You can’t trump Trump

At his inaugural speech on January 20, President Trump espoused two economic principles: “Buy American and hire American.” What else can the rest of the world expect?

“The world must know that we do not go abroad in search of enemies, that we are always happy when old enemies become friends and when old friends become allies,” Trump said.

Among other things, the new US administration intends to withdraw from the Trans-Pacific Partnership and renegotiate NAFTA, the North American Free Trade Agreement.

“With a lifetime of negotiating experience, the president understands how critical it is to put American workers and businesses first when it comes to trade,” Trump said.

What about income tax and estate tax?

For this, we currently have to turn to Trump’s election platform. The Trump plan will collapse seven income-tax brackets to three brackets: 12%, 25% and 33% over $225,000 per year.

It will retain the existing capital-gains rate structure (maximum rate of 20%) with tax brackets shown above. Carried interest will be taxed as ordinary income.

The 3.8% Obamacare tax on investment income will be repealed, as will the alternative minimum tax.

The Trump plan will repeal the death tax (estate tax), but capital gains held until death and valued over $10 million will be subject to tax.

It will lower the business-tax rate from 35% to 15% and eliminate the corporate alternative minimum tax. It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.

It eliminates most corporate-tax expenditures except for the research and development credit. Firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense (a back-door value-added tax?).

What does all this mean for us?

Translating election-platform proposals into legislation is never easy or certain. So the discussion below is no more likely than next year’s weather forecast.

Hopefully, Israel is an ally of the United States. Presumably, the author of the book The Art of the Deal will be looking for win-win outcomes in America’s future trade and other negotiations that benefit all sides, including the US.

Israel has a free-trade agreement with the US, and there is no mention of any change being contemplated. Nor is there any mention of amending America’s income-tax treaty with Israel or any other country.

US citizens and green-card holders living in Israel may see a reduction in US tax rates. But because they also pay Israeli tax on worldwide income less a foreign tax credit, they will continue to pay tax at the higher of the rates applicable in the two countries. Israeli tax rates currently range up to 50% on earned income and 25%-33% on most passive investment and capital gains.

The same applies to most Israeli investors in US real estate, depending on the structure adopted, meaning tax is at the higher of the two countries’ tax rates.

The proposal to replace estate tax with capital-gains tax is significant; currently, non-US persons with US assets worth over $60,000 may be exposed to US estate tax, depending on the structure involved.

The most intriguing aspect:

The proposal to tax the “deemed repatriation” of corporate profits held offshore at a one-time tax rate of 10% is notable. US direct investment in non-US industry totaled around $5 trillion at the end of 2015, of which about $10 billion was invested in Israel (about half in hi-tech), according to the US Department of Commerce.

On this direct investment, US enterprises made profits that are largely parked outside the US to defer US taxation. Various reports estimate these parked profits at around $2t. The proposal to reduce the US federal tax rate on the “deemed repatriation” of such profits from 35% to 10% raises many interesting questions.

How much parked profits would be converted to dollars? How much would be repatriated by to the US? Would this strengthen the dollar? Would this create jobs and activity in the US?

Would the US government deficit rise because of the reduced tax rates or fall because of the tax on the “deemed repatriation”? Suppose the parked profits are invested and cannot be readily repatriated to the US?

In 2004, there was a 5.25% US tax on repatriated profits, subject to various limitations and conditions. Some say the benefit to the US economy was less than expected, but the dollar did strengthen in 2004-2006.

Also, the OECD campaign against “base erosion and profit shifting” (BEPS) means that US multinationals will have to allocate taxable profits to where they are generated, rather than where their intellectual property is held (often offshore).

The EU has indicated in the Apple case that it may tax such profits if the US won’t. Hence the Trump 10% repatriation tax proposal is timely.

On the other hand, Israel has just boldly legislated company tax rates of 6%-12% and a 4% dividend withholding tax for “preferred enterprises” that are owned by multinationals and active in Israel.

As always, consult experienced tax advisers in each country at an early stage in specific cases.