United States: Tax Policy Update - June 30, 2015

NUMBER OF THE WEEK: 65 percent.

The top estate tax rate under Democratic presidential candidate Bernie Sanders' proposal to tax the wealthiest Americans and narrow income inequality in the U.S. The proposal splits the estate tax into four brackets:

Estate Value Proposed Tax Rate
>$3.5 million 45%
>$10 million 50%
>$50 million 55%
$1 billion or more 65%

This ambitious and aggressive proposal would receive little attention in the Republican-controlled Congress, however. Republicans in both chambers have made no secret of their desire to repeal the estate tax entirely. The House of Representatives has already passed legislation to repeal the tax back in April. Nevertheless, Sanders' proposal may push other presidential candidates to put forth their own ideas to address the income inequality problem—especially Democratic frontrunner Hillary Clinton. Among the Republican hopefuls, Senator Marco Rubio was the first to announce his support for repealing the estate tax. Read more here.

LEGISLATIVE LANDSCAPE

The Road Goes on Forever...But the Funding's About to End. Lawmakers will return from recess next week with just over three weeks left to come up with a funding solution for the Highway Trust Fund (HTF), which is set to run dry at the end of July. Finding the necessary offsets for a long-term bill has proved exceedingly difficult, with deep intra-party divides over options like raising the gas tax or incentivizing the repatriation of multinationals' foreign earnings via a one-time "tax holiday." The Senate Finance and House Ways and Means Committees held a total of four hearings this month to examine various aspects of the funding question, but none of those hearings appear to have moved the needle toward agreement on a solution.

In an ideal world, Senate Republicans would like to find enough offsets to pay for a two-year extension of the HTF, but that would require coming up with around $35 billion. House Republicans think a one-year extension with a price tag of roughly $19 billion is more feasible, but, even then, lawmakers are struggling to cobble together enough offsets. For now, Republicans have reportedly identified a broad assortment of tax compliance and administrative changes that raise some revenue, though not enough for even a one-year extension. Republicans are looking to Senate Democrats to come up with either revenue changes or spending cuts they could live with to get an agreement across the finish line.

Permanent Extension of Bonus Depreciation Introduced in Senate. Senator Pat Roberts (R-KS) introduced a bill (S.1660) last week that would permanently extend bonus depreciation, allowing businesses to deduct half the cost of new equipment and property expenses immediately. "This legislation will provide much needed certainty in the tax code so businesses can better plan investments that create more jobs and growth in our communities," Roberts said in a press release. Based on a 2014 Joint Committee on Taxation estimate of a similar proposal, Roberts' bill would cost more than $250 billion over 10 years. The permanent extension of bonus depreciation has attracted its fair share of supporters and detractors. Opponents argue that a permanent extension would eliminate its short-term incentive for investment, and therefore, weaken its effectiveness. Supporters, such as the Tax Foundation and Heritage Foundation, argue that permanent extension would actually boost economic output.

Roberts' bill is not expected to get far in the legislative process this year. A similar bill (H.R. 2510) was introduced in the House in May by Congressman Pat Tiberi (R-OH) but has not received any further action. Senate Finance Chairman Orrin Hatch (R-UT) is generally reluctant to address permanent extenders outside of tax reform.

Baldwin, Levin Introduce Legislation to Close "Carried Interest Loophole." Senator Tammy Baldwin (D-WI) and House Ways and Means Ranking Member Sandy Levin (D-MI) have teamed up to put an end to the capital gains treatment of carried interest. Baldwin and Levin introduced the Carried Interest Fairness Act of 2015 (H.R. 2889) which would treat carried interest compensation as ordinary income for tax purposes, rather than at the 20 percent capital gains rate. According to a fact sheet prepared by the Ways and Means Committee Democratic Staff, the legislation would not affect capital gains income earned from direct investments: "The capital gains rate will continue to apply to the extent that a manager's allocation of capital gain income represents a return on capital they have actually invested in the partnership." Read more here.

Proposed changes to carried interest treatment have popped up in the President's budgets and in the tax reform proposal released by former House Ways and Means Chairman Dave Camp (R-MI) last year. The Joint Committee on Taxation scored the President's proposal as raising more than $17 billion over the 10-year budget window, while Camp's pared-down proposal was projected to raise only $3.1 billion.

REGULATORY WORLD

Update on the Forthcoming IRS and Treasury Guidance Projects. Officials at the IRS and Treasury Department recently discussed the agencies' priority guidance projects. The rules on qualifying income of publicly traded partnerships and rules on determining distributive shares when there are changes in a partner's interest are near completion, according to Curtis Wilson, IRS associate chief counsel of the Passthroughs & Special Industries division. Proposed rules on partnerships remain a continued interest for the IRS and Treasury, but disguised partnership sales and tax treatment of partnership liabilities remain in developmental stages. Gerson indicated that the New York State Bar comments on the latter project will be adopted "in one form or another." The letter from May 2014 can be found here.

European Parliament to Probe Further Into Tax Agreements. A special tax committee of the European Parliament will soon meet with executives of multinational companies on the tax benefits received from Luxembourg. Company executives from Airbus, BNP Paribas and Total, will discuss how they pay corporate taxes and whether base erosion and profit shifting restrictions are needed. Executives from many other well-known multinational corporations have declined to meet with the tax committee. The committee was initially established when it was uncovered that Luxembourg entered into over 300 tax agreements with multinational corporations. A final report is expected from the committee in conjunction with its plan, announced last week, to bring about a common, consolidated corporate tax base.

EU Study Indicates Patent Box Coupled with Modified Nexus is Best. As the U.S. considers intellectual property tax incentives, a study released by the European Union provides that a patent box "[does] not necessarily serve the goal of boosting R&D activity." The OECD expects to use a modified nexus approach in its recommendations, much like the agreement adopted between the U.K. and Germany. The modified nexus requires a certain level of R&D to be conducted with in the country to enjoy the tax benefits of a patent box regime. U.S. lawmakers have recently shown increasing interest in developing a patent or innovation box regime, and we expect to see some variation of the idea proposed in international tax legislation expected later this summer from Rep. Charles Boustany (R-LA).

LINE ITEMS

  • Senate Finance Ranking Member Ron Wyden (D-OR) introduced the Offshore Reinsurance Tax Fairness Act aimed to prevent abuse of the passive foreign investment company rules. Read more here.
  • Congressman George Holding (R-NC) introduced the Tanning Tax Repeal Act of 2015, which would eliminate the 10 percent excise tax on indoor tanning services. Read more here.
  • The Senate Finance Committee's Tax Reform Working Groups are now expected to deliver their recommendations on July 7. Recommendations from the working groups were originally due at the end of May, but the deadline has been extended twice already. Of the five working groups, the international tax group reportedly will offer the most substantive policy offerings.

LOOKING AHEAD

Wednesday, 7/1

International Tax Dialogue — Paris
The European Commission (EC), Inter-American Development Bank (IDB), International Monetary Fund (IMF), Organization for Economic Co-operation and Development (OECD), World Bank Group and Inter-American Center of Tax Administrations (CIAT) host the International Tax Dialogue initiative, July 1-3. The ITD aims to encourage and facilitate discussion of tax matters among national tax officials, regional tax organizations, international organizations and other key stakeholders. Read more here.

Have a Happy and Safe Fourth of July!

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