United States: Tax Policy Update - March 10, 2015

NUMBER OF THE WEEK: 8 percent. The increase in the total amount of corporate profits kept abroad, according to the latest analysis of securities filings by Bloomberg News. The report confirms what U.S. companies have as much as $2.1 trillion in profits held offshore, with U.S. tech giants accounting for $420 billion of the total. The Obama Administration and several lawmakers have proposed various repatriation plans to bring at least some of the money back home to fund transportation and infrastructure projects. Such proposals have stalled, however. Read more here.

LEGISLATIVE LANDSCAPE

Senate Tax Reform Working Groups to Solicit Comment from Outside Stakeholders. According to a senior staffer with the Senate Finance Committee, the tax reform working groups will soon be ready to take comments from outside stakeholders. Though various industry groups have already met with members and staff, the committee is preparing to announce instructions for interested parties to formally share their input with the working groups. Chairman Orrin Hatch (R-UT) has set a late May deadline for the five working groups to report recommendations for their respective issue areas.

With the deadline fast approaching, Ranking Member Ron Wyden (D-OR) said he would like the committee to hold off on marking up additional tax bills so that the working groups can focus on finishing their work.

Democrats Introduce Tax Cut Package for Middle Class. A group of House and Senate Democrats last week unveiled a package of tax bills geared towards the middle class, including the expansion and permanent extension of the following tax credits: the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), and the American Opportunity Tax Credit (AOTC). The package also introduces a new second-earner tax credit worth up to $1,000 for households where both parents are working, and it increases the Child and Dependent Care Tax Credit.

Death & Taxes: Brady Unveils Legislation to Repeal the Estate Tax. Congressman Kevin Brady (R-TX) has introduced the "Death Tax Repeal Act of 2015" (H.R. 1105). This marks the fifth bill introduced this Congress aiming to repeal the estate tax. Congressman Sanford Bishop (D-GA) is the lone Democratic co-sponsor, but Brady is hoping to get additional support from members across the aisle. Brady introduced a similar bill in the 113th Congress, which the Joint Committee on Taxation estimated would cost approximately $200 billion over a decade. An offset has not been provided for the legislation. Brady's bill is a response to the president's proposal in his FY 2016 budget, which calls for the return of the estate tax to a top rate of 45 percent with the exclusion amount reduced to $3.5 million.

Rubio Wants to be President, Talks Tax Reform. The tax reform framework floated by Senators Marco Rubio (R-FL) and Mike Lee (R-UT) last week would also eliminate the estate tax, along with most deductions except for those related to charitable giving and mortgage interest. Although scarce on details, the plan marks the first foray into tax reform for a potential 2016 presidential contender. Here is what we do know—the proposal would:

  • Lower the tax rate for corporations and passthroughs to 25 percent
  • Shift the U.S. to a territorial system of taxation for corporate earnings
  • Allow businesses to immediately expense the cost of investments – 100% expensing
  • Simplify the individual tax code by reducing the number of tax brackets from seven to two – with rates at 15 percent and 35 percent
  • Eliminate most business tax credits and deductions
  • Eliminate the standard deduction, replacing it with a refundable personal credit
  • CCreate a $2500 Child Tax Credit

The Tax Foundation released an analysis of the plan this week, using both dynamic and static scoring methods. Using dynamic scoring, the Tax Foundation estimates that the Rubio-Lee plan would lead to a $1.7 trillion revenue loss in the first 10 years, but would produce $94 billion in annual revenue growth in the long run. Based on the traditional scoring method, however, the plan would cost $414 billion per year. The Tax Foundation concludes that under the plan, the economy would grow by 15 percent, wages by 12.5 percent, and investment by 29 percent. Food for presidential election thought...

REGULATORY WORLD

IRS Guidance on Qualifying Income for PTPs Forthcoming. The Internal Revenue Service is expected to issue guidance on master limited partnership (MLP) eligibility for oil and gas companies. Caroline Hay, an attorney with the IRS Office of Associate Chief, told an audience at the Federal Bar Association Conference that the guidance would provide clarification on the definition of "qualifying income" for those looking to qualify for MLP treatment. Specifically, the upcoming guidance would address "qualifying income from the exploration, development, mining and production, processing, refining, transportation, and marketing of minerals and natural resources." The IRS would also resume the agency's review of private letter ruling (PLR) requests regarding oil and gas publicly-traded partnerships. The issuance of PLRs on the subject was suspended early last year.

Proposed Regulations Clarify Next Day Rule for Consolidated Groups. The IRS has issued proposed regulations limiting the flexibility of reporting tax items when a corporation leaves a consolidated group. The regulations state that credits, losses, and other tax items are reported on the consolidated return, provided the transactions giving rise to these tax items occurred while the corporation was a part of the consolidated group. The proposed regulations indicate, however, that the next day rule is often misinterpreted as "providing flexibility when it shouldn't because the allocation doesn't clearly reflect taxable income." The next day rule is generally applicable when corporations make changes to their entity type at the time of joining or leaving a consolidated group. The IRS is asking that comments be submitted by June 4.

Revisions to U.S. Model Tax Treaty. A Treasury official announced last week that they are working on revising the model tax treaty and plan on releasing it for public comment, although an exact timeline is not clear. The review of the model tax treaty comes as the Treasury Department continues its work with the Organization for Economic Co-operation and Development (OECD) and its Base Erosion and Profit Shifting (BEPS) project. The OECD plans to publish a revised discussion draft in June, which will implicate certain provisions in the model tax treaty.

COURTS & LEISURE

Alabama Rail Diesel Sales Tax Saga Continues. The U.S. Supreme Court in a 7-2 opinion ruled that Alabama's sales tax on diesel for rail carriers is not necessarily discriminatory as CSX Transportation claims in Alabama Department of Revenue v. CSX Transportation, Inc. The Supreme Court overturned a decision by the U.S. Court of Appeals for the Eleventh Circuit, which had ruled that the sales tax discriminated against rail carriers given that motor carriers are exempted from the sales tax without "sufficient justification." The high court found that the Eleventh Circuit erred by not considering whether the state of Alabama could justify the differential tax treatment. The Supreme Court remanded the case to the Eleventh Circuit, giving Alabama another chance to defend the state's diesel sales tax on rail carriers.

LOOKING AHEAD

Tuesday, 3/10

Senate Banking Committee
The Subcommittee on Securities, Insurance, and Investment holds a hearing on "Venture Exchanges and Small-Cap Companies" in 538 Dirksen. For more information, click here.

Senate Finance Committee
The full committee holds a hearing on "Tax Complexity, Compliance, and Administration: The Merits of Simplification in Tax Reform" in 215 Dirksen.

Wednesday, 3/11

Senate Budget Committee
The full committee holds a hearing on the benefits of a balanced budget. Details will be posted here when available.

Thursday, 3/12

Senate Special Committee on Aging
The full committee holds a hearing on "Bridging the Gap How Prepared are Americans for Retirement?" in 562 Dirksen.

Senate Finance Committee
The full committee holds a hearing on "Protecting Taxpayers from Schemes and Scams during the 2015 Tax Filing Season" in 215 Dirksen.

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