Congress will likely handle a lighter legislative agenda in 2016, but the death of Supreme Court Justice Antonin Scalia is expected to impact the Congressional agenda for 2016 and the relations between the two parties as they work to advance other issues prior to the fall elections. President Obama has stated that he intends to send his nomination to the Senate with the intention of filling the vacancy prior to the elections, while Senate Republican leaders have stated that they believe the vacancy should be filled by the next President, although some Republicans appear to be willing to hold hearings on the nomination.
House Speaker Ryan has made it a priority for 2016 to advance a budget resolution and 12 appropriations bills through the House, but he is facing challenges already with the budget resolution, which is being opposed by conservative members who object to the spending levels agreed to by President Obama and Republican leaders in late 2015. Due to the longer summer recess planned to accommodate the political conventions, the House must finish its budget by March this year. Senate leadership has also indicated that they plan to advance a budget proposal, but Senate Budget Chair Enzi (R-WY) will face challenges from Republican Senators who also don’t support the spending levels, since it is unlikely he can rely on Democratic support for approval of the budget. As noted below, President Obama sent his FY 2017 budget proposal to Congress in early February.
There are three issues driving interest in advancing international tax reform this year – the increasing pace of corporate inversions, the G20/OECD Base Erosion and Profit Shifting (BEPS) project, and the EU state aid investigations. Some Members of Congress support repatriation proposals to address the estimated $2 trillion in corporate earnings that US companies are holding offshore but there is continuing disagreement about whether to use the revenues from such proposals for reduction of the corporate tax rate or infrastructure spending. Actions that may be taken as a result of the BEPS project and the EU state aid investigations could trigger increased tax payments by US companies to foreign governments. There is also a growing concern that the United States is failing in the global competition to offer a business-friendly tax environment. The White House has indicated that international tax reform is its top priority on tax policy in the recently released FY 2017 Budget plan. House Speaker Ryan has repeatedly confirmed that tax reform is a top priority of his agenda for the House, and he appointed Ways & Means Committee Chair Brady to head a House Task Force on Tax Reform, which is charged with carrying out the House Republican policy agenda on tax issues.
The Ways & Means Committee held a hearing on February 24th that focused on the “Global Tax Environment in 2016 and Implications for International Tax Reform.” In 2016, Chair Brady plans to produce a consensus blueprint on comprehensive reform and advance draft international tax reform as a “down payment” on broader reform. Congressman Levin (D-MI), who is the senior Democrat on the Committee, believes the focus of international tax reform should be on stopping inversions, and he urged Treasury Secretary Lew during the Committee hearing on the FY 2017 budget to take additional action on inversions and earnings stripping. Secretary Lew said that Treasury is working on a third piece of guidance directed at inversions but stated that legislation is needed to give the Treasury more authority on both issues. Congressman Boustany (R-LA), who chairs the Tax Policy Subcommittee, is managing the work to draft an international tax reform proposal with a target date of July prior to the Congressional summer recess.
During the Senate Finance Committee hearing on the FY 2017 budget, SFC Chair Hatch (R-UT) discussed with Treasury Secretary Lew that he is currently working on draft legislation on corporate integration, which he believes will address the issue of corporate inversions. He has announced that he will be meeting weekly with W&M Committee Chair Brady to discuss that topic and international tax reform.
The House of Representatives on February 2nd failed to override President Obama’s recent veto of legislation that would have repealed most of the tax provisions in the Affordable Care Act (ACA) including the medical device tax and the “Cadillac” tax on high-cost employer-provided health plans.
The Senate voted on February 11th to approve the conference report on a Customs overhaul and trade enforcement bill that includes a provision to permanently extend the current-law moratorium on state and local taxes on Internet access service. The Trade Facilitation and Enforcement Act (HR 644) cleared the House on December 11, 2015, and the President has stated he intends to sign the bill into law. The conference report does not include provisions from the Marketplace Fairness Act (MFA) that are intended to make it easier for states to capture sales and use tax revenue from transactions involving on-line and other “remote” vendors that do not have an in-state presence. Senate Majority Leader McConnell has promised to hold a floor vote on the Marketplace Fairness Act later this year, which allowed the bill to move forward without those provisions.
The Senate Finance Committee held a hearing on employer-sponsored retirement savings plans and efforts to expand their creation, access and participation. A number of proposals in this area are included in the President’s FY 2017 budget proposal, as noted below. Legislation to modify HSAs and FSAs was introduced by Chair Hatch and Congressman Paulsen.
House and Senate leaders of the tax-writing committees sent a letter to the Treasury and the IRS stating that they expect to advance legislation that will make a technical correction to the permanent extension of the R&D credit to make it clear that there was no intention to reinstate the alternative incremental research credit, which expired at the end of 2008.
Treasury released a revised U.S. Model Income Tax Convention (the “2016 Model”), including the model treaty text and preamble and announced that the technical explanation would be released this spring. This baseline text that Treasury uses when it negotiates tax treaties was last updated in 2006. The 2016 Model includes a number of provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. Many of the 2016 Model updates, however, reflect technical improvements developed in the context of bilateral tax treaty negotiations and do not represent substantive changes to the prior model. The 2016 Model includes measures to reduce the tax benefits of corporate inversions by denying reduced withholding taxes on US source payments made by companies that engage in inversions to related foreign persons. The 2016 Model also contains rules requiring that disputes between tax authorities regarding the application of tax treaties be resolved through mandatory binding arbitration.
The IRS issued Notice 2016-08 announcing the intention to make regulatory changes under the Foreign Account Tax Compliance Act (FATCA) to: (1) modify the date for submitting to the IRS the preexisting account certifications required of certain foreign financial institutions (FFIs); (2) specify the period and date for submitting the periodic certification of compliance and (3) modify the transitional information reporting rules for accounts of nonparticipating FFIs to eliminate the requirement to report on gross proceeds for the 2015 year; and (4) permit withholding agents to rely on electronically furnished Forms W-8 and W-9 collected by intermediaries and flow-through entities.
The IRS issued temporary and proposed regulations under section 704(b) providing guidance relating to the allocation by a partnership of foreign income taxes. The regulations aim to improve the operation of an existing safe harbor rule that is used for determining whether allocations of creditable foreign tax expenditures are deemed to be in accordance with the partners’ interests in the partnership.
Treasury Letter to EU regarding State Aid Investigations: Treasury Secretary Lew sent a letter to the EU addressing the recent state aid investigations being conducted by the European Commission Directorate-General for Competition, noting that US companies appear to be targeted and that enforcement actions being pursued are inconsistent with the G20/OECD Base Erosion and Profit Shifting (BEPS) project. The letter states that the US remains committed to working with Europe and the rest of the world on the issues addressed in the BEPS project but urges the EU to reconsider their unilateral actions.
European Commission Anti-Tax Avoidance Package: The European Commission released an anti-tax avoidance package with a directive that proposes six anti-abuse measures designed to prevent aggressive tax planning, increase tax transparency and create a level playing field for all businesses in the EU. If the directive is approved by the European Parliament and the Council of the European Union, then all EU member states would be required to implement the measures but note that the enactment of EU tax directives requires full agreement. The draft directive reflects some of the actions included in the Final Reports from the BEPS project but also goes further with respect to some issues. Key areas addressed in the directive include Country-by-Country reporting, tax treaties, hybrid mismatches, limits on the deductibility of interest and CFC rules.
Multilateral Competent Authority Agreement: 31 countries have signed the Multilateral Competent Authority Agreement (MCCA) committing to the automatic exchange of Country-by-Country reports. The MCAA is an implementation piece of Action 13 (Transfer Pricing) of the BEPS project. The first exchanges will start in 2017-18 using 2016 information. The United States is not a signatory of the MCAA, but those signing include the UK, Belgium, Australia, France, Germany, Ireland, Japan, the Netherlands and Switzerland.
On February 9th, the Obama Administration released its FY 2017 budget blueprint which includes $46.5 trillion in revenue and $52.6 trillion in spending over the 10-year budget window from 2017 through 2026. The Treasury Department released its General Explanation of the Administration’s FY 2017 Revenue Proposals (the “Greenbook”).
The FY 2017 budget plan includes more than 100 revenue changes, most of which have been included in prior budgets, but some of the new items include a $10 per-barrel tax on oil (phased-in), several retirement savings proposals, and modifications to the so-called Cadillac tax on generous health insurance plans. All of the international tax proposals were included in the prior year budget with differences reflecting revised proposed effective dates, revenue expectations and changes to reflect the permanent extensions of two specific proposals.
The main budget introduction and summary includes the following explanatory excerpt on tax reform:
The Budget details the President’s full plan for reforming and modernizing the international business tax system, including a 19 percent minimum tax on foreign earnings that would require U.S. companies to pay tax on all of their foreign earnings when earned – with no loopholes or opportunities for deferral – after which earnings could be reinvested in the United States without additional tax. It would prevent U.S. companies from avoiding tax through “inversions” – transactions in which U.S. companies buy smaller foreign companies and then reorganize the combined firm to reduce U.S. tax liability – and prevent foreign companies operating in the United States from using excessive interest deductions to “strip” earnings out of the United States. The Department of the Treasury has taken steps within its authority to reduce the economic benefits of inversions, but the President has been clear that the only way to fully address the issue of inversions is through action by the Congress.
In prior years, the President’s budget proposals have reflected the position that his tax reform proposals would be enacted as part of business tax reform that is revenue neutral over the long run so that net savings from the proposals would not be used to deficit reduction. In the FY 2017 proposal, however, that position has been modified (and confirmed by a White House official) so that $500 billion from business tax changes would be dedicated to reducing the deficit, which is intended to offset the revenue loss associated with the enactment of the extenders/appropriations legislation in December 2015.
Key New Tax Proposals
SECA (Self-Employment Contributions Act) taxes and Net Investment Income Tax (NIIT): Under this proposal, all active business income would be subject to either the NIIT or Medicare payroll tax, regardless of choice of entity. All the revenues from the NIIT would be deposited in the Medicare Trust Fund. The proposal would also rationalize the taxation of professional services businesses by treating individual owners or professional service businesses taxed as S corporations or partnerships as subject to SECA taxes in the same manner and to the same degree.
“Cadillac” tax: Under current law for 2020 and later, the cost of employer-sponsored health coverage in excess of a threshold is subject to a 40-percent excise tax. The threshold is $10,200 for self-only coverage and $27,500 for other coverage in 2018 dollars, indexed to the Consumer Price Index for All Urban Consumers (CPI) plus one percentage point for 2019 and to the CPI thereafter. To ensure that the tax is only ever applied to higher-cost plans, this proposal would increase the tax threshold to the greater of the current law threshold or a “gold plan average premium” that would be calculated for each state. This proposal would also simplify the accounting of employer and employee contributions to a flexible spending account.
Multiple Employer Pension (MEP) Plans: Under current law, unaffiliated employers (firms not in the same line of business or without other common characteristics) cannot form a single defined contribution (401(k)) retirement plan. As a result, some smaller firms are unable to take advantage of the potential savings in administrative costs such a combination would allow. This proposal would permit unaffiliated employers to join a defined contribution MEP that would be treated as a single plan under the Employment Retirement Income Security Act (ERISA).
Community College Partnership Tax Credit: This proposal would provide businesses with a new tax credit for hiring graduates from community and technical colleges as an incentive to encourage employer engagement and investment in these education and training pathways. The proposal would provide $500 million in tax credit authority for each of the five years, 2017 through 2021. The tax credit would be allocated annually to states on a per capita basis and would be available to qualifying employers that hire qualifying community college graduates.
Oil Fee: The proposal would impose a fee on oil and oil products that would be equivalent to $10.25 per barrel of crude oil. The fee would be phased-in over a 5 year period and would be collected on domestically produced as well as imported petroleum and imported petroleum products. Exported petroleum products would not be taxed and home heating oil would be temporarily exempt. Revenue from the fee would fund the 21st Century Clean Transportation Plan to upgrade the US transportation system, invest in cleaner technologies, improve resilience, and reduce carbon emissions. In addition, 15 percent of the revenues would be dedicated for relief for households with particularly burdensome energy costs.
Among the proposals from previous years that have once again been included in the President’s Proposal are a 19-percent minimum tax on foreign income; a 14-percent one-time tax on previously untaxed foreign income; a limitation on the expatriation of domestic entities; proposals to limit earnings stripping; revised rules on outbound transfers of intangible property, and limitations on the use of hybrid arrangements to avoid US tax. Domestically, the proposals once again include recharacterization of carried interest.
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