U.S. Business Tax Policy Post-Election: What to Expect from 2024 and Beyond
As the 2024 U.S. election approaches, the business community and tax professionals are bracing for potential changes in tax legislation. With the possibility of significant reforms looming, it’s crucial to understand what might happen to U.S. business tax policy in the coming years. Let’s break down the key factors and scenarios that could shape the future of business taxes.
What’s at Stake: Key Tax Provisions and Changes
Several important tax provisions are on the horizon, affecting U.S. businesses:
- Foreign-Derived Intangible Income (FDII) Regime: Currently, FDII provides a reduced corporate tax rate of 13.125% on certain foreign income earned by U.S. corporations. However, this rate is set to rise to 16.4% starting in the 2026 tax year.
- Pillar Two Rules: The OECD’s Pillar Two, introduced in 2021, aims to implement a global minimum tax rate. While many countries are moving forward with these rules, their adoption in the U.S. remains uncertain.
Potential Election Outcomes and Their Impact
How the 2024 election results might influence tax policy depends on which party gains control:
If Republicans Win
- Extending TCJA Provisions: A Republican-controlled Congress and White House may seek to make the business-friendly provisions of the Tax Cuts and Jobs Act (TCJA) permanent.
- Opposition to Pillar Two: A second Trump administration could resist Pillar Two rules, potentially using trade and tax policies to counter its implementation.
If Democrats Win
- Integrating Pillar Two: Democrats are likely to support incorporating Pillar Two into the U.S. tax code and may push forward with some aspects of the Build Back Better legislation that was stalled during Biden’s first term.
- Revenue Raisers: Democrats might leverage the expiration of TCJA provisions to negotiate revenue-raising measures, such as increasing the corporate income tax rate.
Scenarios and Uncertainties
Despite these potential actions, there are several uncertainties:
- Partisan Differences: The likelihood of significant tax reforms may hinge on narrow margins in Congress, which could lead to gridlock and inaction.
- Internal Party Dynamics: The priorities of the Republican Party in 2025 may differ from those of 2017, potentially affecting the focus on TCJA provisions.
- Split Government: A divided Congress could result in continued stalemate and uncertainty, similar to the legislative gridlock experienced in recent years.
What Should Taxpayers Do?
Given the unpredictable nature of future tax policy, here are some practical steps for businesses:
1. Model Various Scenarios
- Prepare for Multiple Outcomes: Businesses should develop models to account for different election outcomes and legislative scenarios. This proactive approach helps in making informed decisions regardless of how the political landscape shifts.
2. Strengthen Recordkeeping and Compliance
- Robust Systems: Ensure that your tax recordkeeping and compliance systems are robust. This includes maintaining accurate data across jurisdictions and managing deadlines effectively.
- Pillar Two Compliance: For U.S. multinationals, Pillar Two compliance will require comprehensive data management across multiple jurisdictions. A streamlined, cohesive internal tax function is crucial to avoid confusion and inaccuracies.
3. Embrace Uncertainty
- Adaptability: Accept that the tax policy landscape is increasingly volatile. Prepare for an environment with significant changes and limited legislative guidance. Flexibility and adaptability will be key.
Preparing for the Unexpected
In one of the most unpredictable election cycles in recent history, businesses and their advisors need to stay vigilant and adaptable. While it’s essential to plan for various scenarios, it’s equally important to recognise that legislative inaction is a possibility. As the future of U.S. business tax policy hangs in the balance, being prepared for both “anything” and “nothing” will help navigate the uncertainties ahead.
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