Congress will return to work in Washington in early 2016 with the House reconvening on January 5th, and the Senate on January 11th. Politics and the fall presidential and congressional elections will dominate Washington in 2016 and the Congressional agenda with leadership making it clear that the 2016 agenda will be significantly less ambitious than 2015. Legislation expected to be considered in 2016 includes passage of the 12 appropriations bills to fund the government for FY 2017, a relief package for Puerto Rico, consideration of the Trans-Pacific Partnership trade deal, and customs legislation. The political agenda will likely include national security issues, gun control, the Paris international climate control agreement and repeal of provisions in the Affordable Care Act.
Will tax reform be on the 2016 agenda? House Speaker Paul Ryan (R-WI) has stated that he would like the House agenda to include tax reform, welfare reform and free trade. Although House Speaker Ryan and W&M Committee Chair Brady continue to talk about moving on to tax reform with the completion of the tax extenders bill, it is unlikely there will be much action on tax reform beyond hearings and continued debate until after the fall elections. W&M Chair Brady has said that he will focus on international tax reform in 2016 in order to set the stage for comprehensive tax reform in 2017. He stated that the SFC international tax working group draft released in the summer of 2015 will serve as the framework for overhauling the US international tax system. Congressional reaction to the BEPS Final Reports may also contribute to activity on international tax issues in 2016.
The President signed into law the Consolidated Appropriations Act, 2016, prior to the end of the year as part of an omnibus spending and tax package that incorporated the tax extender package, discussed below. The law will fund the government through September 30, 2016 setting spending levels for government agencies for the remainder of FY 2016. It also includes a two-year delay in the effective date of the so-called “Cadillac tax” on generous employer-sponsored health insurance plans and a one-year moratorium on the annual fee imposed on health insurance providers.
On December 18, 2015, President Obama signed the “Protecting Americans From Tax Hikes Act of 2015” (the “PATH Act”), which includes extensions of several expired tax provisions (some permanently) as well as modifications to tax administration and various miscellaneous tax matters. For a detailed summary of the provisions of the PATH Act, see the True Alert dated December 22, 2015 .
The PATH Act is estimated to increase the federal deficit by $622 billion between 2016 and 2025 since the bill is for the most part not offset with revenue raising provisions. The exceptions are the revenue raising provisions included in the REIT reform proposals, the new program integrity enhancements for the child tax credit and the earned income tax credit, and a handful of miscellaneous minor offsets.
Both W&M Committee Chair Brady and Senate Finance Committee Chair Hatch described the legislation as a positive step toward US tax reform. Senator Hatch commented that the bill’s adjustment to the tax and revenue baseline would make conditions vastly more favorable for future comprehensive tax reform. Building the permanently extended provisions into the budget baseline lowers the revenue targets for tax reform.
A bipartisan initiative in the Senate Finance Committee in September, which included a provision to give the IRS broader power to regulate paid tax preparers, did not advance, in part because of opposition from the AICPA. In early December, however, two Republican members of Congress introduced a bill, the Tax Return Preparer Competency Act, which would require paid tax preparers to take annual classes and get a background check. The AICPA again expressed concern that CPAs would be included under this bill despite the fact that they are already highly-regulated and licensed at the state level. The Senate Finance Committee is expected to consider their legislation again in 2016.
The Consolidated Appropriations Act, 2016, included a provision that extends the Internet Tax Freedom Act (ITFA) through October 1, 2016. The ITFA (enacted in 1998) imposes a moratorium on state and local taxes on Internet access service with a grandfather clause for states taxing Internet access to transition to other sources of revenue. The House voted to make the ITFA permanent (requiring grandfathered Internet taxes to be phased out by June 30, 2020) as part of the conference agreement on a customs overhaul and trade enforcement bill, but Senate leadership decided to delay consideration of the customs legislation (due in part to opposition) until 2016 and added the short-term extension to the omnibus appropriations package.
On Dec. 21, 2015, the IRS issued proposed regulations to require country-by-country (CbC) reporting by the US parent of a multinational enterprise (MNE) group (REG-109822-15). The regulations target parent entities that have annual revenue for the preceding annual accounting period of $850 million or more. The categories of information required to be reported on the US report were developed in coordination with other member countries of the Group of Twenty (G20) and the OECD and use the model template produced by the OECD as part of the BEPS project. The IRS and Treasury state that while the proposed regulations generally seek to minimize deviations from the model template, the proposed regulations are also intended to be tailored to be consistent with the preexisting information reporting requirements applicable to US persons under sections 6001, 6011, 6012, 6031, and 6038 and to reduce the compliance burdens imposed by the additional reporting. The preamble to the proposed regulations states that the information in the report will not be used as a substitute for an appropriate transfer pricing determination based on a best method analysis but may be used as the basis for making further inquiries into transfer pricing practices or other tax matters.
The following day, Congressman Boustany (R-LA), who is chair of the W&M Tax Policy Subcommittee, introduced the Bad Exchange Prevention (BEPS) Act, which would delay CbC reporting of US companies from the Treasury Department to any foreign jurisdiction until 2017. W&M Committee Chair Brady (R-TX) commented that “Congress will not allow Treasury to move forward with BEPS policies that enable foreign governments to misuse information reporting and exploit American companies.”
The annual IRS/George Washington University international tax conference was held in Washington, D.C. on December 17-18th. The conference covered a wide range of topics including competent authority, treaties, inversions, state aid, treatment of intangibles, and current developments related to the OECD BEPS project and Final Reports.
In Notice 2015-84, the IRS provided a cumulative list of changes in plan qualification requirements for 2015. The list is used by plan sponsors and practitioners in submitting determination letter applications for plans during the period beginning February 1, 2016 and ending January 31, 2017.
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 8th, and the G-20 Leaders endorsed the BEPS package of measures at their annual summit on November 15-16th.
In this issue, we will provide additional detail on Action 5, which relates to harmful tax practices, and Actions 6-7 and 14-15, which relate to tax treaties. In future issues, we will provide additional detail on other Actions.
Achieving consensus among the countries which participated in the BEPS project was challenging and is reflected in the fact that 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 5: Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
Action 5 aims to identify and counter harmful tax practices, taking into account transparency and substance and developing recommendations on the definition of harmful tax practices with the main focus on intangible regimes such as patent boxes. The Action 5 Report sets out a “minimum standard” based on an agreed methodology to assess whether there is substantial activity in a preferential regime. In the context of Intellectual Property (IP) regimes such as patent boxes, consensus was reached on the “nexus” approach. This approach uses expenditures in the country as a proxy for substantial activity and ensures that taxpayers benefiting from these regimes did in fact engage in research and development and incurred actual expenditures on such activities. The same principle can also be applied to other preferential regimes so that such regimes would be found to require substantial activities where they grant benefits to a taxpayer to the extent that the taxpayer undertook the core income-generating activities required to produce the type of income covered by the preferential regime. In the area of transparency, a framework has been agreed for mandatory spontaneous exchange of information on rulings that could give rise to BEPS concerns in the absence of such exchange.
Action 6: Prevent Treaty Abuse
The Action 6 Report includes a “minimum standard” on preventing treaty abuse including through treaty shopping, which involves strategies through which a person who is not a resident of a country attempts to obtain the benefits of a tax treaty concluded by that country. More targeted rules have been included to address other forms of treaty abuse. Changes to the OECD Model Tax Convention were agreed to ensure that treaties do not inadvertently prevent the application of domestic anti-abuse rules. The Report also contains the policy considerations to be taken into account when entering into tax treaties with certain low or no-tax jurisdictions.
Action 7: Prevent the Artificial Avoidance of PE Status
Action 7 aims to prevent the artificial avoidance of Permanent Establishment (PE) status, by redefining the threshold for creating a PE to prevent base erosion and profit shifting. Tax treaties generally provide that the business profits of a foreign enterprise are taxable in a country only to the extent that the enterprise has a PE in that country to which the profits are attributable. The Action 7 Report includes changes to the definition of PE in Article 5 of the OECD Model Tax Convention, which address techniques used to inappropriately avoid the tax nexus, including by replacement of distributors with commissionaire arrangements or by the artificial splitting of business activities.
Action 14: Make Dispute Resolution Mechanisms More Effective
Action 14 aims to make dispute resolution mechanisms more effective through developing solutions to address issues that prevent countries from resolving treaty-related disputes under mutual agreement procedures. The Final Report reflects that countries have committed to a “minimum standard” that includes a political commitment to the effective and timely resolution of disputes through the mutual agreement procedure. The commitment also includes the establishment of an effective monitoring mechanism to ensure the minimum standard is met. A large group of countries has committed to quickly adopt mandatory and binding arbitration in their bilateral treaties.
Action 15: Develop a Multilateral Instrument
Action 15 aims to develop a multilateral instrument to enable jurisdictions to implement measures developed as a result of the work on BEPS and to amend bilateral tax treaties. The Final Report concludes that a multilateral instrument is desirable and feasible, and that negotiations for such an instrument should be convened quickly. Based on this, a mandate has been developed for an ad-hoc group, open to the participation of all countries, to develop the multilateral instrument and open it for signature in 2016.
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Robert M. Gordon
Managing Director & Assistant General Counsel