The new 21 percent corporate tax rate is high enough that many businesses are likely to keep pursuing tax-free transactions, even as others consider the advantages of taxable transactions, two former Treasury officials agreed January 29.
“I think just the rate itself probably isn’t changing the landscape too much,” Marc Countryman of EY, a former Treasury associate tax legislative counsel, said at the University of Southern California Gould School of Law Tax Institute in Los Angeles.
However, Countryman added that when making their decisions, businesses will also have to weigh the effects of other provisions enacted under the Tax Cuts and Jobs Act (P.L. 115-97), such as the new global intangible low-tax income (GILTI) requirements and the availability of immediate, full expensing. The ability to do a taxable asset transaction and take advantage of front-loaded deductions may encourage companies to complete a taxable deal instead of a tax-free transaction, he said.
Karen Gilbreath Sowell of EY, a former Treasury deputy assistant secretary for tax policy, agreed, noting that companies will need to model different outcomes under the new law to decide what is best for them. “It may not be as important any longer to squeeze [transactions] into our tax-free provisions depending upon your company’s GILTI profile,” she said.
Cash transactions might also be in for a change under the new law, Sowell suggested. “If you were going to acquire something and the seller really wanted cash, but you’ve been trying to push for a tax-free acquisition, you can now offer them cash, maybe do a [section] 338 election, step up the basis in the qualifying assets, and then all of that can be immediately expensed,” she said. “And that can really change the bidding dynamic on a transaction like that.”
Sowell said she has seen transactions set up as reorganizations that were in process before the tax law that “are now being shifted to take a look at what the taxable model might look like.”
Companies will probably take a closer look at whether to make acquisitions in the United States or offshore, and will be reassessing where they declare their intellectual property, Countryman said. The U.S. rate and the GILTI and foreign-derived intangibles (FDII) provisions should be weighed when making those decisions, he said.
Sowell also predicted a “revival” in thinking about two provisions that she says have been largely ignored for decades: the accumulated earnings tax and the personal holding company rules. Treasury has already started to look at those provisions and has requested comments on how they might be changed, she said, adding, “That will be very, very interesting because with the change in rates, there could be an incentive to hold on to your money.”
In addition to GILTI and FDII, Treasury and the IRS are prioritizing guidance on the deemed repatriation transition tax under section 965, the qualified business income deduction under section 199A, and the section 163(j) interest deduction limitations, Sowell noted. She predicted that the guidance will come in different forms and won’t necessarily be “big, robust regulations that tell us the answer to every question.” Instead, she said, it might be “rough justice” guidance that attempts to provide quick answers intended to make sure taxpayers are applying the law consistently.