United States: Tax Policy Update - February 2, 2015

Last Updated: February 10 2015
Article by Russell W. Sullivan and Danielle R. Dellerson

Number Of The Week: 19 Percent

The proposed minimum tax rate on U.S. multinational companies' foreign earnings, under President Obama's FY 2016 budget proposal released today. The 19 percent rate would apply to new foreign earnings. The proposal would first impose a one-time mandatory 14 percent tax on companies' earnings that are currently held offshore—whether they choose to repatriate those earnings or not. Please see below for a more detailed look at tax proposals in the president's proposal.

IT'S BUDGET DAY!

Here's how this works in Washington: if the president's proposed FY 2016 Budget wakes up and sees its (very, very large) shadow, it foretells another seven months of partisan rancor over revenue and spending levels before current government funding runs out (and we near the debt limit.) Spoiler alert: the Budget's shadow looms large this year over a Republican-controlled Congress.

The Treasury Department's Green Book, detailing the budget's revenue provisions, was released moments ago and is available here. The White House fact sheet, outlining the budget proposals and dubbed "Middle Class Economics," is available here. Read House Ways and Means Chairman Paul Ryan's response here.

Overview of Major Revenue Measures

President Obama's proposed budget comes in at approximately $4 trillion for fiscal year 2016. The proposal would raise more than $1 trillion in new revenue over the next decade through tax reform and reducing tax breaks for high-income earners. Highlights below:

  • Revenue Raisers.

    1. A one-time mandatory repatriation tax of 14 percent on previously earned income, which is expected to raise $268 billion;
    2. A 19 percent minimum tax on corporate foreign earnings in the future that would raise about $206 billion;
    3. An increase to the capital gains and dividend tax rate to 28 percent and an end to the stepped-up basis rule, which would generate $208 billion over 10 years;
    4. doubling of the tobacco tax to help fund a five-year extension of the Children's Health Insurance Program (CHIP) among other early childhood programs. The tax is expected to bring in $95 billion;
    5. An end to the "Gingrich-Edwards" loophole, which would raise $74 billion.
  • International Tax Extenders. The proposal would extend the exception for Subpart F active financing income and look-through treatment for controlled foreign corporations.
  • Corporate Tax Rate. The proposal aims to reduce the corporate tax rate to 28 percent with a 25 percent effective rate for domestic manufacturing.
  • Dual Capacity Taxpayer Rule. The proposal would modify the dual capacity taxpayer rule. We will provide details as soon as the Treasury's Green Book becomes available.
  • Bank Tax. The proposal would impose a seven point basis fee on the liability of big banks.
  • Buffet Rule. The proposal would enforce the "Buffet Rule" which would impose a 30 percent minimum tax on millionaires.
  • Permanent Extenders. Make permanent the tax credits for R&D, PTC as well as the Investment Tax Credit and Section 179 expensing.
  • Sports Facilities. Modify tax-exempt government bond financing for professional sports facilities by removing the private payment test – effective Dec. 31, 2015.

LEGISLATIVE LANDSCAPE

Ryan on Meet the Press. House Ways and Means Chairman Paul Ryan sat down with NBC's "Meet the Press" Sunday, reiterating his goal of making the tax code more simple and fair. Though he did not go into details about discussions held at last week's Ways and Means Republican retreat, Ryan said he would like to work with President Obama and find "common ground" before putting out his own plan to overhaul the tax code.

Ryan will have the opportunity to explore possible areas of agreement with the administration when Treasury Secretary Jack Lew comes before the Ways and Means Committee on Tuesday to pitch the president's budget proposal.

Ways and Means Retreat Recap. At their retreat last week, committee Republicans agreed to attempt an overhaul of the nation's tax code on both the corporate and individual sides. Meanwhile, the White House remains set on doing corporate-only tax reform. "Corporate only leaves too many of our job creators behind," Congressman Kevin Brady told attendees at the American Bar Association's tax conference in Houston last week. Indeed, House Republicans have expressed concerns that corporate-only reform would leave out pass-through businesses. Republicans at the retreat also discussed plans to reduce the number of tax brackets and move the U.S. to a territorial system of international taxation.

Permanent Extenders Up for Consideration. This week – look for the House Ways and Means Committee to mark up bills that would permanently extend tax breaks for small businesses and charitable donations. The charitable donations bill would expand deductions for businesses that donate food to food banks, allow seniors to donate directly to charity through distributions from IRA accounts tax-free, and enhance the deduction for property donated for conservation easement. The second bill would permanently extend Section 179. In a memo to House members, Majority Leader Kevin McCarthy indicated that the House would bring the bills to the floor during the week of Feb. 9.

White House Withdraws 529 Tax Proposal. The Obama Administration announced that it would drop plans to tax withdrawals under 529 college savings plans. "Given it has become such a distraction, we're not going to ask Congress to pass the 529 provision so that they can instead focus on delivering a larger package of education tax relief that has bipartisan support," the White House said. The administration, much to its chagrin, received criticism from both Republicans and Democrats for the politically ill-conceived plan. Reps. Lynn Jenkins (R-KS) and Ron Kind (D-WI) remain determine to bring the legislation to the floor for consideration, which would preserve and expand some of the tax-free benefits of 529s. The bill is expected to come to the House floor during the week of Feb. 23.

Repatriation Bill for HTF Forthcoming. Senators Rand Paul (R-KY) and Barbara Boxer (D-CA) are looking to introduce a bipartisan repatriation bill that would help fund the Highway Trust Fund (HTF). The Invest in Transportation Act of 2015 would extend the HTF by allowing companies to bring home their foreign earnings on a voluntary basis at a rate of 6.5 percent. The rate would only apply to "repatriations that exceed each company's average repatriations in recent years." Companies must complete their transfers within a 5-year window. The bill would also prevent firms from using repatriated funds for stock buy-backs or executive pay increases.

In addition, all tax revenues collected from the program would be put towards the HTF. After the Boxer-Paul proposal was unveiled, Senate Finance Chairman Orrin Hatch immediately expressed his doubts. "A stand-alone temporary tax holiday would end up costing the government in the end. Saying you're going to use something that loses money to pay for [...] infrastructure is just bad policy, plain and simple," Hatch said. The Joint Committee on Taxation evaluated a similar proposal last year, estimating that it would cost $95.8 billion over 10 years. The current highway authorization expires May 31.

Hatch to Bring "Hire More Heroes Act" to Senate Floor. The Senate Finance Committee unanimously approved the Hire More Heroes Act (H.R. 22) in a markup last week, which would allow firms to hire veterans without having to count them as full-time workers under the Affordable Care Act's employer mandate. Members of the committee filed a total of 27 amendments to the bill but agreed that they would wait until the measure reaches the floor. Of note, Senators Portman and Cardin offered an amendment that would extend and expand the Work Opportunity Tax Credit (WOTC) through Dec. 31, 2015. A full list of amendments can be found here.

Barthold Stays Put at JCT. At the Joint Committee on Taxation organizational meeting, House Ways and Means Chairman Paul Ryan and Senate Finance Chairman Orrin Hatch voted to keep Thomas Barthold as chief of staff for the JCT. In the first session of the 114th Congress, Mr. Ryan takes over the role of JCT chairman with Mr. Hatch as his vice chairman. The two will switch roles during the second session. Meanwhile at the Congressional Budget Office, Director Doug Elmendorf's fate remains unknown though it is likely he will be replaced with someone that Republicans can see eye-to-eye on dynamic scoring.

Hatch Sorting Out Logistics for Working Groups. Chairman Hatch has not decided whether he would invite the public to participate in the work of his tax reform working groups. Mr. Hatch has tasked his working groups to come up with recommendations and "real ideas" for tax reform. It remains to be seen whether Mr. Hatch would reach out to the public and various industries for input. Either way, Mr. Hatch is expecting the working groups to identify the key issues by March. Senate Democrats last week outlined some key principles they would like to see reflected in any reform plan – ensuring fairness, raising revenue for public initiatives, preserving or expanding tax incentives for innovation (e.g. R&D credit).

REGULATORY WORLD

871(m) Proposed Regulations on Priority Guidance Plan
On Jan. 29, the IRS and Treasury released an update to their 2014-2015 Priority Guidance Plan, listing the various projects that they intend to work on through the plan year (July 2014 through June 2015) without setting deadlines. Of note, the IRS and Treasury will continue working on the proposed regulations for Section 871(m) of the tax code, which addresses dividend equivalent payments. Based on comments by an IRS senior counsel last October, the 871(m) work may be completed before June 2015.

Parent-Subsidiary Benefits in European Union Narrowing
The Council of the European Union added an anti-abuse clause to further prevent corporate tax avoidance and aggressive tax planning. The clause restricts governments from granting the benefits of parent-subsidiary law, which aids in eliminating double taxation from hybrid loan mismatches, if the corporate arrangements are not "genuine." The clause is a de minimis rule allowing member states to adopt stricter national rules if so desired. Many steps are being taken not only by the European Union, but also the OECD through its BEPS project to further the global efforts to address corporate tax avoidance.

COURTS & LEISURE

Small Victory in Big Case Over $643m

A federal judge in Ohio ruled last week that NetJets Large Aircraft, Inc. could rely on a 20-year old technical advice memorandum from the IRS in limiting tax liability in a dispute for $643 million. The dispute centers around the taxable transportation under Section 4621 of the tax code, which imposes taxes on the "occupied hourly fee." However, the memorandum provides that the occupied hourly fee relates only to "amount paid." While not outright prevailing in the lawsuit, it does help NetJets in their ongoing litigation.

LOOKING AHEAD

Tuesday, 2/3

House Ways and Means Committee
The Ways and Means Committee holds a hearing on the President's Fiscal Year 2016 Budget Proposal. Witness: Treasury Secretary Jack Lew. Hearing to be held in 1300 Longworth.

Senate Finance Committee
The committee convenes a hearing to consider the Administration's budget request for the Internal Revenue Service and to examine if the IRS is operating efficiently and effectively. IRS Commissioner John Koskinen will also testify. Hearing to be held in 215 Dirksen.

Wednesday, 2/4

House Ways and Means
The committee meets to mark up several tax extenders, aiming to make them permanent.

Senate Finance Committee
The full committee holds a hearing on the President's Budget for Fiscal Year 2016. Witness: Treasury Secretary Jack Lew. Hearing to be held in 215 Dirksen.

DC Bar – TaxationSection
Domestically controlled Real Estate Investment Trust's (REIT) are an increasingly popular investment structure for international investors. Steven Schneider from Goulston & Storrs and Daniel Carmody and Richard LaFalce from Morgan Lewis will discuss how to structure private domestically controlled REITs and some of the benefits and burdens of using this structure. This luncheon program is sponsored by the Pass-Throughs and Real Estate Committee of the D.C. Bar Taxation Section.

Thursday, 2/5

Senate Finance Committee
The full committee holds a hearing on the President's Budget for Fiscal Year 2016. Witness: Treasury Secretary Jack Lew. Hearing to be held in 215 Dirksen.

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