canadian businesses, from a tax and cashflow perspective anyway, were relatively indifferent as to whether they're paying tax in Canada or paying tax in the U.S., and then when you consider that, a lot of U.S. businesses don't actually pay tax on 100% of their state income, the way the state tax system works. Some businesses were actually better off having income and operations and paying U.S. tax than they were in Canada. So with a Republican win, there would be a little bit more certainty that the tax rate likely wouldn't go back up to anything that exceeds the Canadian rate, and then we would have to see what happens with tax legislation as a whole. In order to pass tax legislation in short order, like happened three years ago, you would need to have Republican control of the House and the Senate and the Oval Office, which remains to whether this election would have a Republican sweep. So depending on what the results of the election are, a lot of Canadians can probably expect the status quo or if there is a Republican win, look for tax cuts that might provide further incentive to expand into the U.S. So if a Canadian business has been thinking about expanding in the U.S. or growing its U.S. operations, some of these tax cuts for Made in America or expensing of capital assets or a lower tax rate on exports might provide that incentive to continue that expansion or look into it much more seriously
- Based on those comments, I can totally see why this election is so important to these Canadian businesses. So thanks, Julia. This should be an interesting ride and I look forward to seeing where it lands.
- Me too.
- So into our viewers, thank you for joining us. Check out the second video in our series to hear what you need to know with a Biden Democratic win, and of course, following the election, we will provide further insights to help Canadian businesses navigating into the U.S. Alternately, visit our website and you can learn more, thanks.