The new tax code in the US is barely three months old, but it’s already being proclaimed as the greatest and most lasting accomplishment of the (still-young) Trump administration. The slashing of the corporate tax rate from 35 percent to 21 percent at a single stroke opens broad new vistas to American business, while other provisions extend the president’s campaign trail rhetoric by encouraging repatriation of assets and new investment within the United States.

Apparently, this isn’t enough, because Trump and his Republican colleagues in Congress are already talking about a further round of tax cuts, which the president has labeled “Phase 2.” “We’re actually going for a Phase 2,” Trump said at an event in Missouri, noting that he was working with House Ways and Means Committee Chairman Kevin Brady to produce something “that will help in addition to the middle class, will help companies, and it’s going to be something I think very special.”

Part of Phase 2 would inevitably mean correcting some of the mistakes that were included in the bill rushed through Congress at the close of 2017, including the infamous “grain glitch” that may make independent farmers unable to compete with cooperatives, and a provision that allows restaurants and retailers to deduct the cost of renovations over 39 years, rather than the intended 15. But Republicans also want to make permanent the tax cuts they passed for individuals and small businesses, having used a budget reconciliation process that will require them to sunset after 10 years of deficit-increasing measures.

This post is meant to give a basic rundown of what “Phase 2” of tax reform might mean for entities of any size, and to emphasize the shifting landscape in the tax code that remains ahead.

Another full tax reform overhaul seems unlikely

The Republicans got the new tax code through by the skin of their teeth. This is only the third complete overhaul of the US tax code in the last century, and historical precedent as well as a look at the current legislative landscape suggests that another bill as broad-reaching as the last one is unlikely to receive serious consideration before the midterm elections – at which point the situation may change entirely.

More concerning is that even fixing the glaring mistakes in the bill – much less interpreting its sincere provisions in a growth-promoting way – may be a harder sell than the tax bill was itself. Amendments to the law can’t be passed by a party-line, up or down vote like was used for the law itself. Right now, Congressional Democrats figure they have little to lose by letting Trump and the G.O.P. sink into the swamp of endless war over a bill they opposed and have no interest in making successful – which is what the Republicans did to President Obama after he signed the Affordable Care Act.

Democrats have already unveiled a proposal that would roll back the top individual rate cuts in order to pay for infrastructure investments, aiming to beat Trump at his own game. Meanwhile, Republicans are internally wrangling themselves over some of the issues raised by the bill. Key drafters like Sen. Orrin Hatch are insisting on the strictest interpretation of the anti-profit-shifting measures, while other Republicans have made ambivalent noises about the potential implications of further cuts to the budget deficit.

All of this means the administration would be very fortunate indeed to be able to pass two or three adjustments to the law during 2018. “Phase 2” may turn out to be mostly a branding exercise.

We are in uncharted territory with the new tax reform

Regardless of these problems, the tax bill is already having a huge impact. American-based firms are racing to repatriate their profits at the favorable rates it offers, and even medium-size organizations are looking at how they can restructure their entities to take maximum advantage.

But over in Europe, things aren’t looking so good – the European Commission has just announced that it will target Silicon Valley corporations, especially the GAFA quartet (Google, Apple, Facebook, Amazon) by levying a new tax on their online earnings in the larger economies like France and Germany where they have been making the most profit, not just in Ireland or Luxembourg, where they are based for more reasonable tax bills.

The unpatched holes in the new US tax regime, combined with the international effects its passage is already having, mean a period of great turbulence ahead as multinational organizations get acquainted and reorient themselves to better cope with the new demands being made on them by governments and shareholders alike.

Conclusion

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