United States: Tax Policy Update - April 21, 2015

NUMBER OF THE WEEK: 6.5 percent

The tax rate at which companies could voluntarily repatriate their foreign earnings under the Invest in Transportation Act of 2015 ( S. 981). Senators Barbara Boxer (D-CA) and Rand Paul (R-KY) introduced the bipartisan proposal, offering ways to save the Highway Trust Fund. Funding authority for surface transportation projects is due to expire May 31. Under the bill, all tax revenues collected through the repatriation program would be transferred into the Highway Trust Fund. "This bipartisan repatriation proposal will stimulate the economy by bringing back hundreds of billions of American dollars currently sitting offshore...and will provide much-needed revenue to the Highway Trust Fund," Boxer said. Some of Boxer's colleagues in the Senate have expressed doubts about a one-time, voluntary repatriation holiday as the Joint Committee on Taxation regards such measures as revenue losers over the long run. Earlier this year, Senate Finance Chairman Orrin Hatch (R-UT) has indicated that he would not support such a revenue-losing proposal to fund infrastructure, calling it "bad policy." Read a summary of the Boxer-Paul proposal here.

LEGISLATIVE LANDSCAPE

House Approves Estate Tax Repeal and Other Tax Measures. Following the passage of the IRS reform bills, House lawmakers moved quickly to approve the Death Tax Repeal Act (H.R. 1105) and the State and Local Tax Deduction Fairness Act (H.R. 622). The two bills would repeal the estate tax and the generation-skipping transfer (GST) tax for all future transfers and make permanent the deduction for state and local sales tax. Votes on the two bills fell largely along party lines. The estate tax repeal passed by a vote of 240-179 with only seven House Democrats crossing the aisle to support the legislation. The permanent state and local sales tax deduction was approved by a 272-152 vote.

The White House has issued veto threats for both measures. It remains unclear whether the Senate would take up either bill any time soon. Majority Leader Mitch McConnell (R-KY) has given no indication on timing for the two bills, which have been placed on the calendar. Senate Finance Chairman Orrin Hatch has previously told reporters that he would like to deal with tax extenders as part of comprehensive tax reform. The Obama Administration, along with House Democrats, has repeatedly voiced their opposition against making any tax extenders permanent without offsets. Permanent extension of the state and local sales tax deduction would cost approximately $42 billion over 10 years, and the estate tax repeal would cost $269 billion.

Business Coalition Rebuffs Tax Chairmen's Call for Help. Chairmen Orrin Hatch (R-UT) and Paul Ryan (R-WI) – leaders of the tax reform efforts in Congress – sent a letter to a coalition of business groups, asking for ideas on how to reduce effective tax rates and simplify the tax code for pass-through entities. The prospects of comprehensive tax reform – tackling both the business and individual sides of the tax code together – are growing dim according to the chairmen: "[I]t is likely that some aspects of tax reform will not be completed until the next administration takes office." Despite this, Hatch and Paul are looking for ways to enact some reforms that will lower the effective tax rate for pass-throughs without having to lower individual rates.

The Coalition for Fair Effective Tax Rates has rebuffed the chairmen's request and reiterated the need for comprehensive tax reform if all businesses are to be treated equally for tax purposes. "As a practical reality no combination of credits, deductions, or exclusions will bring about tax rate parity and produce a fair, simple, transparent and pro-growth tax code," the letter stated. The coalition also made clear that its members could not support any approach to tax reform that does not include help for pass-through entities.

Senator Warren: Tax Risky Financial Practices. "The amount of interest a financial firm can deduct annually should be based on the relative amount of capital that firm holds – and the risk it poses," Senator Elizabeth Warren said at a conference at the Levy Economics Institute. The Massachusetts senator argued for changes in the tax code to deter big banks and their executives from engaging in risky behavior. Warren also called for the introduction of a financial transaction tax to address high-frequency trading. A staunch supporter of financial regulatory reform, Warren would like Congress to eliminate a tax loophole that encourages companies to compensate their executives through "massive" performance-based bonuses. In Warren's view, such bonuses tend to exacerbate short-term risk-taking behavior. The full speech can be read here.

Sanders Targets Corporate Profit Shifting. Senator Bernie Sanders (I-VT) has introduced legislation that would prevent U.S. corporations from keeping their profits abroad to avoid federal income taxes. The Corporate Tax Dodging Prevention Act (S.922) would specifically:

  • end rules that allow U.S. corporations to defer tax liability on active foreign earnings until repatriation;
  • close loopholes that allow corporations to accelerate their foreign tax credits;
  • prevent corporations from claiming to be foreign if their management and control operations are primarily based in the United States;
  • prevent American corporations from avoiding U.S. taxes through inversions;
  • prevent foreign-owned corporations from stripping earnings out of the U.S. by manipulating debt expenses; and
  • close a loophole that has allowed large U.S. oil companies to claim foreign tax credits for royalty payments to foreign governments.

"At a time when we have a $18.2 trillion national debt and an unsustainable federal deficit [...], it is past time for corporate America to pay their fair share in taxes so that we can create the millions of jobs this country needs," Sanders said at a news conference on Capitol Hill. The senator from Vermont introduced similar, but ultimately unsuccessful, proposals in the 113th Congress. With a Republican-controlled Congress, S. 922 is not expected to go far. Read a summary of the bill here.

REGULATORY WORLD

DOL's Fiduciary Rule in Primetime. The Department of Labor has issued its long-awaited re-proposal of the fiduciary rule for retirement advisers. Spanning 120 pages, the proposed rule expands the definition of "fiduciary" to cover brokers who provide retirement advice to investors. The rule would require retirement advisers to act in their clients' best interest. DOL is giving the public 75 days to submit comments on the proposed rulemaking. Public comments are due on July 6, 2015.

On a related note, in a recent court case concerning the scope of ERISA fiduciaries, the Supreme Court has decided not to weigh in, denying a writ of certiorari in Santomenno vs. John Hancock Life Insurance Company.

Self-Certification Required under FATCA. There has been some confusion as to whether or not self-certification was required in jurisdictions that have Model 1 intergovernmental agreements in place. Without self-certification, then new accounts could not be opened and existing accounts had to be closed. However, some countries like Canada and the U.K. merely required that the accounts be reportable accounts, bypassing any self-certification requirement. The Securities Industry and Financial Market Association (SIFMA) penned a letter stating that inconsistent guidance put some of its members across borders in untenable positions because other countries did not follow U.S. guidance regarding self-certification. A U.S. Treasury official has cleared up any confusion stating that self-certification was a key due diligence requirement.

BEPS Project Chugging Along, U.S. Not Fully on Track. While the base erosion and profit shifting (BEPS) project is nearing completion in the fall of 2015, it does not appear that the U.S. is fully on board with all of the Organization for Economic Cooperation and Development's forthcoming recommendations. Robert Stack, the Treasury Department's deputy assistant secretary for international tax affairs, noted that there was an "undeserved" focus on U.S. multinational companies. While the speculation is that the BEPS plan will be implemented by the EU immediately, it may not be so in the U.S., where new legislation and regulation will likely be needed for guidance in certain cases. BEPS may be successful in getting the implementation and recognition across the pond, but that will not necessarily be the case here.

LOOKING AHEAD

Wednesday 4/22

Senate Finance Committee

The full committee holds a markup of legislation to extend and modify the credit for health insurance costs of certain eligible individuals. The committee is also expected to markup the Trade Promotion Authority bill as well as other trade-related bills.

American Enterprise Institute and the Brookings Institution

AEI and Brookings hold a discussion on "Carbon Taxes: Practicalities and Prospects." Read more here.

Thursday, 4/23

Senate Finance Committee

The Subcommittee on Health Care holds a hearing on the medical device tax. Read more here.

The Tax Council

The Tax Council hosts a legislative luncheon with Congressman Devin Nunes, where he will discuss his idea for corporate tax reform. RSVP here.

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