United States: U.S. International Tax Policy: 10 Questions For 2015

The year 2015 promises to be an active one in U.S. international tax policy, as new players take the stage in the tax reform debate, the Base Erosion and Profit Shifting (BEPS) effort continues to develop and even begins to go into effect around the world, and corporate inversions remain a hot tax policy topic after a year of intense publicity and aggressive executive action. Against this backdrop, 2015 likely will feature a great deal of activity in the international tax arena, even if fundamental changes to the U.S. international tax regime remain unlikely in the near term. Here are 10 pressing questions that may be answered as the year unfolds.

1. Can "business only" tax reform be made to work?

It is widely agreed that President Obama and congressional Republicans are too far apart on individual income tax policy to make that a productive area of discussion. On the other hand, it is often said that the two sides "are not that far apart" on business tax reform, in the sense that almost everyone agrees that the U.S. corporate income tax rate is too high and that the tax base should be broadened in at least some respects as part of a rate reduction effort. Thus business tax reform could be an area of constructive engagement during 2015. More detailed discussions over the course of this year will reveal how much agreement there really is between the two sides, as well as how challenging it will be to design a coherent business tax reform approach without broadly implicating the individual income tax rules, in light of the fact that so much business is conducted through pass-through entities whose income is taxable under the individual regime.

2. Can policy makers agree on revenue goals for business tax reform?

It is likely that President Obama and congressional Republicans can agree that revenue-neutral business tax reform would be a worthwhile objective, if reform could improve the efficiency, perceived fairness and administrability of the rules. However, disagreements might arise as to whether, for example, the legislation must be revenue-neutral over the conventional 10-year budget window, or indefinitely in a "steady state." If there is a one-time surge in tax revenues from a deemed repatriation of foreign earnings as a transition into a territorial dividend exemption system, will that enable the enactment of policies with negative longer term budget effects as conventional budgeting principles would permit, or will President Obama invoke steady state neutrality to require dedication of this one-time revenue surge to other priorities, such as infrastructure spending, as indicated in the president's fiscal year (FY) 2016 budget proposal? The latter scenario would mean that the permanent policy would have to tilt more heavily towards base broadening in order to accomplish tax reform on a revenue neutral basis.

In addition, the concept of revenue neutrality for a business tax reform package as a whole may obscure many other revenue effects of potential interest. In particular, various segments of the business community (e.g., large multinationals, smaller businesses, U.S.-based companies, non-U.S.-based companies, various industrial sectors) will be interested in whether tax reform is revenue neutral for them, or if instead they are being called upon to finance someone else's tax cut (or benefiting from someone else's tax increase). Accomplishing revenue-neutral business tax reform to the satisfaction of both major political parties and all of these different segments of the business community will be a challenge.

3. Will "dynamic scoring" materially lighten tax reform's base-broadening load?

Although conventional revenue estimates are already "dynamic" in the sense that anticipated behavioral responses to proposed legislation are taken into account (i.e., microeconomic analysis), these estimates historically have been "static" in the sense that the macroeconomic baseline (overall size of the economy) is held constant. For the vast majority of business tax proposals, this distinction is of no consequence, as only the very broadest business tax proposals would be more than a drop in the macroeconomic bucket in view of the size of the U.S. economy. But for the most significant changes, such as a several-point reduction in the corporate income tax rate, there may be macroeconomic effects as well, and congressional Republicans are taking steps to account for these effects in scoring the revenue effects of tax reform. Their hope is that macroeconomic growth expected to result from large tax-cutting measures could boost projected tax receipts, thereby partially offsetting the more direct revenue-losing effects of such measures. This in turn would reduce the amount of base broadening necessary to accomplish tax reform on a revenue-neutral basis, making tax reform an easier lift.

Whether this scenario plays out in practice remains to be seen, and depends critically on what kind of political buy-in these dynamic scores receive—they will still be presented alongside (not instead of) conventional scores, and the White House and congressional Republicans might continue to differ regarding which one is the appropriate yardstick for determining revenue neutrality.

4. Will Congress invoke budget reconciliation procedures in order to pass tax reform legislation?

Although Republicans currently control both houses of Congress, "control" means different things as applied to the House of Representatives and the Senate, respectively. In the Senate, individual members and the minority party have greater blocking power (for example, in the form of the filibuster), such that a supermajority of 60 (out of 100) votes is typically required to pass legislation in the Senate, whereas in the House the majority party can more easily work its will. An exception to the Senate's supermajority requirement is legislation put before the Senate to "reconcile" taxing and spending measures with a budget resolution. Under this reconciliation process, only a simple majority vote in the Senate is required, but the legislation must be limited substantively in various respects (for example, it cannot increase deficits beyond the budget window, and thus might need to include "sunset" provisions). Such legislation would remain vulnerable to a presidential veto.

Passing tax reform legislation through the reconciliation process would be no one's first choice, but it is possible that congressional Republicans could pursue it in the event that a deal with the White House proves impossible otherwise. Although the legislation might not become law in the event of a veto, it could be an achievable legislative accomplishment and an important political document heading into the 2016 elections. As such, it could be a meaningful marker for what a potential Republican president and Congress might enact in 2017 or later.

5. How deep and wide is the agreement on "tough territorial" as the basic model for the U.S. outbound regime?

It is likely that both President Obama and congressional Republicans can agree that the United States should move to a territorial-type dividend exemption system to eliminate the distortions created by making the repatriation of earnings a major taxable event, and also should tighten the existing rules (e.g., subpart F) limiting the ability to defer or avoid tax on certain kinds of income earned by non-U.S. subsidiaries. These two policy initiatives cut in opposite directions, in that one would decrease and the other would increase the U.S. tax burden on income earned by U.S.-based multinational groups outside the United States; together the initiatives are sometimes described as a "tough territorial" approach. It remains to be seen whether President Obama and congressional Republicans can agree on the nature, extent and balance of the territorial-type features and the base-broadening features of such a regime, and whether the business community would be any better off under a regime that might result from these deliberations. The president's FY 2016 budget proposal includes a "minimum tax" regime that would fit the tough territorial description. Although the proposal's various numerical thresholds make it more "tough" than "territorial," the proposal nevertheless suggests there is a chance that the two sides might be able to meet somewhere in the middle.

6. What will be the revenue and policy goals for the inbound rules as part of U.S. tax reform?

Although the U.S. international tax reform discussion has tended to focus more on the outbound rules (primarily directed at U.S.-based multinationals) than on the inbound rules (primarily directed at non-U.S.-based multinationals), more recently some focus has shifted toward the inbound rules, particularly in the wake of various BEPS developments and increased attention to inbound structures in connection with corporate inversions. As the tax reform discussion advances in 2015, it will be interesting to see how prominently inbound approaches feature in the debate, and what balance of tax-cutting and tax-raising measures are proposed by different policy makers with respect to the inbound business community.

7. If business tax reform proves elusive in 2015, will policy makers pursue a more limited tax package as a consolation prize?

It is possible that the White House and congressional Republicans will conclude that they are unable to enact business tax reform in 2015 but will agree on a more limited package of tax proposals, potentially including both revenue-raising and revenue-losing items. For example, some members propose another partial repatriation holiday, while others urge that further anti-inversion legislation be enacted without delay, and numerous industry-specific tax issues continue to be discussed (such as potential repeal of the medical device excise tax). Although the tax writers may resist the pursuit of a more limited tax package, it is possible that the mutual desire to accomplish something, even something short of true tax reform, could lead to the passage of a more limited tax package in 2015. Thus, even if tax reform remains a long shot in the coming year, the tax legislative area could still present near-term risks and opportunities for the business community.

8. When and how will the "tax extenders" package be addressed?

The "tax extenders" package of expiring tax provisions (e.g., research and experimentation credit, subpart F "look-through" and active financing rules) has again expired and thus will require legislative attention in 2015. As always, questions center on when exactly Congress might pass the extension of the provisions, whether any key provisions might fall out of the package, and the term of any extension. The rationale for pursuing such a limited extension at the end of 2014 apparently was to enable congressional Republicans to pursue a more Republican-leaning package for 2015. In addition, the nature and timing of tax extenders (routinely enacted without revenue offsets) affect the budget baseline for subsequent tax reform and thus can have a real effect on whether and what kind of tax reform eventually is achieved.

9. Will the impasse over tax treaty ratification finally be broken?

The Senate has not ratified a tax treaty instrument since 2010, because the objections of a senator have blocked the invocation of the unanimous consent procedures typically used to approve tax treaties, and tax treaties are generally not seen by Senate leadership as sufficiently important to warrant the use of extended Senate floor time, as would be required without such procedures. Several signed tax treaties and protocols are currently pending as a result, and it is likely that the impasse has some effect on the conduct of current treaty negotiations with existing and prospective treaty partners. It remains to be seen whether the new Senate majority leadership will be able to negotiate an end to the impasse.

10. What surprises may come in the form of executive action?

One of the more remarkable U.S. international tax policy developments of 2014 was the Internal Revenue Service's (IRS's) issuance of Notice 2014-52, which aggressively asserted executive authority to limit certain tax benefits following certain corporate inversion transactions. Officials have suggested that there could be more to come in this area. Even if there are no new bold strokes on inversions, the notice sets a precedent for a somewhat elastic interpretation of various anti-avoidance rules in the tax code and regulations when important tax policy objectives are thought to be at stake, which could have reverberations beyond the inversion area.

Meanwhile, even if no new tax policy issue "heats up" like inversions did in 2014, the IRS's existing guidance plan includes several important and potentially controversial items, including in the areas of repatriation and outbound transfers of intangibles. If the White House and congressional Republicans continue to have a hard time coming together on legislation in 2015, IRS guidance may remain on center stage in U.S. international tax policy.

U.S. International Tax Policy: 10 Questions For 2015

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions