Washington Tax Insight Jan 2017
-
Upload
robert-m-gordon -
Category
Documents
-
view
15 -
download
0
Transcript of Washington Tax Insight Jan 2017
Budget Reconciliation and Tax ReformSenate Majority Leader McConnell (R-KY) has announced
that he plans to address tax reform and repeal of the ACA by
using two budget resolutions and the budget reconciliation
process. The budget reconciliation procedure involves the
approval of a budget resolution that sets broad tax and spending
goals and instructs committees to report legislative language to
meet those goals. Budget resolutions are non-binding, but budget
reconciliation legislation requires the President’s signature.
Typically, there is one budget reconciliation bill that is subject to
rules that limit Senate debate and bar filibusters and unrelated
amendments with a simple majority needed for passage. Senator
McConnell has stated that the first budget resolution will repeal
the ACA, and a second in the spring will deal with tax reform.
If tax reform is passed as part of the budget reconciliation process,
it must be deficit-neutral and it will expire at the end of a 10-year
period. If a narrow tax and infrastructure package is advanced, it is
possible that Democratic support could be developed, but a more
comprehensive tax reform package may face challenges getting
the more than 60 votes needed in the Senate to prevent a
filibuster. Another potential obstacle will be the position of
key conservatives in Congress on the two budget resolutions
since comments have indicated that they may be willing to
allow the first resolution to advance but insist on the second
resolution containing proposals of importance to conservatives.
House Speaker Paul Ryan (R-WI) has also stated that he believes
the budget reconciliation process is the best way to proceed with
advancing tax reform. Ways & Means Committee Chair Brady has
stated that Democrats will be offered an opportunity to contribute
their ideas and engage on tax reform, but he has acknowledged
that Republicans will be willing to move tax reform using the
reconciliation process.
The Senate Finance CommitteeSenate Finance Committee
Chair Hatch (R-UT) has
indicated that he will turn his
efforts from his corporate
integration plan to a focus
on comprehensive tax reform
since Republicans will
control the White House
and the Congress. Hatch
commented, “Given the
current reality, any substan-
tive tax reform proposal will
need to be considered and
evaluated in the context of
January 2017 A publication from
Politics and Congressional ActivityPresident-elect Trump will take office on January 20, 2017. Typically, a new President will deliver a policy and budget address to ajoint session of Congress in late February that is similar in content to a State of the Union address, but a date for such speech by thePresident-elect has not been announced.
Congress convened on January 3, 2017. Based on comments from the Republican leadership and President-elect Trump, it is expectedthat the Congressional agenda in the early months of 2017 will include repeal of the Affordable Care Act (ACA), tax reform, andchanges to environmental regulations, as well as the need to consider confirmation of several nominees for key positions in the TrumpAdministration and to address several foreign policy issues.
WashingtongTax Insight
It is expected that the
Congressional agenda in the
early months of 2017 will
include repeal of the Affordable
Care Act (ACA), tax reform,
and changes to environmental
regulations, as well as the
need to consider confirmation
of several nominees for
key positions in the Trump
Administration and to address
several foreign policy issues.
“
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 January 2017 Page 2
True Partners Consulting | Boston | Chicago | Dallas | Long Island | Los Angeles | New York City | San Jose | Tampa | TPCtax.com
A publication from
what has quickly become a much broader discussion.” He has said
that he continues to want to consider how integration fits into the
tax reform debate. Chair Hatch has also signaled that he may be
reconsidering his intention to retire in 2018. Under Senate rules,
he is eligible to continue as Chair of the SFC through 2020.
Senator Claire McCaskill (D-MO) will take the SFC seat held by
Senator Chuck Schumer, who becomes the new Senate Minority
Leader. No replacement has been announced for the seat held by
Senator Dan Coats (R-IN), who retired.
The Ways & Means CommitteeW&M Committee Republicans held a two-day strategy
session in December to “review the decision points on tax reform
and health care” and to consider the feedback they received on
the GOP tax reform blueprint. Chair Brady has downplayed the
differences between the Trump tax reform proposals and the GOP
blueprint by commenting that they will be the subject of discussion
between the Congress and the White House and are “more than
manageable.” A key variance is that Trump proposes a 15%
corporate rate while the blueprint calls for a 20% rate, and Trump’s
plan would use revenue from a deemed repatriation proposal
for infrastructure spending, while Chair Brady prefers investing
that revenue into offsetting the cost of the corporate rate cut.
MiscellaneousW&M Committee Chair Brady and SFC Chair Hatch introduced
identical bills in the House and Senate on December 6th that would
make a variety of technical changes and clarifications to provisions
included in recently enacted tax legislation. The bipartisan bills
were cosponsored by W&M Ranking Democrat Neal and SFC
Ranking Democrat Wyden. The technical corrections legislation
includes clarifications to current law on bonus depreciation, the
research credit, the American Opportunity Credit, the partnership
audit rules, and REIT income testing rules. The introduction of
the bills prior to Congress recessing for the year was done to lay
groundwork for the changes to be made in the new Congress and
to allow taxpayers an opportunity to comment on the language
of the bills.
The Congressional Budget Office (CBO) issued a 316-page
summary of spending and tax policy changes titled “Options
for Reducing the Deficit: 2017 to 2026” for consideration by
Congress to reduce the deficit. The options were collected from a
number of sources including previously proposed legislation and
budget proposals from prior administrations. The report includes
several proposals targeting corporations, foreign income and
business-related activities, including changes to the rules for R&D
expensing, depreciation, LIFO, publicly traded partnerships,
foreign tax credit pooling, and deferral, and new fees on large
financial institutions, financial transactions, greenhouse gas
emissions, and a Value Added Tax. The report includes an estimate
of the effects of each proposal on the budget and a discussion of
the pros and cons, but does not make recommendations.
Treasury and the IRSThe IRS issued proposed and temporary regulations that provide
guidance on distributions of stock or securities of a controlled
corporation without recognition of income, gain or loss.
The regulations provide guidance on determining whether a
corporation is a predecessor or successor of a distributing or
controlled corporation for purposes of the exception under
Code section 355(e) to the nonrecognition treatment afforded
qualifying distributions. They also provide certain limitations on
the recognition of gain in certain cases involving a predecessor
of a distributing corporation. In addition, the regulations also
contain rules regarding the extent to which Code section 355(f)
causes a distributing corporation (and in certain cases its share-
holders) to recognize income or gain on the distribution of stock
or securities of a controlled corporation.
In Notice 2016-73, the IRS announced its intent to issue regula-
tions modifying the “triangular reorganizations” rules under
Code section 367 for foreign corporations where a subsidiary
acquires its parent’s stock and uses that stock to acquire a target
corporation. These rules will target transactions that repatriate
earnings and basis of foreign corporations without incurring
US tax by exploiting the Code section 367(a) priority rule.
The regulations will also modify the “all earnings and profits”
amount that must be included in income as a result of certain
inbound asset acquisitions that repatriate “excess asset basis.”
Treasury and the IRS issued final regulations under Code section
367 regarding transfers of certain intangibles (foreign good-
will and going concern value) to foreign corporations through
“nonrecognition transactions.” This rulemaking finalizes
regulations proposed in September 2015 and finalizes parts of
the temporary regulations issued in 1986. These final regulations
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 January 2017 Page 3 A publication from
Prepared in conjunction with Potomac Law Group PLLC
eliminate the foreign goodwill and going concern value exception
in Treas. Reg. §1.367(d)-1T(b) and narrow the scope of the Code
section 367(a)(3) active trade or business exception to apply
only to certain tangible property and financial assets. The final
regulations do not take a position on whether goodwill and going
concern should be characterized as a Code section 936(h)(3)(B)
intangible, so taxpayers may elect to apply either Code section
367(a) or Code section 367(d) to transfers of such items.
Treasury and the IRS issued final regulations under Code section
6038A that treat a domestic disregarded entity that is wholly
owned by a foreign person as a domestic corporation separate
from its owner for the limited purposes of the reporting, record
maintenance, and associated compliance requirements that
apply to 25% foreign-owned domestic corporations. This
guidance makes three changes to the proposed regulations that
were issued in May 2016 including changing the effective date to
apply to taxable years of entities beginning on or after January 1,
2017, and ending on or after December 13, 2017. The regulations
also ease compliance with the filing of Form 5472 by providing
that corporations have the same taxable year as their foreign owner
if the foreign owner has a US return filing obligation, and they
make it clear that the reporting should apply without regard to
certain regulatory exceptions generally applicable under
§1.6038-2(e)(3) and §1.6038A-2(e)(4).
The IRS issued three sets of guidance on the tax treatment of
foreign currency gains or losses by subdivisions of taxpayers
within a larger multinational company, known as “qualified
business units (QBUs),” under Code Section 987. In final
regulations, the IRS addressed the determination of the taxable
income or loss of a corporation or an individual with respect
to a QBU subject to Code section 987 as well as the timing,
amount, character, and source of any Code section 987 gain or
loss. Temporary and proposed rules address the recognition and
deferral of foreign currency gain or loss of QBUs in situations
where taxpayers terminate a QBU and situations involving
partnerships. The IRS also issued Notice 2017-07 which
modifies the effective dates for the deferral rule under these
anti-abuse rules under Code section 987.
The IRS issued temporary and proposed regulations under
Code section 901(m) addressing transactions that generally are
treated as asset acquisitions for US income tax purposes but
treated as stock acquisitions or disregarded for purposes of
determining foreign income and the foreign tax credit. The
regulations target certain “covered asset acquisitions” that the
IRS has identified as abusive avoidance transactions using the
foreign tax credit by limiting the ability of taxpayers who buy
and sell foreign assets in such transactions to claim the foreign
tax credit.
The IRS issued Notice 2016-76 providing for the phased-in
application of the Code section 871(m) regulations issued
in 2015 related to compliance with dividend equivalent
payment regulations. The guidance states that changes to
these regulations are expected with an explanation of several
compliance challenges including the creation of systems for
withholding and reporting for dealers, issuers, and other
withholding agents; implementing new system requirements
for paying agents and clearing organizations; and enhancing
and developing data sources for determining whether trans-
actions are Code section 871(m) transactions.
The IRS issued proposed regulations providing new guidance
on the fractions rule and the application of Code section
514(c)(9)(E) to partnerships that hold debt-financed real prop-
erty and have one or more tax-exempt qualified organization
partners as well as other partners. The fractions rule limits the
ability of such partnerships to allocate a disproportionate amount
of income to the tax-exempt qualified organizations.
The IRS issued proposed regulations under Code section 472
dealing with the establishment of dollar-value last-in, first-out
(LIFO) inventory pools by taxpayers that use the inventory
price index computation (IPIC) pooling method. The proposed
regulations amend the IPIC pooling rules to clarify that manufac-
tured or processed goods and resale goods may not be included
in the same dollar-value LIFO pool.
The IRS issued final regulations to increase user fees for those
who seek to pay their liabilities through installment agree-
ments effective on January 1, 2017. The fee for an installment
agreement plan will be $225 (increased from $120) with the
fee for low-income taxpayers continuing at $43. The IRS is also
introducing two new online installments subject to separate user
fees including an online payment agreement at $149 and a direct
debit online payment agreement at $31.
Washington Tax Insight January 2017 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
Treasury and the IRS issued final regulations relating to the
health insurance premium tax credit under Code section 36B.
The final regulations affect (1) individuals who enroll in
qualified health plans through Health Insurance Exchanges
and claim the premium tax credit and (2) Exchanges that make
qualified health plans available to individuals and employers.
These regulations expand the intentional or reckless disregard for
the facts exception to the section 36B safe harbor for household
income below 100% of the federal poverty level.
In Notice 2016-79, the IRS set the business mileage rates for
taxpayers for 2017, which will be 53.5 cents per mile (a half-
cent decrease from 2016), and sets the driving rates for medical,
moving and charitable purposes. The IRS also issued Revenue
Procedure 2010-51, which provides rules for “using optional
standard mileage rates in computing the deductible costs of
operating an automobile for business, charitable, medical, or
moving expense purposes.”
In Revenue Procedure 2017-12, the IRS issued guidance stating
that it will treat as debt an instrument that provides total loss-
absorbing capacity (TLAC). The covered TLAC is issued by
an intermediate holding company of a foreign global systemically
important bank (GSIB) pursuant to Federal Reserve regulations
and will be treated as indebtedness for federal tax purposes “to
the extent that the internal TLAC has not been subject to a debt
conversion order.” The purpose of this guidance is to help foreign
banks address certain Federal Reserve Board loan requirements.
International Issues
OECDThe Organization for Economic Cooperation and Development
(OECD) issued new guidance to assist in the implementation
of the BEPS initiative regarding country-by-country (CbC)
reporting. Under the BEPS Action 13 Final Report on “Transfer
Pricing Documentation and Country-by-Country Reporting,”
the OECD is setting the reporting standards for multinational
enterprises (MNEs) with cross border operations. This guidance
addresses the “parent surrogate filing,” the application of CbC to
investment funds and partnerships, and CbC reporting notification
requirements for MNE Groups during the transitional phase.
Under BEPS Action 15, the OECD released the text of a
multilateral instrument to implement tax treaty-related
measures that was negotiated by more than 100 jurisdictions
with a signing ceremony set for June 2017. The new multilateral
convention is expected to introduce results from the BEPS
project into more than 2000 tax treaties globally.
European CommissionA summary of the arguments included in Ireland’s appeal filed in
November 2016 to overturn the August decision by the European
Commission to recoup nearly $14 billion in unpaid taxes from
Apple Inc. as part of its state aid investigations were publicly
released. The central issue is whether two Irish tax rulings in 1991
and 2007 gave a form of special treatment to Apple. Ireland has
argued that the rulings did not depart from “normal” taxation
because they followed a part of the Irish tax code that states that
nonresident companies should not pay income tax on profit that
isn’t generated in Ireland. Apple Inc. has also filed an appeal to the
decision but did not release the text of its appeal. The US Treasury
issued a statement about the case noting that the EU’s decision is
“retroactively applying a sweeping new State aid theory that is
contrary to well-established legal principles, calls into question
the tax rules of individual countries, and threatens to undermine
the overall business climate in Europe.” The General Court of
the European Union will render the decision on the appeal and
whether the tax must be collected.
The European Commission announced a series of proposals
to improve the Value Added Tax (VAT) environment for
e-commerce businesses in the European Union. The proposals
will be submitted to the European Parliament for review and
consultation, and then to the European Council for adoption.
The proposals include new rules that allow companies to sell
goods online to manage all their EU VAT obligations in one
place, rules on actions against VAT fraud from outside the EU,
and simplification of VAT rules for startups and micro-businesses
selling online with cross-border sales under 10,000 euros.
Washington Tax Insight January 2017 Page 5 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
Tax Reform UpdateAs President, Donald Trump will have significant authority over tax law
and regulations, and it is expected that the new Administration and the
new Congress will consider comprehensive changes to the current tax
code and regulations. Although tax policy was a topic for debate and
discussion during the election campaign and a Trump tax proposal was
issued in September of 2015, there remains a great deal of uncertainty as
to how tax legislation will develop in the first few months of the Trump
Administration and what the details of that legislation will be.
Republicans control both the House and the Senate in the next Congress,
which will help advance the cause of tax reform, since Republican
leadership has made tax reform a priority for several years and a GOP
tax reform “blueprint” was released in 2016. It should be noted, however,
that proposals from the President-elect and Congressional leadership have
not aligned in all areas.
Secretary of the Treasury Nominee, Steve MnuchinSteve Mnuchin, a former Wall Street executive who served as the
Trump campaign finance manager, has been selected as the nominee
for Secretary of the Treasury, and he has submitted tax returns and the
required questionnaire to the Senate Finance Committee in preparation
for his confirmation hearing. W&M Committee Chair Brady praised
the nomination citing his private sector experience and stated that he is
looking forward to working with him on policy development to help
business create jobs and grow the US economy.
In an interview after his nomination was announced, Mnuchin com-
mented that tax reform will be his number one priority stating that it is
“something that happens absolutely within the first 90 days of this
presidency.” He has focused on the importance of cutting the corporate
tax rate, which he believes will encourage multinationals to repatriate
accumulated offshore earnings and bring jobs back to the US. He believes
that the revenue needed for the corporate tax rate cut as proposed by
President-elect Trump to 15% will be raised by economic growth and
increased personal income.
He has stated that the Trump Administration will rely on dynamic scoring
to measure the revenue impact of its tax reform proposals. Dynamic
scoring takes into account certain macroeconomic feedback effects of
the plan on the economy and federal revenue levels. The House adopted
rules in 2015 that require the Joint Committee on Taxation staff and
the Congressional Budget Office to use dynamic scoring for major
fiscal legislation. The Tax Foundation has estimated the revenue loss
under the Trump plan to range from $2.64 trillion to $3.93 trillion
using dynamic scoring, while the Tax Policy Center estimates the
loss to be in the range of $6 trillion.
Border AdjustabilityOne of the most hotly debated issues in tax reform is the proposal in the
GOP blueprint that calls for replacing the corporate income tax with a
border adjustable, destination cash-flow tax that would eliminate US
tax on products, services, and intangibles exported abroad, regardless of
their production location, but impose a US tax on products, services, and
intangibles imported into the US, regardless of their production location.
Several commentators have questioned whether such a tax might not
comply with WTO rules.
W&M Committee Chair Brady continues his support for the proposal
commenting that he is happy to listen to retailers, oil refiners and other
critics of the plan but “it’s important though for them to understand that
we cannot leave in place any tax policies that encourage our companies
to move their operations overseas just to sell back in the United States –
those won’t stay.” He stated that “industries will have to adjust.”
There is opposition developing to this proposal including from some
factions of the Republican party, some of whom argue that border
adjustments would distort the market in the long term, although some
economists have suggested that adjusting exchange rates would modify
the adverse effects. A letter signed by more than 75 business groups
including retailers, auto dealers, toy makers and apparel makers was sent
to Chair Brady and stated that the proposal would lead to “huge business
challenges caused by increased taxes and increased cost of goods, which
would in turn likely result in reductions in employment, reduced capital
investments and higher prices for consumers.”
Analyses by investment banks Goldman Sachs and RBC Capital have
raised concerns about the impact on corporate profits and increased
prices for consumers. The National Foreign Trade Council has reserved
comment stating that they want to give Republicans the opportunity to
elaborate on their tax reform plans.
Democratic staff of the SFC have called the House GOP blueprint
regressive and fiscally irresponsible with specific criticism of the
“destination-based cash flow tax” calling it “risky, untested and
especially vulnerable to unforeseen consequences.” The comments
also stated that the proposal could cause consumer prices to spike,
give a boost to Wall Street and have an unpredictable impact on trade.
One of the most hotly debated issues in tax reform is
the proposal in the GOP blueprint that calls for replacing
the corporate income tax with a border adjustable,
destination cash-flow tax that would eliminate US tax
on products, services, and intangibles exported abroad,
regardless of their production location, but impose a
US tax on products, services, and intangibles imported
into the US, regardless of their production location.
Several commentators have questioned whether
such a tax might not comply with WTO rules.
“
”
©2017 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.
Robert M. GordonManaging Director(312) 235-3321
Contact Information: