A move from the current income tax regime to the proposed destination based cash-flow tax (DBCFT) could create significant dislocation and economic disruption.
Transition rules may advantage taxpayers, however the effect of the transition rules will depend on a number of policy considerations—revenue effects, political considerations, integration with the proposed reform, the short-term and long-term effects on businesses, who are the “winners” and “losers” in tax reform. These considerations can be distilled to two questions: how long will transition last, and what will be allowed?
One threshold question for designing transition rules is: How soon after enactment of tax reform will the effective date be? There are many additional concerns, including:
- In a system where interest deductibility is elective or eliminated, whether the interest accrued on existing (pre-tax reform) debt will be deductible and, if so, for how long (whether the existing debt will be “grandfathered” into the new regime).
- In the context of the proposals for immediate deduction or amortization of capital expenditures (see post on Capital Expenditures, here), whether an immediate deduction would be available for current (pre-tax reform) capital expenditures.
- In a territorial system of taxation (see post here), any accrued foreign tax credits will no longer have any value, because foreign earnings would not be subject to U.S. tax.