United States: Tax Policy Update - August 04, 2015

NUMBER OF THE WEEK: 34

The number of days until the U.S. House of Representatives returns from August recess. The Senate is in this week to tackle procedural motions for legislation related to cybersecurity and Planned Parenthood. The Senate is expected to depart for recess later in the week. Both chambers are scheduled to return Sep. 8. Members will have little time to admire the fall colors when they return, however. An aggressive legislative agenda looms once more over both chambers: long-term highway bill, international tax reform, government funding for FY2016, FAA reauthorization, Export-Import Bank reauthorization, raising the debt ceiling, and more.

Programming Note: Hey, it's August recess! McGuireWoods' Tax Policy Update will be taking a break for the remainder of August. We will be back in your inbox when Congress returns Sep. 8. So enjoy your summer vacations – it's going to be a busy fall!

LEGISLATIVE LANDSCAPE

Surface Transportation Programs Receive Three-Month Extension. Prior to leaving for August recess, the House approved a three-month highway extension to keep transportation projects running until Oct. 29. The three-month patch includes $8 billion in offsets – identical to those in the five-month bill originally offered by the House. Senate members voted 91 to 4 to pass the House's three-month extension with the understanding that House leaders will work with the Senate to craft a multiyear bill in the fall. With the $8 billion enough to cover highway programs through the end of the year, the three-month patch is essentially a five-month extension bill in disguise. Should Congress fail to reach agreement on a long-term highway bill before the end of October, there is enough money to do another short-term extension.

As reported in previous week's McGuireWoods Tax Policy Update, the offsets include additional information reporting requirements for mortgages, modifications to tax filing due dates, and clarification of the six-year statute of limitations for overstatement of basis, among others. Save for the mortgage reporting requirements and tax filing due dates, most of these offsets become effective when the President signs the bill. The mortgage reporting requirements would apply to information returns to be made and statements required to be furnished after December 31, 2016, and the tax filing due date change applies to tax years beginning after 2015.

Hope Springs Eternal: Senate OKs Six-Year Highway Bill. In addition to passing the three-month extension for highway programs, the Senate approved its six-year highway bill (H.R. 22) by a vote of 65-34. Despite passage, the Senate bill was not taken up by the House. The Senate bill would authorize transportation programs for six years, containing offsets that would provide funding for only three years – a shortfall which received criticisms from House GOP leaders. The offsets include lowering the Federal Reserve dividend rate and keeping government-sponsored enterprise fees at current levels, among others.

With the three-month patch in place, Congress will work towards finding an amenable set of offsets to fully fund transportation programs for the long term. As both chambers work towards a multiyear highway bill, House Ways & Means Committee Chairman Ryan (R-WI) has made clear that he would be looking to the repatriation of foreign earnings from U.S. companies as a solution. The GOP remains divided on how to fully fund a long-term bill. Senate Finance Committee Chairman Hatch stated that he wanted to use repatriation for other purposes. It should be interesting to see what offsets the chambers will agree upon for multiyear funding given their positions on repatriation. Either way, the Senate's six-year bill will likely be used as a starting point for bicameral discussion of a multiyear bill.

Boustany Taking Comments on "Innovation Box" Proposal. Rep. Charles Boustany (R-LA) released a discussion draft of the Innovation Promotion Act of 2015 – a part of his international tax reform plan that would tax "innovation box profits" at 10 percent. The proposal seeks to establish preferential tax rates on profits derived from the sale or license of intellectual property – or any profit generated from such arrangements.

The discussion draft proposes to isolate a taxpayer's innovation box profits from other profits and allow for a significant deduction to be taken specifically against those profits – in other words, the deduction would not otherwise impact the taxpayer's net operating loss position. The deduction itself would be equal to 71 percent of the lesser of the taxpayer's innovation box profits or the taxpayer's taxable income, resulting in an approximately 10 percent effective tax rate on innovation box profits overall. For affiliated groups, the innovation box would be available on a consolidated basis, allocated amongst all members based on relative distribution of innovation box profit.

In comparison to other innovation box regimes, the bill reflects a liberal standard for eligible IP but allows for a less competitive overall effective rate when compared with countries such as Luxembourg, the Netherlands, or Belgium – each of which generally results in an effective tax rate of less than 7 percent and in many cases 5 percent or lower. That said, because the innovation box is likely to ameliorate the overall effective tax rates of U.S. R&D multinationals, the regime would help improve the international competitiveness of U.S. companies.

A special thanks to McGuireWoods' international tax expert Michael Rodgers for the analysis above. For a copy of the technical explanation and information on how to provide feedback, click here.

REGULATORY WORLD

Inversion Regulations Appear on IRS Guidance Plan. The IRS released its 2015-2016 Priority Guidance Plan on Jul. 31, announcing 277 projects in total. Of note, the guidance plan indicates that the regulations related to Notice 2014-52, which seeks to curb corporate inversions, would be an IRS priority. Other IRS projects include finalizing the proposed regulations under Section 871(m), preparing guidance on targeted capital accounts under Section 704(b), and addressing whether taxpayer can get foreign tax credit in covered asset acquisitions under Section 901(m). The number of projects in the guidance plan reflects nearly a 15% decrease from last year's total. The full guidance plan can be found here.

Unfair for Proposed Regs to Strip MLP Status. In a comment letter, Westlake Chemical Partners LP ("Westlake") said it was "unfair" of the IRS to revoke master limited partnership status from natural gas liquid companies. While the proposed regulations allow for a ten-year transition period, the letter states further that the reversal "sends an unfortunate message to investors and businesses that they cannot rely on IRS rulings." Westlake had converted from a corporation to a partnership when it received its private letter ruling in Jun. 2013. The proposed rules released in early May seek to limit the type of qualifying income permitted for master limited partnerships. Comments are due by Aug. 4, 2015.

LOOKING AHEAD

Tuesday, 8/4

Department of the Treasury

The Treasury holds a closed meeting of the Debt Management Advisory Committee to discuss issues presented to the Committee by the Secretary of the Treasury and the making of recommendations to the Secretary.

Thursday, 8/6

Financial Services Roundtable
The FSR holds a webcast on the DOL's fiduciary rule and prohibited transaction exemption, focusing on employee retirement income security. Read more here.

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.

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