After the Election: What to Expect When the Trump Administration Comes to Washington

Donald Trump won the White House this past Tuesday in a surprising victory that concluded a turbulent election season in the U.S. With the Republicans retaining control of the Senate and the House, we look ahead at potential regulatory and legislative actions to expect from the Trump Administration and Congress in the coming term. While there is a high degree of uncertainty about what an administration led by Mr. Trump will do, this bulletin speculates on how Mr. Trump’s policy agenda may manifest itself in the areas of (i) tax, (ii) infrastructure, (iii) regulatory enforcement with regard to mergers and acquisitions and foreign investment, and (iv) economic sanctions.  

What You Need To Know

• Given Republican control of the White House and Congress, the likelihood of some form of corporate tax reform has increased, though the exact scope and timing is subject to some uncertainty. At a minimum, there will likely be a reduction in the corporate tax rate, and the potential exists for more significant measures, such as major changes to the taxation of income earned outside the U.S. and measures that would integrate the corporate and individual tax regimes.
• Infrastructure spending is primed to accelerate if the Trump Administration can come to terms with the Republican Congress to pass new spending bills that deliver on this campaign promise.
• Mergers and acquisitions that engage U.S. competition laws will face stringent review, with the Trump Administration anticipated to continue and potentially accelerate the long-term trend toward more aggressive enforcement.

1. Tax
1. Corporate Tax Reform. The likelihood of some form of corporate tax reform has increased, though the exact scope and timing is subject to some uncertainty. At a minimum, there will likely be a reduction in the corporate tax rate, and the potential exists for more significant measures, such as major changes to the taxation of income earned outside the U.S. and measures that would integrate the corporate and individual tax regimes.
2. Repatriation “Holiday.” There will likely be some form of legislation to allow U.S. multi-nationals to repatriate overseas earnings with a reduced level of U.S. taxation, most likely in the form of a one-time or temporary “holiday” with a reduced tax rate on repatriated earnings. The taxes imposed on the repatriated cash (at the new reduced rate) could be earmarked for infrastructure and other big-ticket expenditures.
3. “Carried Interest.” There is a reasonable potential for some form of revision to the current taxation of carried interest, probably by causing certain “incentive” distributions that are disproportionate to capital contributions to be taxed as ordinary income rates, even if the underlying allocated income consists of capital gains. While this may not directly affect foreign investors, U.S. and other fund managers may seek to restructure how they earn their carried interest by contributing additional capital or may seek to directly pass some of the burden of this tax to investors by increasing the amount of their carried interest, and will almost certainly seek to increase the amount of tax distributions they get from the Fund to cover the tax imposed at the new rates. These changes may occur as part of a broader tax reform that alters how (and lowers the rates at which) business income earned through pass-through entities is taxed.
4. Rate Decreases. In addition to the anticipated reduction in corporate income tax rates, there will likely be a push to lower the highest individual income tax rate, either generally or in a more tailored fashion.
5. Continued Targeting of Inversions. In the short term, the Trump Administration will likely continue the Obama Administration's targeting of inversions and earnings-stripping through existing provisions, including newly enacted regulations under Section 385. Long term, these policies are likely to change in connection with any significant reforms of the corporate tax regime and the taxation of business income earned outside of the U.S.
2. Infrastructure

1. Spending. If the Republican Congress cooperates with Mr. Trump’s agenda, there is potential for increased spending on infrastructure, as Mr. Trump has proposed to invest, or enable the private sector to invest, up to $1 trillion in the nation’s infrastructure over 10 years. The promised areas of focus include:

   1. transportation, including roads, bridges, tunnels, ports and airports;
   2. water and wastewater systems;
   3. modern and reliable electricity grids; and
   4. telecommunications and security infrastructure.
2. Private Investment. Mr. Trump has indicated that his administration will introduce some form of legislation to leverage public-private partnerships and other private investments through tax incentives to drive investment in infrastructure.  Notably, he’s in favor of  incentive-based contracting, a key feature of the PPP procurement methodology, to ensure projects are completed on time and on budget.
3. Funding. The Trump Administration’s infrastructure plan may be funded, in part, through the repatriation of foreign corporate profits, as discussed in the Tax section above. Mr. Trump has also focused on user-pay and tolled projects to minimize direct government investment.
4. Approvals Processes. Mr. Trump has proposed regulatory reform to reduce bureaucratic delays and streamline the permitting and approvals processes for infrastructure projects.
3. Mergers & Acquisitions and Foreign Investment Review
1. Antitrust and Competition. While antitrust and competition issues did not feature prominently in Mr. Trump’s campaign, some of Mr. Trump's campaign comments, including on AT&T's $85.4 billion bid for Time Warner, potentially suggest that the Trump Administration will continue the trend of increasing challenges to mergers and acquisitions.
2. Foreign Investment Review. Investment in, and acquisitions by, foreign entities of U.S. businesses are reviewed by the Committee on Foreign Investment in the United States (CFIUS) to determine if such investments impact national security. Deals involving Chinese and Russian investors have received the greatest scrutiny under President Obama. Mr. Trump’s embrace of Russia, but denunciation of China, during his campaign suggests that under the Trump Administration CFIUS may take a differentiated approach to investments from these countries.
4. Economic Sanctions

1. Economic sanctions of foreign countries and persons is a regulatory area in which we may see Mr. Trump substantially shift away from the Obama Administration. During the campaign Mr. Trump indicated an interest in reversing sanctions with regard to:

   1. Cuba. Mr. Trump’s running mate, Mike Pence, said just last week that “when Donald Trump is President of the United States, we will repeal Obama’s executive orders on Cuba.” These orders included easing several of the U.S.’s decades-long economic sanctions against Cuba.
   2. Iran. While Mr. Trump has made conflicting statements on Iran, in March 2016 he said that as President his “number one priority” would be to “dismantle the disastrous deal with Iran,” which could result in the “snapback” of stringent sanctions that were lifted by the Obama Administration when Iran agreed to a deal on its nuclear program.
   3. Russia. Mr. Trump is on record for saying that he would “look at” lifting Russian sanctions that President Obama ordered following Russia’s annexation of Crimea. Because Canada has imposed its own sanctions on Russia, a rollback in the U.S. could put the two countries at odds.