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What Trump's Tax Reform Might Mean for Fashion and Luxury Goods Companies

With tax reform front and center on the political agenda, retailers should be paying close attention to changes that could have an important impact on the fashion industry.
 
Last week, President Trump launched a public push for comprehensive tax reform, promising an improved competitive tax position for US companies relative to other countries in the Organisation for Economic Co-operation and Development.
 
“We predict there will be great pressure to pass tax reform that promotes growth through simplification, expensing, and low rates,” said Government Relations Co-Chair Phil English. “However the Congressional leadership may ultimately settle for incremental reform coupled with targeted relief and loophole repeal. This compromise would face major resistance, because it could undermine the momentum for future reform.”
 
As negotiations unfold, companies should systematically assess how specific tax issues affect them and set tax reform objectives based on their business model.
 
For the fashion industry, we anticipate:

  • Bicameral Republican negotiators and Treasury have agreed on broad principles, embracing enhanced cost recovery, simplification, territoriality,  and dramatically lower corporate rates. They are seeking a formula that achieves higher rates of economic growth (and revenue) and deters international inversions and base erosion.
  • We expect the negotiations to produce a common plan that will be made public this month.
  • We expect tax reform to face an uphill battle that will pass no earlier than next spring. After that the election season will reduce any prospect of a complicated and controversial tax reform package.
  • Tax reform faces the procedural minefield of budget rules. To be considered in the Senate, a tax bill following regular order must achieve cloture with 60 votes, requiring substantial Democratic support.
  • The only alternative is to fold it into budget reconciliation, requiring revenue neutrality. Tax reformers must achieve lower rates while maintaining revenue levels as scored by the Congressional Budget Office and Joint Committee on Taxation. With no prospect of using the personal tax system to subsidize corporate cuts, this limits tax reform options.
  • One revenue proposal in the House was to replace the corporate income tax with a destination based cash flow business tax. Because it was border adjustable, it was capable of generating higher revenues at lower rates while arguably incenting exports. Because of adverse effects on complicated supply chains, this proposal was formally abandoned. But the additional $1 trillion in revenue to finance rate reduction has not been replaced.
  • It will be extremely difficult to pass tax reform without bipartisan support, but deep divisions between the parties on tax philosophy and even geography make it difficult to predict where common ground could emerge.
  • Divisive corporate issues will include expensing vs. interest expense write-offs and how to coordinate them; territorial treatment of international business taxes; tax treatment of energy production; tax treatment of dividends; and pass-through entities.

Individual tax controversies include the deductibility of state and local taxes; municipal bonds; the design of the home mortgage deduction; the estate tax; the AMT; the tax treatment of healthcare expenses; and the charitable deduction.

Arent Fox will be actively monitoring these issues. For questions, please contact Anthony Lupo, Byron DorganPhil English, or Dan Renberg.