washington tax insight dec 2016
TRANSCRIPT
HouseCongressman Paul Ryan (R-WI) will return as Speaker of the
House with Congressman Kevin McCarthy (R-CA) as Majority
Leader and Congressman Steve Scalise (R-L) as Majority Whip.
House Democrats have chosen current Minority Leader Nancy
Pelosi (D-CA) to retain her position, House Ways & Means
Committee Chair Kevin Brady (R-TX) keeps his position and
will lead the House effort on tax reform in 2017. Congressman
Richard Neal (D-MA) replaces Sander Levin (D-MI) as Ranking
Member on the Committee.
The Ways and Means Committee currently has 39 members,
split between 24 Republicans and 15 Democrats with no
announcements yet as to whether that ratio will change.
Two Democrats chose to retire – Congressman Charles Rangel
(D-NY) and Congressman Jim McDermott (D-WA) – and
three Republican seats will be filled due to the departures of
Congressmen Dold (R-IL), Boustany (R-LA) and Young (R-IL).
SenateSenator Mitch McConnell (R-KY) will return as Majority
Leader for the Republicans. His counterpart as Minority Leader
will be Senator Charles Schumer (D-NY), who replaces the
retiring Senator Harry Reid (D-NV). Senator Schumer named
an expanded leadership team of 10 Senators including Senators
Bernie Sanders, Dick Durbin, Patty Murray and Joe Manchin.
Senate Democrats are viewed as the last line of defense against
the Trump agenda due to the general requirement of 60 votes
in the chamber necessary to break a filibuster. In the next
Congress, the Senate will have 51 Republicans, 48 Democrats
and one independent.
Senator Orrin Hatch (R-UT) returns as Chair of the Senate Finance
Committee. Senator Ron Wyden (D-OR) won re-election and
returns to lead the Democrats on the Committee. Several
Republican members won re-election including Senators
Portman (R-OH), Grassley (R-IA), Burr (R-NC), Crapo (R-ID),
Isaakson (R-GA), Scott (R-SC) and Thune (R-SD) with one
member to be replaced, Senator Dan Coats (R-IN), who will
retire at the end of the year.
Lame Duck SessionThe GOP-controlled Congress
will likely want to avoid a
lengthy lame duck session
in anticipation of the new
administration. But with the
current Continuing Resolution
due to expire on December
9th, Speaker Paul Ryan
has announced that House
Republicans will pursue a
short-term spending bill
December 2016 A publication from
Election Results and the Policy AgendaOn November 8th, Donald Trump was elected the 45th president of the United States. During the transition period until inaugurationday on January 20, 2017, he is working to assemble a team of advisors and cabinet members. President-elect Trump discussed taxreform as a priority during his campaign and released a package of tax proposals, but it is difficult to predict what the pace and contentof tax reform will be under a Trump Administration until key appointments are made and a more detailed package of proposals is available. The key appointee for the agenda on tax reform will be Trump’s pick for Treasury Secretary, Steve Mnuchin, a former WallStreet executive who served as the campaign finance manager. Although IRS Commissioner Koskinen’s term does not expire until November 9, 2017, it is unclear whether he will be replaced sooner considering efforts by House Republicans to impeach him.
WashingtongTax Insight
President-elect Trump discussed
tax reform as a priority during
his campaign and released a
package of tax proposals, but
it is difficult to predict what
the pace and content of tax
reform will be under a Trump
Administration until key
appointments are made and
a more detailed package
of proposals is available.
“
Prepared in conjunction with Potomac Law Group PLLC
”
True Partners Consulting | Boston | Chicago | Dallas | Long Island | Los Angeles | New York City | San Jose | Tampa | TPCtax.com
Washington Tax Insight December 2016 Page 2
True Partners Consulting | Boston | Chicago | Dallas | Long Island | Los Angeles | New York City | San Jose | Tampa | TPCtax.com
A publication from
to fund the government at current levels through the end of
March 2017. Senate Majority Leader McConnell has given some
signs that he would also like to move a spending bill that funds
the government at current levels through March 2017.
Delaying action until March on budget and spending issues allows
the Trump Administration the chance to have an impact on the
budget for the rest of the 2017 fiscal year and avoids a fight over
these issues in the lame duck session. Some Republicans have
expressed concerns about this approach, however, noting that this
could result in budget fights early in the Trump Administration,
which could lead to a delay in other key elements of the Trump
agenda in the first 100 days.
Other issues that could be considered prior to the end of the
year include the 21st Century Cures Act (a bipartisan House-
passed bill on the development of new medical treatments
and prescription drugs); water and energy legislation; the Iran
Sanctions Act; and the annual defense policy bill. With a
short-term limited spending bill, the prospects for tax extenders
legislation does not look promising, but staff representatives
of SFC have indicated that a handful of noncontroversial tax
bills could be approved prior to the end of the year including
technical corrections and two pension-related bills.
The 2017 Agenda – the First 100 DaysPresident-elect Trump has called for a broad legislative
agenda that includes tax reform, major changes to the
Affordable Care Act (ACA), expanding the military, and
significant infrastructure building. These are programs that
will cost billions of dollars and the impact on the deficit will
have to be considered by Congressional leadership as these
programs are advanced by the Trump Administration in 2017.
Congressional Republicans have indicated that repeal of the
Affordable Care Act (ACA) will be one of their first priorities,
and they are considering use of the budget reconciliation
process to advance this legislation. The chairmen of the
House and Senate Budget Committees have informally
agreed to do both a 2017 and 2018 budget early in the Trump
Administration which could pave the way for use of the
reconciliation process, which avoids the problems of a
Senate filibuster by requiring only 51 votes for passage.
Treasury and the IRSPost-elections, House W&M Committee Chair Brady indicated
that he hopes the incoming Trump Administration will reverse
position on the Treasury Department’s Section 385 earning
stripping regulations. Several business groups, including the
Business Roundtable, the National Association of Manufacturers
and the Organization for International Investment are also taking
the position that the recently finalized anti-inversion rules,
including the controversial earnings stripping regulations, should
be pulled back when the Trump Administration takes over. The
Treasury Department has indicated that they intend to finalize the
"serial inverter" rule that it proposed in the spring, which aims to
prevent non-U.S. companies from engaging in multiple merger
deals that allow their U.S. partners to rebase in low-tax countries,
if only on paper.
Treasury and the IRS issued final regulations on certain
transactions between controlled foreign corporations (CFCs)
and foreign partnerships. The regulations cover the treatment of
property held by a CFC as United States property in connection
with certain loan or guarantee transactions involving partnerships.
The final regulations also provide rules for determining whether
a CFC is considered to derive rents and royalties in the active
conduct of a trade or business for purposes of determining
foreign personal holding company income (FPHCI), as well
as rules for determining whether a CFC holds US property as a
result of certain related party factoring transactions. These rules
finalize proposed regulations issued in 2015 and a portion of a
1988 proposed rule. The IRS also issued proposed rules under
section 1.956-4(b) so that a CFC that is a partner in a controlled
partnership determines its share of US property held by the
partnership under the liquidation value percentage method,
regardless of the existence of any special allocation of income
or gain from the property.
In Revenue Procedure 2016-55, the IRS announced several
annual inflation adjustments scheduled to be effective
in 2017. Included are: (1) the standard deduction which
will be $12,700 (increase of $100) for married filing jointly,
$6350 (increase of $50) for single filers and married filing
individually, and $9350 (increase of $50) for heads of
households; (2) income limit on itemized deductions of
individuals will start at $287,650 or more (with $313,800
Prepared in conjunction with Potomac Law Group PLLC
True Partners Consulting | Boston | Chicago | Dallas | Long Island | Los Angeles | New York City | San Jose | Tampa | TPCtax.com
Washington Tax Insight December 2016 Page 3 A publication from
Prepared in conjunction with Potomac Law Group PLLC
for married couples filing jointly); (3) AMT exemption
increases $400 to $54,300 and phases out starting at
$120,700 (with $84,500 for married couples filing jointly
with phase out to begin at $160,900); and (4) personal
exemption remains unchanged at $4050 subject to a phase-
out beginning at $262,500 in income (with $313,800 for
married couples filing jointly).
IRS Appeals Chief Kirsten Wielobob issued a letter clarifying
certain changes to the IRS appeals process as a result of recent
changes that had caused concern with some practitioners. These
changes included a proposed shift of authority to settle cases away
from the Appeals Team Case Leaders (ATCLs) to their managers,
shifting most Appeals conferences away from in-person meetings
to phone conferences, and allowing Chief Counsel and/or
Compliance to be present for Appeals conferences. The letter
stated that settlement authority would remain with the ATCLs
with possible modifications to existing processes. It also indicated
that Appeals will revise its procedures to be clear that a manager
must review a case and propose any changes prior to the ATCL
finalizing the settlement.
International Issues
OECDThe Global Forum on Transparency and Exchange of
Information held its annual meeting in November with 220
delegates from 84 jurisdictions and 12 international organiza-
tions to further the shared goal of improving tax transparency
and achieving a level playing field. The meeting came at the
completion of the first round of the Forum’s peer review
process, with the release of 17 new reports assessing the level
of compliance with the international standard for exchange of
information on request. A special fast-track review procedure
was agreed at the meeting to enable the Forum to recognize
progress made by mid-2017 and to assess changes being made
in various jurisdictions. A second round of peer reviews
currently in progress will include an assessment of the
availability of and access by tax authorities to beneficial
ownership information of all legal entities and arrangements.
European CommissionThe EU is moving ahead with its proposals for a uniform set
of rules on taxing corporation profits which would require
multinational companies to pay taxes based on where their
assets and employees are located and where their sales take
place. These proposals known as the common consolidated
corporate-tax base (CCCTB) are aimed at curbing creative tax
reporting, tax evasion and sweetheart deals that some European
countries have used to attract companies as reflected in the
information gathered as part of the EU state aid investigations.
To become law, the CCCTB needs unanimous approval from all
28 EU member states and subsequent approval by each of their
national parliaments. If enacted, the law would take effect in
two phases. First, companies whose European operations have
more than 750 million euros a year in revenue would have to
calculate their taxable profits under a set of accounting rules that
apply across all EU countries. In the second phase, companies
would have to pay taxes in member states based on three criteria:
assets, employees and sales. The EU’s Council of Ministers will
discuss the first part of the proposed rules in 2017 and will move
on to the second part of the rules only after agreeing to the first.
The European Parliament Committee of Inquiry Into Money
Laundering, Tax Avoidance and Tax Evasion (PANA Committee)
held a public hearing titled “Anti-money laundering and
tax evasion: Who assures compliance with the rules and enforces
them?” The purpose of the hearing was to “learn from law
enforcement bodies how the rules against money laundering
and tax evasion are enforced.” One of the recommendations
from experts is to set up a European register of beneficial
owners of companies.
Prospects for Tax Reform in 2017With Donald Trump winning the presidential election and Republicans
maintaining control of both the House and Senate, the prospects for tax
reform in 2017 have significantly increased. Following Trump’s pick of
Steve Mnuchin as Treasury Secretary, the next key position to be filled
will be the Assistant Secretary for Tax Policy.
Even though the path to comprehensive tax reform now looks more
promising, many questions and challenges remain. Will the Republicans
want to produce a bipartisan bill and compromise with the Democrats,
and, if so, what approach will the Democrats take? Will Republicans
try to use the budget reconciliation process to move tax reform?
To what extent must tax reform be revenue neutral, and how should
revenue and distributional effects be measured? If Trump pairs tax
reform with infrastructure spending, will both be advanced as part
of a 100-day agenda? Will the costs of an infrastructure bill be totally
offset or will there be a significant increase in the federal deficit if tax
reform fails to cover the costs of the infrastructure plan?
While similar in some respects, there are significant differences
between the Trump tax proposals released during the campaign and key
proposals in the GOP Blueprint on tax reform released this past summer.
Both plans want to lower the 35 percent corporate tax rate, call for a
lower rate on pass-through businesses, and suggest a deemed repatriation
of offshore earnings of US companies, but they differ in many details
including applicable tax rates. Most importantly, the GOP plan for
corporate taxes proposes a destination-based approach that would apply
taxes based on where goods, services and intellectual property are
consumed (rather than produced), and calls for a “border adjustments”
system that would tax US imports but not exports, while the Trump tax
plan does not specifically include these proposals.
A key issue that will affect the pace of tax reform legislation and the
policy therein is whether a bipartisan effort can be successful. A Trump
economic advisor, Stephen Moore, has commented that bipartisan
legislation is important to this effort, and Ways & Means Committee
Chair Brady has stated that he would prefer to take a bipartisan approach
to tax reform. He commented, “We are going to ask for and seek
[Democratic] input, and listen to these ideas as we go forward. Because
at the end of the day, I think tax reform is more durable and long-lasting
and pro-growth if we can find common ground between Republicans and
Democrats.” Ranking SFC Democrat Wyden has also voiced his support
for a bipartisan approach to tax reform. Should bipartisanship not be
workable or achievable, it is likely that Congressional Republicans will
look to the budget reconciliation process to move tax reform legislation,
since this would allow tax reform to be passed in the Senate with only
51 votes, thereby avoiding a potential Senate filibuster.
The HouseSpeaker Ryan has consistently viewed comprehensive tax reform as one
of his priorities for the House agenda. Post-elections, W&M Committee
Chair Brady indicated that he plans to move ahead quickly on tax
reform commenting “Tax reform is going to happen in 2017,” and
adding that the panel will be “ready to move this early.” He plans to
use the House GOP Blueprint released in June as the starting point,
and his staff has been working to produce legislative language reflecting
the Blueprint proposals after meeting for months with business groups
and taxpayers to get their input on the proposals.
The GOP Blueprint calls for cutting tax rates for corporations, pass-
through businesses, and individuals; adopting a territorial system for
taxing foreign-source income of US multinationals; and moving the
US toward a border-adjustable cash flow tax system without adopting
an explicit consumption levy such as a national sales tax or value-added
tax (although the plan functions economically as a subtraction-method
VAT rather than as an income tax). His goal is to produce a revenue
neutral bill measured under a “dynamic” scoring model. Whether and
when legislative language might be released is unclear, and no schedule
for Committee and House Floor action has been released.
House Democrats have targeted inversions and earnings stripping as
well as higher taxes on corporations and wealthy individuals, but they
have not produced a comprehensive blueprint to counter the GOP plan.
The SenateSenate Majority Leader McConnell has not shared the interest of
Speaker Ryan in making tax reform a top priority issue. SFC Chair Hatch
does support moving ahead on tax reform, but he has focused his attention
in 2016 on an alternative approach consisting of a corporate integration
plan lowering the corporate tax rate by combining a dividends-paid
deduction with a withholding tax on dividend and interest payments.
The details of his plan have not been made public to date but a Senate
Finance Committee staff representative recently commented that a
draft could be completed during the lame duck session.
The two leading Democrats on the issue of tax reform are Schumer, the
soon-to-be Minority Leader, and Wyden, who continues as the Ranking
Democrat on the Committee. Wyden has supported moving on the issue
of inversions in the short term, but has also issued several discussion
drafts on tax reform topics in the past several years. Schumer, who has
not always aligned with Wyden on approach and policy, has been active
on the topic of tax reform, supporting international tax reform paired
with infrastructure spending.
Washington Tax Insight December 2016 Page 4 A publication from
Prepared in conjunction with Potomac Law Group PLLC
True Partners Consulting | Boston | Chicago | Dallas | Long Island | Los Angeles | New York City | San Jose | Tampa | TPCtax.com
Washington Tax Insight December 2016 Page 5 A publication from
Prepared in conjunction with Potomac Law Group PLLC
©2016 True Partners Consulting LLC. All rights reserved. Printed in the USA. True Partners Consulting is a registered trademark in the U.S. and several international jurisdictions.
Any tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax
penalties or promoting, marketing, or recommending to another party any transaction or matter addressed in this communication (or any attachment). The information contained herein is for informational
purposes only and is based on our understanding of the current tax laws and published tax authorities in effect as of the date of publishing, all of which are subject to change. You should consult with your
professional tax advisor to discuss the potential application of this subject matter to your particular facts and circumstances.
True Partners Consulting | Boston | Chicago | Dallas | Long Island | Los Angeles | New York City | San Jose | Tampa | TPCtax.com
Robert M. GordonManaging Director(312) 235-3321
Contact Information:
Procedural Issues – Using Budget Reconciliation?The budget reconciliation process has often been used in past years to
advance targeted tax changes through Congress. A budget resolution is
necessary first with the inclusion of budget reconciliation instructions,
after which the legislation then enjoys certain protections including
the requirement of 51 votes for passage (thereby avoiding a Senate
filibuster). Under current reconciliation rules, however, the legislation
must be deficit neutral over a 10-year period. If it is not, the legislation
must sunset after the 10-year period. The plans currently put forward
by Republicans would likely result in a significant increase in the
deficit, so this issue must be addressed by Republican leadership if
they decide to utilize the budget reconciliation process.
An alternative to using the budget reconciliation process would require
compromise with Senate Democrats, who must decide whether they
want to work with Republicans to advance some of their own tax reform
proposals or whether they will choose to block tax reform legislation
under a Trump Administration.
Emerging Key Policy Issues in the Tax Reform DebateOne of the key issues in the tax reform debate is what the treatment
will be of the offshore income being held currently by US companies –
whether there will be a requirement that it be repatriated subject to a
low tax rate and, if so, how will that money be used – to lower rates
generally or to fund infrastructure spending. The GOP Blueprint includes
a one-time deemed repatriation of deferred active foreign-source income
of US multinationals with differential rates for cash (8.75 percent) and
noncash assets (3.5 percent), which could be paid ratably over eight
years at the taxpayer’s election. Chair Brady has stated that the one-time
revenue generated from deemed repatriation should be used to offset
the cost of reducing the corporate tax rate to 20 percent and the
pass-through business rate to 25 percent. In contrast, other key players
have supported using
that revenue for
infrastructure spending,
notably Speaker Ryan
who worked with
Senator Schumer on
legislation, and
potentially the incoming
Trump Administration.
The Trump tax plan
includes a one-time
deemed repatriation of
accumulated deferred
foreign income at a
10 percent tax rate
along with a $1 trillion
investment in
infrastructure spending,
although the two proposals have been linked only by comments after
the election from his advisors including Stephen Moore.
Another proposal in the House GOP Blueprint which has drawn interest
relates to “border adjustments” and provides that exports would not be
subject to US taxes regardless of where they were produced, whereas
imports would be taxed in the US regardless of where goods were made,
with businesses taxed not on where the headquarters are but where
they sell their goods. This proposal was not included in prior year tax
discussion drafts so input from the business community has been
requested. Some advocates of this proposal believe it will gain bipartisan
support, raise over $1 trillion worth of revenue over a 10-year period and
help stop the increase in inversions, but it could also result in a significant
tax increase on retailers, which will make it controversial.
Under current reconciliation
rules, however, the legislation
must be deficit neutral over
a 10-year period. If it is not,
the legislation must sunset
after the 10-year period.
The plans currently put forward
by Republicans would likely
result in a significant increase
in the deficit, so this issue
must be addressed by
Republican leadership if
they decide to utilize the
budget reconciliation process.
“
”