NUMBER OF THE WEEK: $1.4 Billion
This is the projected amount Pfizer Inc. could save in annual taxes by restructuring and moving its tax residence to the U.K., according to several news reports citing a Barclays analysis of Pfizer's $100 billion bid to buy U.K.-based AstraZeneca. The U.K.'s corporate tax rate will drop to 20 percent by next year, compared to the 35-percent rate for corporations in the United States. Pfizer has disclosed that it pays an effective 27-percent rate under current U.S. law.
LEGISLATIVE LANDSCAPE
House: Permanent R&D Credit Heads to Floor. Following last week's Ways and Means Committee markup of six business tax "extender" bills, the House will vote later this week on just one of the six plucked from the bunch: a bill to permanently extend the research and development (R&D) tax credit (H.R. 4438). The R&D credit is one of the most widely supported of the business tax extenders — and the most expensive. Its permanent extension would cost more than $155 billion over 10 years, and the bill is not offset by spending cuts or revenue raisers elsewhere, which is why many House Democrats say they cannot support it. The bill nevertheless is expected to pass this week, but it is unclear if the House will send it over to the Senate for consideration any time soon. Many House members want to avoid going to conference once the Senate passes its version of extenders legislation, which presents a stark contrast to the piecemeal approach we're seeing in the House.
Senate: Extenders Vote Next Week? The Senate is gearing up to pass an $85 billion package (also unpaid for) that would extend almost all of the 55 expired provisions retroactively through 2015. You can review the Finance Committee's report on the bill here. Consideration of the bill could begin as early as next week, although we would not be surprised to see it put off until the week of May 19. It's unclear if the bill will be open to amendments or if Senate Majority Leader Harry Reid (D-NV) will "fill the tree," in order to prevent votes on politically controversial issues, like the repeal of the medical device tax.
REGULATORY WORLD
IRS Now Challenging Caterpillar. Following a tense hearing last month before the Senate Permanent Subcommittee on Investigations (PSI) on its international tax practices, Caterpillar Inc. now faces challenges brought by the Internal Revenue Service regarding the company's "overseas transactions involving its spare-parts business," according to a regulatory filing disclosed Friday. The hearing is the latest effort from PSI Chairman Carl Levin (D-MI) to crack down on what he alleges is tax evasion. Levin said Caterpillar had made a "paper change" to book U.S. profits in Switzerland that saved the company $2.4 billion in U.S. taxes from 2000 to 2012. Caterpillar execs and their tax accountants testified that all of their tax practices, past and present, fully comply with U.S. law.
Treasury to Keep Eye on Pfizer, Other Inversions. Drug maker Pfizer Inc. announced on April 28 that its $99 billion bid to take over U.K.-based AstraZeneca would result in a restructuring under which both companies would be owned by a new U.K. parent, reducing Pfizer's tax bill from the U.S. 35-percent corporate rate to the U.K. rate, currently 21 percent and decreasing to 20 percent next year. The company's operational headquarters would remain in New York under the deal. As of this writing, Pfizer raised its bid to $106 billion, with AstraZeneca assuming a resistant stance to the deal. Read more about the possible move here.
Following the news of Pfizer's potential inversion, an unnamed U.S. Treasury official told Reuters that "cracking down on companies that reincorporate overseas to reduce their U.S. taxes is a priority for the administration." President Obama's budget proposal for FY 2015 contained a provision that would make inversions more difficult to execute. Read more here.
FATCA Enforcement Eases Up. The IRS and Treasury Department issued Notice 2014-33 on Friday, May 2, which would grant grace periods to foreign banks that make "good faith" attempts to comply with the reporting and withholding requirements of the Foreign Account Tax Compliance Act, slated for enforcement beginning July 1, 2014. Treasury officials said foreign banks' compliance efforts during the 2014 and 2015 transition period will be considered when determining whether to launch enforcement actions.
Like Bs to Money. The IRS announced on April 25 that it will revisit the "Killer B" regulations to Section 367(b), which relate to the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving foreign corporations. IRS Notice 2014-32 said the agency plans to eliminate the deemed contribution model under the existing regulations, modify the amount of income and gain taken into account for purposes of applying the priority rules of section 367(a) and (b), and clear up ambiguities in the application of the anti-abuse rule.
COURTS & LEISURE
$1.6 Billion Settlement in the Works? Credit Suisse Group AG is reportedly in talks with the U.S. Department of Justice to pay as much as $1.6 billion to resolve an investigation into the bank's role in helping Americans evade U.S. taxes, according to a Reuters report. Credit Suisse is the largest of 14 Swiss banks currently under U.S. criminal investigation as part of the Justice Department's crackdown on offshore tax evasion.
LOOKING AHEAD
This week in Washington, the research and development tax credit and a renewed focus on the IRS targeting scandal will highlight the House floor agenda. The Senate Finance Committee is holding a hearing on innovative ways of financing highways and transit, and Senate leaders will try to reach an agreement to take up energy efficiency legislation as controversy persists over including an amendment that would greenlight the Keystone XL Pipeline. Meanwhile, Federal Reserve Chair Janet Yellen will appear before the Senate Budget Committee, the Joint Economic Committee and the Financial Stability Oversight Council.
Please see below for further detail on these events and others in Washington this week:
Relevant Congressional Activity
House Financial Services Committee
On Thursday, May 8, 2014, the House Financial Services Committee will hold a hearing entitled "Annual Testimony of the Secretary of the Treasury on the State of the International Finance System." Witness testimony will be given by:
- The Honorable Jacob J. Lew, Secretary
Department of the Treasury
Senate Finance Committee
On Tuesday, May 6, 2014, the Senate Finance Committee is holding a hearing entitled "New Routes for Funding and Financing Highways and Transit." The witnesses include:
- Dr. Joseph Kile, Assistant Director for Microeconomic Studies Division Congressional Budget Office
- Mr. Aubrey L. Layne, Jr., Secretary of Transportation
State of Virginia - Mr. Jayan Dhru, Managing Director, Corporate &
Infrastructure Ratings
Standard & Poor's Ratings Services - Ms. Samara Barend, Senior Vice President and P3 Development Director AECOM Capital
- Mr. Chris Edwards, Director, Tax Policy Studies
Cato Institute
Senate Banking, Housing, and Urban Affairs Committee
On Wednesday, May 7, 2014, the Senate Banking Subcommittee on Economic Policy will hold an open hearing entitled "Drivers of Job Creation." Witnesses will be:
- Ms. Jennifer Erickson, Director of Competitiveness and Economic
Growth
Center for American Progress - Mr. Derek Smith, CEO
Clean Energy Works Oregon - Mr. Emil Frankel, Visiting Scholar
Bipartisan Policy Center - Dr. Robert Dietz, Vice President for Tax and Market
Analysis
National Association of Home Builders
Senate Budget Committee
On Thursday, May 8, 2014, the Senate Budget Committee will hold a hearing entitled "The U.S. Economic and Fiscal Outlook." Witness testimony will be given by:
- The Honorable Janet L. Yellen, Chair
Board of Governors of the Federal Reserve System
Joint Economic Committee
On Wednesday, May 7, 2014, the Joint Economic Committee will hold a hearing entitled "The Economic Outlook." Witness testimony will be given by:
- The Honorable Janet L. Yellen, Chair
Board of Governors of the Federal Reserve System
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