2020 has proven to be an eventful year. The COVID-19 pandemic (and its economic impact), continuing shifts in global policy, as well as US presidential and congressional elections on the horizon, will have a significant impact on foreign investment in the United States in 2020.
The federal government has taken a number of steps to address the health and economic impacts of the COVID-19 pandemic. In March, three separate pieces of legislation were enacted, including the CARES Act, a $2.3 trillion economic relief package with tax and non-tax measures to provide liquidity and promote workforce retention. Additional legislation may be considered. The Treasury Department and the IRS delayed certain tax deadlines and provided other administrative relief following President Trump’s national emergency declaration. The Administration also has provided some tariff relief.
In December, a year-end tax package was enacted as part of legislation funding the federal government through the end of the current fiscal year (September 30, 2020). It renewed more than 30 expired or expiring tax provisions through the end of 2020, including controlled foreign corporation (CFC) look-through treatment. It also modified certain provisions of the 2017 Tax Cuts and Jobs Act (the Act), expanded retirement savings incentives, provided disaster tax relief, and repealed certain Affordable Care Act tax provisions. However, it did not include a package of proposed technical corrections to the Act.
After having been stalled for several years, the Senate approved four protocols amending existing US income tax treaties with Japan, Luxembourg, Spain, and Switzerland that entered into force in 2019. However, three proposed new income tax treaties with Chile, Hungary, and Poland are still awaiting Senate action. The Treasury Department hopes to negotiate new tax treaties in 2020.
Thousands of pages of federal regulations implementing the 2017 tax reform law have been issued, including guidance regarding the base erosion and anti-avoidance tax (BEAT), anti-hybrid rules, and the business interest expense limitation under Section 163(j). However, many questions remain, and significant guidance still needs to be finalized. The Treasury Department has set a goal of completing all 2017 tax reform regulatory guidance by October 1, 2020.
At the same time, governments around the world are rethinking longstanding tax principles regarding taxation of cross-border activities at a time of public debate over whether companies are paying their ‘fair share’ of taxes. The OECD Inclusive Framework is continuing to work toward its goal of producing a final report to the G20 by the end of 2020 on a consensus solution to the tax challenges arising from the digitalization of the economy. The proliferation of unilateral measures, such as digital services taxes, has heightened the urgency to reach agreement on a multilateral approach.
The Congressional tax-writing committees are monitoring global tax developments and have expressed support for a multilateral approach. Implementation of any OECD consensus solution likely will require US tax law changes and modification of existing tax treaties. As a result, US international tax provisions enacted as part of the Act may be subject to change.
The 2020 elections could change control of the White House and the balance of power in Congress, affecting prospects for tax legislation in 2021 and beyond. President Trump and Democratic presidential candidates have laid out very different tax policy agendas. The President has signaled his intent to propose additional tax cuts for middle-income individuals and business. Democratic candidates have proposed tax increases on business and higher-income individuals to fund various initiatives. It remains to be seen whether the COVD-19 pandemic and the dramatic increases in deficit-financed federal spending to combat the coronavirus and stabilize the US economy will cause the candidates to revise their campaign tax plans.
Enactment of major changes to the current tax laws, such as a corporate tax rate increase, is likely to require unified control of the White House and Congress. Alternatively, the changes would have to reflect the priorities of both Democrats and Republicans. A change in White House control could have important consequences for regulatory and administrative actions taken by President Trump.
Future US tax policy also may be impacted by large and growing federal budget deficits. Prior to the COVID-19 pandemic, the Congressional Budget Office (CBO) projected a federal deficit of $1 trillion in 2020, with deficits averaging $1.3 trillion per year and totaling $13.1 trillion over the 10-year budget period (2021-2030). Debt held by the public is projected to increase from 79% of GDP in 2019 to 98% at the end of 2030.
The 2017 tax reform law sunsets nearly all individual and pass-through business tax provisions after 2025. In addition, key business provisions are set to become more restrictive. This includes limits on interest deductions beginning in 2022 and tightened international tax rules beginning in 2026. If Congress were to immediately extend all Act provisions, as well as extend other expiring tax provisions, federal budget deficits would increase by $2.1 trillion plus $200 billion in debt service over 10 years. Further, the 10-year budget cost rises with each passing year.