United States: Tax Policy Update - June 02, 2015

NUMBER OF THE WEEK: 68,000.  The estimated number of vehicles that traverse the Memorial Bridge between Arlington, Va., and Washington, D.C., each day—now with increasingly frustrated drivers stuck in snarled traffic after two lanes of the 83-year-old bridge had to be shut down for emergency repairs, estimated to take at least six months to complete. Critics of Congress's inability to pass a long-term highway funding bill say the iconic bridge—and its now-iconic traffic—is a symbol of congressional inaction. Lawmakers are increasingly looking to tax reform—especially changes to international tax provisions—to come up with the money for a long-term funding authorization.

LEGISLATIVE LANDSCAPE

Highway Funding Update: Intersection with International Tax Reform Ahead? Since passing a two-month extension just before the Memorial Day recess, we continue to hear tales of stalled negotiations between Senate Democrats and Republicans over how to fund a longer-term bill. Senate Finance Committee Chairman Orrin Hatch (R-UT) is nevertheless planning to introduce an $11 billion patch that would keep the highway trust fund afloat through 2015, giving lawmakers more time to come up with funding for a five or six-year plan as a part of tax reform negotiations. Members of the Senate Finance Committee's international tax reform working group are reportedly meeting regularly with the Obama Administration, and House Ways and Means Chairman Paul Ryan is looking more favorably at pairing international reforms with transportation funding. The two-month highway patch will run out at the end of July, just before lawmakers break for the August recess.

Medical Device Tax Repeal Readied in the House. The House Ways and Means Committee will mark up a bill today to repeal the medical device excise tax—a provision that was enacted as part of the Affordable Care Act. However, Chairman Paul Ryan has steered the repeal bill away from an earlier version that would have provided refunds for companies that have already paid the tax, which went into effect in 2013. Eliminating the retroactive application of the repeal—and thus the tax refunds—brings the cost of repeal down to $24.4 billion over 10 years from the original estimate of $26.5 billion, according to the Joint Committee on Taxation. The bill, H.R. 160, is expected to make it through the Ways and Means Committee today, and could be on the House floor for a vote the week of June 15. Senator Hatch introduced a similar bill, S. 149, in January that would repeal the tax retroactively. While repeal of the device tax has some support from congressional Democrats, the Obama Administration is firmly opposed to it, complicating its path to enactment.

Tiberi Introduces Permanent Bonus Depreciation Bill. In what's become an annual rite of spring, House Ways and Means member Pat Tiberi (R-OH), has introduced legislation to permanently extend so-called bonus depreciation — a tax provision that allows businesses to immediately deduct half the cost of new equipment purchases and qualified improvement property rather than waiting for years to depreciate the cost. Tiberi's bill, H.R. 2510, would also "lift some restrictions to allow certain tax credits to be used for capital reinvestment and would ensure more companies would be able to take advantage of the immediate deduction." The Obama Administration has threatened to veto any permanent extensions of big-ticket tax extender provisions, like bonus depreciation and the popular research and experimentation tax credit, if they are not accompanied by offsets. Last month, the House passed a $182 billion permanent and expanded version of the R&E tax credit in May without any offsets.

Senate Tax Reform Working Groups: Recommendations Likely Delayed Until Late June.

Before the Memorial Day recess, Senate Finance Committee Chairman Hatch and Ranking Member Wyden announced they would extend the deadline for their committee's five tax reform working groups to develop recommendations for the full committee. While we await confirmation of a new deadline, which we hear will likely be in late June, we will continue to spotlight comments submitted to the working groups. This week: the National Association of Publicly Traded Partnerships.

Comment Spotlight: National Association of Publicly Traded Partnerships

In its submission, the National Association of Publicly Traded Partnerships (NAPTP) stressed the importance of preserving the master limited partnership (MLP) structure. The NAPTP highlighted that MLPs allow smaller investors to invest in energy and real estate development while providing a valuable new source of capital. MLPs are also crucial to the growth of midstream energy services like pipelines, processing plants. While NAPTP is seeking preservation of MLPs, the IRS has recently published proposed regulations which appear to limit the types of businesses that could be structured as MLPs. The full NAPTP submission can be found here.

REGULATORY WORLD

EU Puts the Squeeze on the "Irish Double-Dutch Sandwich;" Readies Plan for Minimum Corporate Tax Rate. A special European Parliament tax committee visited Ireland and the Netherlands last week as part of its ongoing investigation into the countries' tax rulings with respect to multinational corporations. At the conclusion of meetings with Dutch and Irish officials, the tax committee's chairman, Alain Lamassoure, called for a phasing out of the tax practice known as the "Irish double-Dutch sandwich," a tax maneuver popularly used by many multinational firms. The visit coincided with an announcement that the European Commission will unveil an action plan on June 17 against aggressive corporate tax planning, including a revival of a proposal to create a Common Consolidated Corporate Tax Base (CCCTB) for EU member states. For more on the CCCTB, read here.

OECD Releases Revised Draft on Preventing Treaty Abuse. The Organization of Economic Cooperation and Development (OECD) released its revised discussion draft on the prevention of treaty abuse, which includes an alternative simplified limitation on benefits rule that should be accompanied by the principal purposes test. This draft is a follow-up to the public consultation held in January of this year, where public comments noted the importance of a flexible approach in designing the limitation on benefits rule. While the OECD heeded recommendations on the limitation on benefits rule, they stuck to their guns in keeping the principal purposes test (PPT) broad and subjective. Public comments sought a safe harbor to permit some certainty in claiming treaty benefits without application of the PPT, but the OECD has declined to do so for now. This revised draft is the penultimate discussion draft in the OECD's Base Erosion and Profit Shifting (BEPS) project that is wrapping up later this year.

IRS Permits Additional REIT Entities. In private letter rulings, the IRS held that rents from real property include outdoor advertising space by tenants with rotating ads and that certain ski lift towers are inherently permanent structures qualifying as real property for purposes of real estate investment trust entities (REITs). In PLR 201522002, the IRS noted that sharing the advertising space does not change the character of income from being rents from real property. With respect to ski lift towers, the IRS stated in PLR 201521006 that such towers include parts like the foundation and tower, but not lift chairs or cables.

LOOKING AHEAD

Relevant Congressional Activity

Tuesday, 6/2

Other Activity

Tuesday, 6/2

Wednesday, 6/3

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