Outline of the Key Issues and Legislative Schedule
The 2016 legislative session is expected to consist of 3 phases of what will likely be a relatively short Congressional year due to the November elections. The first phase may last until Memorial Day when some legislation could advance. The second phase will run through the summer (when the political conventions occur) to the November elections. It is unlikely that legislation will advance during this period although hearings and debates on key issues are likely, aimed at highlighting the contrasts between the two parties. The final phase will be the post-election lame duck session, when Congress will finish any key legislation for the year. In the past, lame duck sessions of Congress have sometimes produced major legislation from political compromises but it is currently difficult to predict whether that might occur this year.
The first session of the 114th Congress in 2015 was one of the more productive in recent years, and because of that, coupled with the shortened legislative calendar, it is likely that the session in 2016 will not produce much significant legislation. The politics of the election process will greatly influence the Congressional agenda with Senate Majority Leader McConnell interested in retaining control of the Senate and protecting his moderate colleagues. House Speaker Ryan has indicated that he wants to help shape the policy agenda for the Presidential campaign, stating that his priorities include national security, health care, jobs and economic growth, and poverty and opportunity.
There are some areas where Congress is likely to approve or, at a minimum, advance legislation. Appropriations bills for FY 2017 are already being worked on in House and Senate committees, and the President is expected to submit his budget to Congress on February 9th. A Budget Resolution is not necessary this year since legislation last year approved the spending levels for FY 2016 and 2017, but Congressional Republicans may approve a resolution in order to have the option of advancing Budget Reconciliation legislation this year. The ability of Congress to pass 12 individual spending bills by September 30th will be challenging, so it is possible that an omnibus bill will have to be considered as part of the lame-duck session.
Late in 2015, the Administration completed negotiations on the Trans-Pacific Partnership (TPP), a 12-nation trade agreement, and there is a sizable bipartisan coalition that will work to approve the TPP this year. The National Defense Authorization Act is generally viewed as “must-pass” legislation, and there may be consideration of legislation to provide assistance to Puerto Rico. Some areas that enjoy bipartisan support include prison reform, energy legislation and revisions of Dodd-Frank but it will be difficult for these issues to see major consideration. Other issues that are debated may be primarily for “messaging” purposes, such as votes on the authorization to use military force against the Islamic State and the Syrian refugee crisis.
Congressional Republican leadership may also work to advance an alternative to the Affordable Care Act (ACA). President Obama vetoed legislation in December that was approved by the House and Senate that would have repealed most of the tax provisions enacted in the ACA, including the excise tax on the sale of medical devices and the “Cadillac” tax on certain high-cost employer-sponsored health insurance plans. This legislation would have also made significant changes to the health insurance coverage mandates for individuals and employers. House Speaker Ryan stated that the House will hold a vote to override the veto but because H.R. 3762 did not pass with a two-thirds majority in either chamber, an override vote is unlikely to succeed.
A complete overhaul of the tax code is not expected to advance in 2016, but international tax reform may receive significant attention including hearings, draft legislation and possible votes in Committee. The issue of corporate inversions continues to be cited by the leadership of the tax-writing committees as one of the reasons action is needed.
House Ways & Means Committee Chair Brady has stated publicly that he plans to hold a vote on international tax reform legislation this year with the intention of laying the groundwork for comprehensive tax reform after the elections, and he will schedule a series of hearings throughout the year. A February 2nd hearing will focus on the Committee’s “pro-growth ideas and policies that will help create jobs, increase paychecks, and expand opportunities for all Americans.” The hearing will likely include a discussion of tax reform since Chair Brady often cites tax reform as something Congress can advance to promote economic growth. Also, Congressman Nunes (R-CA) has introduced H.R. 4377, the American Business Competitiveness Act with 26 co-sponsors, which will be considered at a later hearing.
SFC Chair Hatch announced plans to release a discussion draft of a corporate integration proposal in the near future stating that it would propose giving corporations a deduction for dividends paid to shareholders. Corporate integration has been under study at the SFC in recent years and the Finance Committee Staff Report on Comprehensive Tax Reform for 2015 and Beyond (issued in December 2014) discussed it extensively. The July 2015 report from the SFC bipartisan working group on business tax reform addressed “partial corporate integration,” under which undistributed income would be taxed at the corporate level and income distributed to shareholders would be taxed only once.
EU State Aid Investigations
In a letter to Treasury Secretary Lew, SFC Chair Hatch (R-UT), Ranking Member Wyden (D-OR) and Committee members Portman (R-OH) and Schumer (D-NY) warned that the EU’s state aid investigations could lead to retroactive taxation on multinational enterprises and have an adverse impact on US-based companies. In recent years, the EU has launched a series of formal investigations into some of its member countries giving favorable tax rulings to multinational companies. The letter expresses concerns that these may set a precedent that could pave the way for the EU to tax the historical earnings of many more US companies. The SFC members “urge Treasury to intensify its efforts to caution the EU Commission not to reach retroactive results that are inconsistent with internationally accepted standards and that the United States views such results as a direct threat to its interests.”
On January 15, 2016, the IRS issued Notice 2016-10 relating to alternative methods of compliance with the rules under sections 853 and 905(c) as they apply to a regulated investment company (RIC) under certain circumstances. The notice affects a RIC that receives a refund of a foreign tax that, when paid by the RIC, was treated as paid by the RIC’s shareholders under section 853(b)(2). The notice also states that the IRS plans to issue regulations that will allow a netting procedure that, if applied by the RIC, will greatly reduce the administrative costs and burdens on the US government, the RIC, and the RIC’s shareholders. Finally, the notice provides guidelines for RICs who want to obtain closing agreements relating to tax consequences arising from the receipt of refunds.
The IRS issued Notice 2016-4, which extends several reporting deadlines for certain employers, insurers and other coverage suppliers under sections 6055 and 6056, which were added to the Code by the ACA. The notice also provides instructions to individuals who do not get a Form 1095-B or Form 1095-C by the time they file their tax returns.
The IRS announced the composition of the new Large Business and International (LB&I) division team resulting from the new organizational structure that was announced in 2015. The staff changes are effective February 7, 2016. The IRS stated that the new structure is focused on improving tax compliance by strengthening LB&I’s ability to perform activities in support of the changing tax administration landscape.
In line with recommendations from the BEPS project, the European Council adopted a new directive on December 8, 2015, that will require EU member states to exchange information automatically on advance cross-border tax rulings and advance pricing arrangements (APAs) from January 1, 2017. Member states will be required to enact the new rules into national law before the end of 2016.
The EU has released drafts of two EC legislative proposals relating to recommendations in the BEPS project. One of the proposals contains rules against tax avoidance practices that directly affect the functioning of the internal market covering the deductibility of interest, exit taxation, a general anti-abuse rule, controlled foreign company rules and a framework to tackle hybrid mismatches. The second proposal requires member state authorities to exchange country-by-country tax reporting details of multinational companies and aims at achieving a degree of uniformity in implementing country-by-country reporting across the EU.
On October 5th, the Organization for Economic Cooperation and Development (OECD) released the 2015 Final Reports on the OECD/G20 Base Erosion and Profit Shifting (BEPS) project two years after its launch in 2013 at the request of the G-20 leaders. The G-20 Finance Ministers approved the Final Reports at their meeting on October 8, 2015, and the G-20 Leaders endorsed the BEPS package of measures at their annual summit on November 15-16, 2015.
Action Item Summaries – OECD BEPS Final Reports
In this issue, we will provide additional detail on Action 1, which addresses the tax challenges of the digital economy, Action 11, which relates to measuring and monitoring BEPS, and Action 12, which relates to the requirement that taxpayers disclose their aggressive tax planning arrangements.
The recommendations in the Final Reports indicate one of three possible levels of endorsement. “Minimum standards” indicates commitments to consistent implementation of standards laid out in final reports, and agreements to be subject to monitoring by the OECD during and after implementation. “Common approaches” indicate agreement as to “general tax policy direction,” with the aspiration that they will become “minimum standards” over time. “Best practices” are provided where the negotiators failed to reach a consensus that countries must adopt legislation on the specific topic in question.
Action 1: Addressing the Tax Challenges of the Digital Economy
In September 2013, the OECD Committee on Fiscal Affairs established a Task Force on the Digital Economy (TFDE) to identify tax issues raised by the digital economy and options to address them. The TFDE identified the spread of the digital economy as a challenge for international taxation, finding that the application of the concepts of source and residence or the characterization of income for tax purposes is more difficult in the context of the digital economy. The TFDE determined that the digital economy is increasingly becoming the economy itself and that attempting to ring-fence it from the rest of the economy for tax purposes would not be practical. The TFDE identified some key features of the digital economy that exacerbate the BEPS risks, which the BEPS report took into consideration when discussing proposed solutions. The TFDE also looked at the challenges posed for value-added tax (VAT) collection, particularly where goods, services, and intangibles are acquired by private consumers from suppliers abroad.
Action 7 considered options to modify the exceptions to permanent establishment status to ensure that they were only available for activities that are in fact preparatory or auxiliary in nature. With regard to indirect taxes, the TFDE recommended that countries apply the principles of the international VAT and general goods and services tax (GST) guidelines for the collection of VAT on cross-border business-to-consumer supplies of services and intangibles and consider introduction of the collection mechanisms included in the guidelines. Countries may adopt various options that the TFDE identified, including the new nexus standard based on a significant economic presence, withholding taxes on certain digital transactions, and imposition of an equalization levy, provided that countries respect existing treaty obligations and that they ensure consistency with existing international legal commitments. Future work will be detailed in a mandate to be developed in 2016 with a report to be issued in 2020.
Action 11: Measuring and Monitoring BEPS
The Action 11 Final Report addresses a number of topics related to the empirical analysis of BEPS, including the measurement of BEPS and the identification of its economic impact, and presents findings related to the scale and scope of BEPS. The Report includes suggestions on how to evaluate the effectiveness of the various BEPS “countermeasures” proposed as part of the BEPS Project and offers recommendations on collecting and disseminating data to facilitate analysis of BEPS.
The Final Report defines BEPS as relating to “arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place or by exploiting gaps in the interaction of domestic tax rules where corporate income is not taxed at all.” The Report proposes six indicators to analyze the existence, scale, and economic impact of BEPS over time: (1) the concentration of foreign direct investment (FDI) relative to gross domestic product (GDP); (2) high profit rates of low-taxed affiliates of top global multinational enterprises (MNEs); (3) high profit rates of MNE affiliates in lower-tax locations; (4) effective tax rates of large MNE affiliates relative to non-MNE entities with similar characteristics; (5) concentration of royalty receipts relative to research and development spending; and (6) interest expense to income ratios of MNE affiliates in countries with above-average statutory tax rates.
The Final Report states that analysis of the data confirms the existence of BEPS and notes its increase in scale in recent years. The Final Report also includes a review of the literature on the economic impact of BEPS and discusses methodological approaches to estimating the fiscal impact of BEPS and the various ways in which MNEs may engage in BEPS, and it suggests that BEPS results in excessive interest deductions and distorts the location of patents and real economic activity. On data collection and dissemination, the Final Report recommends the publication of a new OECD Corporate Tax Statistics publication that compiles a range of data and statistical analyses relative to the economic analysis of BEPS in an internationally consistent format.
Action 12: Mandatory Disclosure Rules
Action 12 recognized the benefits of tools designed to increase the information flow on tax risks resulting from aggressive tax planning strategies and called for recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements or structures, taking into consideration the administrative costs for tax administrations and businesses. The Final Report provides an overview of mandatory disclosure regimes in use in OECD and G20 member states, together with recommendations for designing and adopting similar regimes in other countries, with international tax arrangements being given special focus.
The following features need to be considered: who reports, what information to report, when the information has to be reported, and the consequences of non-reporting. The Final Report recommends including these features:
At present, seven countries among the OECD and G20 members, including the US, the UK, and Ireland, require taxpayers and advisers or promoters of transactions to disclose contemporaneously the use of aggressive tax planning with a potential for tax avoidance. The expanded Joint International Tax Shelter Information and Collaboration Network (JITSIC Network) of the OECD Forum on Tax Administration will provide an international platform for an enhanced cooperation and collaboration between tax administrations, based on existing legal instruments, which could include cooperation on information obtained by participating countries under mandatory disclosure regimes.
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