United States: Tax Policy Update - February 10, 2015

NUMBER OF THE WEEK: 52 percent.

The likelihood that tax reform will happen in 2017 or earlier, according to the tax experts that participated in the Tax Council (TTC) and Ernst & Young (EY) Tax Reform Business Barometer in January 2015. Results from the survey will be available on the Tax Council's website later this week. A majority of the respondents also believe that tax reform would be business-only (59%) and revenue-neutral (61%). Regarding the likelihood of the tax-writing committees releasing specific plans in 2015, the respondents gave a median expectation of 50 percent.

LEGISLATIVE LANDSCAPE

Go Along to Get Along – Lew Plays Nice with Tax-Writing Chairmen. If the mood on Capitol Hill last week served as any indication of things to come, a divided government might not be so bad after all. Treasury Secretary Jack Lew's appearance before the House Ways and Means and Senate Finance Committees gave Republicans and Democrats a chance to explore possible areas of cooperation in the president's budget proposal for fiscal year 2016. Despite some clear differences over policy, Mr. Lew and leaders of the tax-writing committees agreed broadly on the need to reform the nation's tax code in a way that benefits everyone — not just corporations. All sides agreed that passthroughs and other closely-held businesses would pose a challenge to business-only tax reform. Of note, Mr. Lew remarked that passthroughs do have the option to switch to a corporate structure if that proves more advantageous. But he reiterated the administration's commitment to help small family businesses, citing the permanent extension of Section 179 expensing in the president's FY2016 proposal as an example. Regarding extenders, Mr. Lew along with Democratic committee members believe that they should be dealt with as part of comprehensive tax reform and, more importantly, that any permanent extension should be paid for.

House Ways and Means Approves Permanent Tax Extenders. The committee has approved seven bills that would make permanent a set of tax breaks related to certain charitable donations and business expensing. "It's about time we got around to making these permanent, instead of all these back-to-the-future extensions," Chairman Paul Ryan said at the markup. The votes during markup fell along partisan lines. Members disagreed over whether passing permanent extenders in a piecemeal fashion would help advance tax reform efforts. Republicans argued that making some provisions permanent would bring more certainty to the tax code, and it would also help provide a more accurate baseline for any tax reform plan. Democrats, however, were critical of the approach, expressing their disapproval of doing permanent extensions without offsets. The House is expected to take up some of the extenders (H.R. 636 and H.R. 644) for floor consideration on Thursday. The two bills would make permanent Section 179 expensing rules and several tax breaks related to charitable donations.

Light Reading: JCT Releases Tax Expenditures Report. In anticipation of the Senate Finance Committee's hearing entitled, "Getting to Yes on Tax Reform: What Lessons Can Congress Learn from the Tax Reform Act of 1986," the Joint Committee on Taxation released a report analyzing a number of tax expenditures. The report discusses the concept of these expenditures and how they are measured, weighing their "efficiency, equity, and administrability." The report also provides a list of tax expenditures since the Tax Reform Act of 1986. Read the complete report here.

Low Hanging Fruit Set for Markup. The Senate Finance Committee announced it will hold an executive session this Wednesday, Feb. 11 at 10 a.m. to mark up a slew of relatively noncontroversial tax bills—17 to be exact—including measures to expand the ability of foreign entities to invest in U.S. real estate and changes to taxes on liquefied natural gas. All of the currently posted bills have bipartisan support on the committee, but we expect members to file additional amendments prior to Wednesday's markup. We will update you as more information becomes available. Links to all related amendments can be found here.

REGULATORY WORLD

Foreign Tax Credit Splitting Gets Final Rule. On Monday, the IRS issued final rules for the regulation of foreign tax credit splitting events. The final rule provides clarification to the definition of usable shared loss. According to the rule, a shared loss is defined as a shared loss of a U.S. combined income group that could be used under foreign law to offset the group's own income. The rules are effective after publication in the Federal Register, which is expected on Feb. 10.

OECD Releases CBC Reporting Guidance. The OECD released guidance on the implementation of country-by-country (CBC) reporting, effective for fiscal years beginning on or after January 1, 2016. Multinationals with annual revenue of €750 million or more would be subject to CBC reporting. The OECD and G20 countries also reached agreement on two other items bringing the BEPS project closer to implementation: (1) A mandate urging negotiations on a multilateral instrument to implement BEPS measures; and (2) criteria for assessing patent box preferential treatment. A live webcast will be available here on Thursday, Feb. 12. Officials will discuss the country-by-country reporting guidance and provide a general BEPS progress report.

Treasury Working on Earnings Stripping Regulation . Last week, Treasury said that they are looking at various ways of addressing earnings stripping. Treasury Senior Counsel Douglas Poms said that they have been thinking about the issue and wondering if changes other than through section 163(j) may be appropriate. This issue is of the interest to the Treasury given the release of IRS Notice 2014-52 addressing corporate inversions and the OECD's recent publication on interest deductions. Notice 2014-52 reveals that Treasury and the IRS are "considering guidance to address strategies that avoid U.S. tax on U.S. operations by shifting or 'stripping' U.S.-source earnings to lower-tax jurisdictions, including through intercompany debt.

COURTS & LEISURE

Super Tax Savvy. Following the Super Bowl, Chevy awarded Tom Brady with a $34,000 Colorado truck for winning the Super Bowl MVP. Brady announced later that week he wanted to give the truck to Malcolm Butler for making the game-saving interception. Tax pundits quickly assessed that Brady would have an $18,500 tax liability, arising from receiving the truck (39.6% x $34,000) and gifting it to his teammate (40% x $20,000 arising from the amount in excess of the annual gift tax exclusion of $14,000). Thanks to Tom's savvy tax advisers, Chevy is now awarding the truck directly to his teammate. Sure, Butler will owe taxes, but he shouldn't feel too deflated – it's a brand new truck!

Medtronic's $2 Billion Tax Case Begins. Though Medtronic, Inc. may avoid paying domestic corporate taxes following last month's inversion, the Tax Court heard opening statements from Medtronic and the IRS about a $2 billion income adjustment for tax years 2005 and 2006. The argument centers around transfer pricing issues on royalties between Medtronic and its offshore subsidiary. The IRS seeks to make the adjustments between Medtronic and its subsidiary pursuant to Section 482 of the tax code.

LOOKING AHEAD

Tuesday, 2/10

Senate Finance Committee
The full committee holds a hearing on "Getting to Yes on Tax Reform." Witnesses include former SFC Chairman Bob Packwood and former Senator Bill Bradley. Hearing to be held in 215 Dirksen.

Senate Banking Committee
The full committee meets to conduct a hearing on the "Regulatory Relief for Community Banks and Credit Unions." Hearing to be held in 538 Dirksen.

Wednesday, 2/11

Senate Finance Committee
The full committee holds an open executive session to markup 17 original tax bills. Meeting to be held in 215 Dirksen. Live webcast can be viewed here.

Thursday, 2/12

Tax Council Policy Institute
The institute hosts its 16th annual Tax Policy and Practice Symposium entitled, "How Taxes Matter: The Globalization of Tax Policy and Implications for US Economic Growth and Investment." This event will focus on tax issues facing companies including the role of tax policy in driving global economic growth and job creation, insight into OECD and G20's BEPS efforts and strategies for the ever-changing legislative environment.

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