The upcoming elections in the United States have significant implications for a wide range of tax policies. Among other policy distinctions, Democrats and Republicans differ on how to handle expiring provisions under the 2017 Tax Cuts and Jobs Act (the TCJA), tax reform going forward, and global tax coordination efforts under the Pillar Two initiative led by the Organization for Economic Cooperation and Development (the OECD). Whether and how each of these issues is addressed will depend on who wins the presidential election, which political party wins control of each chamber of Congress, and the dynamic between the executive and legislative branches.
Expiring TCJA provisions
Expiring provisions under the TCJA are likely the biggest tax policy issue that will be affected by the upcoming elections. Enacted in 2017 under the Trump administration, the TCJA introduced wide-ranging changes across the U.S. Tax Code, such as reducing the federal corporate income tax rate from 35% to 21%, reducing the top marginal federal individual income tax rate from 39.6% to 37%, and implementing a modified "territorial" system of corporate taxation.
While the 21% federal corporate income tax rate is permanent under the TCJA, many other TCJA provisions are scheduled to expire or be automatically modified between the end of 2025 and 2028. These include the top marginal federal income tax rate for individuals of 37%, the 20% deduction for income earned through certain pass-through businesses like partnerships and REITs, the immediate expensing of depreciable property other than real estate, and a lower effective tax rate for certain income earned by foreign corporate subsidiaries (global intangible low-taxed income, GILTI, and foreign-derived intangible income, FDII).
The Democrats generally oppose extending expiring TCJA provisions, while former President Trump and the Republicans generally favour extending or even expanding TCJA provisions.
Tax reform proposals
The forthcoming Democratic presidential candidate will likely take a progressive position on tax reform that would reverse the TCJA in many cases. Democrats have widely called for increasing the federal corporate income tax rate from 21% to potentially 25% or 28% (reversing part of the TCJA's rate reduction). Some Democrats have also called for an increase in the corporate alternative minimum tax (applicable to companies averaging over US$1 billion in profits) and in the excise tax on corporate share buybacks. Also popular within the Democratic party is increasing taxes on high-earning individuals, such as by accelerating the return to pre-TCJA marginal federal income tax rates or by increasing the tax rate on long-term capital gain and qualified dividends.
If the U.S. does not adopt Pillar Two, multinational companies will need to navigate the interaction between the Pillar Two rules in other jurisdictions and different rules in the United States, including the GILTI, FDII, and others.
By contrast, former President Trump has proposed to make permanent several expiring TCJA provisions, including lower individual income tax rates. Trump has also proposed to further reduce the federal corporate income tax rate (from 21% to 20% or lower). Similarly, the 2024 Republican Party platform proposes to make permanent at least some TCJA provisions and to pursue additional, unspecified tax cuts. To offset potential revenue loss, Trump has proposed various tariffs, including a universal baseline tariff on all U.S. imports and higher tariffs specifically targeting imports from China.
Both parties' proposed tax plans, if enacted, could materially impact businesses' cashflow and cross-border investment activity, although Trump's proposals would be closer to a continuation of the status quo. However, any significant tax changes, whether increasing tax rates or enacting tax cuts, will require a Congress willing to cooperate with the next President. Currently, Republicans control the U.S. House of Representatives, while Democrats hold a slim majority in the Senate. After the election, this may change, giving one party control of one or both chambers of Congress.
Pillar Two
The next administration must also address the OECD's global tax coordination efforts under Pillar Two, which would impose a minimum tax of 15% on multinational companies in each jurisdiction in which operations are located, regardless of where profits are declared. To date, over 25 countries, including Canada, the United Kingdom, and many EU countries, have adopted final legislation implementing Pillar Two, and approximately 10 other countries have proposed draft legislation. However, the United States has not adopted Pillar Two. The current Biden Administration and other Democrats support Pillar Two, but Republicans have objected to the Pillar Two framework. If Trump wins the presidency, there is unlikely to be momentum to implement Pillar Two.
If the United States does not adopt Pillar Two, multinational companies will need to navigate the interaction between the Pillar Two rules in other jurisdictions and different rules in the United States, including the GILTI, FDII, and base erosion and anti-abuse tax (BEAT) rules enacted under the TCJA, as well as the corporate alternative minimum tax enacted under the 2022 Inflation Reduction Act. Multinational companies may be subject to top-up taxes in other jurisdictions that are Pillar Two-compliant and will need to model the potential impact on their cross-border operations.
Conclusion
As businesses, stakeholders, and other taxpayers prepare for potential tax changes in the United States, vigilance and adaptability will be crucial in navigating the impact on the business community, particularly multinational enterprises. Canadian businesses or investors looking to invest south of the border will want to consider how to adapt their cross-border strategies, depending on who wins the White House and each chamber of Congress.
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