United States: Tax Policy Update - October 27, 2014

Last Updated: October 29 2014
Article by Russell W. Sullivan and Danielle R. Dellerson

NUMBER OF THE WEEK: 2.

The number of new corporate tax inversion deals announced since the U.S. Treasury Department issued new regulations Sept. 22 to make the deals more difficult and less financially appealing. Ohio-based Steris Corp. offered to buy UK's Synergy Health Plc in a deal that would shift Steris' tax domicile to Britain, and Houston-based oilfield housing supplier Civeo Corp said it will redomicile in Canada for tax purposes.

LEGISLATIVE LANDSCAPE

Portman Says "Love Your Country, Reform Its Tax Code." In response to the latest corporate inversion announcements — this time including Buckeye State medical supply firm Steris Corp. — Ohio Senator Rob Portman (R) wrote an op-ed for Bloomberg calling upon lawmakers to show their patriotism by overhauling the tax code.

McCarthy Lays Out GOP's Strategy For Showing "Ability to Govern." With just over one week before Election Day and polls continuing to favor a GOP takeover of the Senate, House Majority Leader Kevin McCarthy (R-CA) is gearing up for a GOP blitz to show the American public that his party can get things done. Absent such a showing right out of the gate, the party doesn't stand a chance in the 2016 presidential election, McCarthy recently told donors and reporters.

Topping McCarthy's 2015 policy list are energy, trade and tax issues that have at least some bipartisan support and can be achieved without major reforms. Think Keystone XL Pipeline, repeal of the medical device tax and a highway-funding bill that is offset, in part, by new drilling on public lands. McCarthy is also angling to get a long-term government-funding bill, tax extenders and renewal of the Terrorism Risk Insurance Act wrapped up during the lame duck.

Staffers Readying Extenders Options. When their bosses return from campaigning in two weeks, congressional tax staffers will be ready to make recommendations for what is sure to be a contentious debate over tax extenders. So far, no uniform recommendations have surfaced. The House and Senate have staked out vastly different approaches to dealing with the 50-plus expired tax breaks, with the Senate Finance Committee adopting a two-year extension of all the expired provisions, while the House has passed a relatively short list of mostly business-related extenders that would be made permanent and, in some cases, expanded. The post-election dynamics will no doubt impact the extender negotiations, although Republican lawmakers have said they want to pass some form of an extenders package during the lame duck session, regardless of the election results.

Internet Taxes Spawn Protests. While the U.S. legislative landscape sits idle for two more weeks, a tax policy dispute is heating up in Hungary, where thousands of protesters took to the streets to voice objections to their government's proposed plans to tax Internet access. The Hungarian government plans to impose what amounts to a $0.62 tax for every gigabyte of data accessed by users. Protesters argue the plan is aimed at limiting access to information, muzzling non-government media and directing attention away from the country's deteriorating relationship with the U.S.

Meanwhile, the current U.S. moratorium on the imposition of Internet access taxes by states will expire in mid-December and is expected to become embroiled in the ongoing dispute over whether states should be allowed to collect sales taxes for online purchases made from companies that do not have a physical presence in the consumer's state. Pairing the sales tax bill, known as the Marketplace Fairness Act, with the moratorium on Internet access taxes will significantly improve its chances for passage, handing a major victory to bricks-and-mortar stores in the process.

REGULATORY WORLD

New Guidance Allows DC Plans to Offer Deferred Annuities in Target Date Funds. The U.S. Department of the Treasury and the Internal Revenue Service issued new guidance Oct. 24 designed to expand the use of income annuities in 401(k) plans. The new rules allow plan sponsors to include deferred annuities in target date funds that are used as a default investment, in a manner that complies with plan qualification rules. The guidance provides a special rule that enables qualified defined contribution plans to provide lifetime income by offering, as investment options, a series of target date funds (TDFs) that include deferred annuities among their assets, even if some of the TDFs within the series are available only to older participants.

OECD Signals Openness to Ireland's Proposed Patent Box Scheme Amid Criticism. Pascal Saint-Amans, the director of the Centre for Tax Policy and Administration at the Paris-based Organisation for Economic Cooperation and Development (OECD), told the Irish Independent that Ireland's announced plans to create a patent box are "fine." But, he added, the "devil is in the details." A patent box is the term used for a country's preferential (read: significantly lower rate) tax treatment of multinationals' profits that are derived from intellectual property licensing and transfers.

Several other European nations' patent box regimes are already under scrutiny by the European Commission for potentially amounting to "state aid," in violation of European Union rules. Ireland's patent box plans were unveiled in conjunction with its announcement that it would end its "Double Irish" tax structure, which allowed some multinationals to locate profits of Ireland-based companies with subsidiaries in low- or no-tax nations, like Bermuda.

Last December, European finance ministers ordered a review of all patent boxes in the EU, including schemes in Belgium, Cyprus, Spain, France, Hungary, Luxembourg, Malta, The Netherlands, Portugal and UK. The EC report on its patent box findings is expected before the end of the year.

COURTS & LEISURE

Amazon vs. the Tax Man. In other international tax news, the IRS is back in court to battle retail giant Amazon over a tax bill worth at least hundreds of millions of dollars. The long-awaited Tax Court trial began last Friday to decide if Amazon undervalued a 2005 deal with its European subsidiary by more than $3 billion. The IRS argues that Amazon shifted its easily mobile, valuable assets like software and other intellectual property to low-tax countries to avoid paying U.S. taxes.

Amazon is just one of several multinational companies battling the IRS in court over transfer pricing disputes. The trial kicks off amid growing concern about the myriad ways big corporations move assets and cash to avoid paying taxes. The European Union is probing the tax practices of U.S. tech companies like Amazon and Apple and the OECD is working to write new norms for transfer pricing.

Swiss Banks Object to Terms of U.S. Amnesty Offer. Dozens of Swiss banks are pushing back against a U.S. Justice Department non-prosecution agreement, under which the banks would disclose how they helped Americans evade taxes in exchange for amnesty. Lawyers for the bank sent a letter to the Justice Department last week, according to Bloomberg News, which obtained a copy of the letter. The banks complain that the model accord, which would require them to cooperate with U.S. and other foreign authorities, amounts to a global cooperation agreement without sufficient assurances that the banks will escape future scrutiny.

LOOKING AHEAD

Relevant Agency Activity

Internal Revenue Service

On Wednesday, Oct. 29, the IRS Information Reporting Program Advisory Committee will meet. Agenda items include the Foreign Account Tax Compliance Act, the expanded use of TIN matching, cost basis reporting and the de minimis threshold for Form 1099 corrections, among other issues. More information is available here.

Other Activity

Wednesday, Oct. 29

On Wednesday, Oct. 29, the D.C. Bar will host the second installment of its International Tax Series, this time with a focus on corporate tax inversions. The luncheon program, "Recent Developments on Inversions: Notice 2014-52," will focus on the U.S. Treasury Department's recently released anti-inversion regulations. More information is available here. Panelists will include Treasury Department officials and tax practitioners, including:

  • Michael Caballero, Covington & Burling
  • Andrew Eisenberg, Jones Day
  • John Merrick, Special Counsel to the Associate Chief Counsel (International), Internal Revenue Service
  • Timothy Shuman, McDermott Will & Emery
  • Brenda Zent, Tax Specialist, U.S. Treasury Department

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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