United States: Tax Policy Update - May 12, 2014

Last Updated: May 19 2014
Article by Russell W. Sullivan


The approximate number of U.S. corporations that have moved their tax domiciles to lower-tax jurisdictions overseas in the last two years following acquisitions of smaller, foreign companies, according to an op-ed by Senate Finance Chairman Ron Wyden (D-OR). These so-called "inversions" result in significant tax burden reductions for U.S. corporations, and they are receiving lots of attention lately as lawmakers focus on erosion of the U.S. tax base. Many tax experts expect to see a growing exodus of U.S. multinationals as congressional tax reform efforts continue to stall.  


House: Permanent R&D Credit Passes Despite Veto Threat. The House voted 274-131 on Friday, May 9, to approve H.R. 4438, which would renew, simplify and make permanent the tax credit for research and development — the most costly of all the expired business tax provisions known as "extenders." The bill is projected to cost $156 billion over the next decade and is not offset by spending cuts or tax hikes elsewhere — a fact that House Democratic leaders seized upon in their opposition to the bill and the White House cited earlier in the week when it threatened to veto the bill if it came to President Obama's desk.

Senate: Extenders Teed Up. The debate over whether certain "extenders" should be paid for is revealing divisions between the White House and Democratic members in Congress, many of whom voted in favor of the permanent R&D tax credit in the House and are expected to vote in favor of an unpaid-for tax extender bill in the Senate when it comes to the floor this week.

That bill, known as the EXPIRE Act (S. 2260), passed out of the Senate Finance Committee last month by unanimous voice vote and a cloture vote to proceed to the bill is expected early this week. The $85 billion package would retroactively extend for two years almost all of the 55 tax provisions that expired at the end of 2013, keeping them in place through the end of 2015. The package includes many key business tax breaks, including the production tax credit for renewable energy and provisions allowing deferral of taxation on income earned overseas.

Senate Finance Committee Chairman Ron Wyden (D-OR) has said the two-year extension of the extenders is meant to act as a "bridge" to tax reform, giving lawmakers time to hash out a deal on a comprehensive overhaul of the tax code.

Senate Attaches Extenders to Jobs Bill for Veterans. It remains unclear how and when the two sides of the Capitol will reconcile their two very different approaches for handling tax extenders. But rather than wait for the House to send over the R&D tax credit bill, Senate Majority Leader Harry Reid (D-NV), attached the extenders package to the Hire More Heroes Act of 2014 (H.R. 3474), a bipartisan bill that passed in the House almost unanimously in March. The Heroes Act would encourage employers to retain and hire veterans by allowing them to exclude from its calculation of "full-time employees" those who already have health coverage under TRICARE (Defense Department) or the Department of Veterans Affairs for purposes of the employer mandate under the Affordable Care Act.

Inversion Bills Coming. Wyden penned an op-ed in the Wall Street Journal on May 9 laying out a legislative framework for stemming the rising tide of U.S. multinational corporations that are relocating their tax domiciles abroad by merging with foreign companies, thereby reducing their U.S. tax burden. U.S. drugmaker Pfizer is the most recent U.S. corporation to stir the inversion pot after it announced plans to move its tax residence to the U.K. if it successfully acquires U.K.-based AstraZeneca Plc.

Sen. Carl Levin (D-MI) told reporters that he and his brother, House Rep. Sander Levin (D-MI), will introduce identical bills in the House and Senate in the next few days aimed at slowing inversions by tightening requirements under Code Section 7874. It is unclear if Levin and Wyden are working on a bill together, but Wyden indicated in his op-ed that his proposal would apply retroactively to May 8, 2014, because, he said, "corporations must understand that they won't profit from abandoning the U.S." Wyden acknowledged that the current U.S. tax code is driving companies to relocate overseas, but he said the problem cannot wait for full-scale tax reform, which he hopes to complete before the 2016 presidential election.

"Policy Machinery" in Place for Tax Reform. Mark Prater, chief tax counsel to Finance Committee ranking Republican Orrin Hatch (R-Utah), told attendees of the American Bar Association's Section of Taxation meeting on May 10 that he is optimistic about lawmakers' progress on tax reform. He said the series of hearings and discussion drafts over the course of the last three years have put the "policy machinery" in place to move comprehensive reform forward. Now if only the political machinery would catch up...


IRS Issues New Rules for Corporate Acquisitions, Reorganizations. The Internal Revenue Service issued proposed regulations (REG-131239-13) on May 6 modifying the definition of an acquiring corporation under tax code Section 381 with regard to certain assets in reorganizations. The proposed rules would provide that, in a transaction described in Section 381(a)(2), the acquiring corporation is the corporation that directly acquires the assets transferred by the transferor corporation, even if the transferee ultimately retains none of the transferred assets. The proposed rules are a follow-up to rules proposed in April 2012 on the allocation of earnings and profits in nonrecognition transfers of property from one corporation to another.

"Real Property" Under REITs Clarified, Extended to Renewable Energy Property. The IRS issued proposed regulations (REG-150760-13) on May 9 that would clarify the definition of real property for purposes of the real estate investment trust (REIT) provisions of the Internal Revenue Code. According to IRS, the new proposed regs would provide a "framework to analyze the types of assets in which REITs seek to invest." According to a speech delivered the same day, President Obama said the new rules would clarify the application of the REIT structure to renewable energy installations, starting with solar energy.

Obama highlighted the guidance as part of a broader speech announcing a range of executive actions to promote the use of solar energy and energy efficiency. The White House, in a fact sheet corresponding with the president's speech, said the guidance on REITs is "a step forward for renewable energy." The proposed rules will be published in the Federal Register May 14. A public hearing on the rules is scheduled for Sept. 18, and comments and requests to speak at the public hearing must be received by Aug. 12.

Final Rules Issued on Retirement Plan Distributions. The IRS has issued final regulations clarifying the tax treatment of payments by qualified retirement plans for accident or health insurance. The final regs reflect the general rule under Code Sec. 402(a) that amounts held in a qualified plan that are used to pay accident or health insurance premiums are taxable distributions, unless described in certain statutory exceptions. The regs also provide an additional exception for arrangements under which amounts are used to pay premiums for disability insurance that replaces retirement plan contributions in the event of a participant's disability. These regs affect sponsors, administrators, participants and beneficiaries of qualified retirement plans.


DOJ Making Headway on Tax Evasion Crackdown. The Justice Department's program to allow Swiss banks to sign up to disclose data about their U.S. account holders in return for a set penalty and the chance to avoid prosecution is yielding significant amounts of information, the DOJ's top tax official said May 10 during a meeting of the American Bar Association Section of Taxation. Bloomberg BNA reported that Kathryn Keneally, assistant attorney general of the tax division, told meeting attendees that the U.S. offshore voluntary disclosure initiative (OVDI) is still available to those the government hasn't yet discovered, but it may be too late for others.

Keneally's comments come amid reports that banking giant Credit Suisse may pay $1.6 billion to resolve the Justice Department's criminal probe into the bank's role in helping Americans evade U.S. taxes.


Relevant Congressional Activity

The House is out this week for a district work period and will return the week of May 19, 2014.

The Senate will vote today on a motion to end debate on an energy efficiency bill that has become highly controversial since Senate Majority Leader Harry Reid (D-NV) blocked Republicans from adding amendments. The cloture vote is expected to fail.

The Senate will then turn its attention to consideration of the tax extenders package, the EXPIRE Act (S. 2260), with a cloture vote possible on Tuesday, May 13, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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