Blog Posts Tagged With International Tax

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Comparison of the Final House and Senate Bills

While the last-minute changes made to the Senate Bill brought the House and Senate Bills closer together, a number of important differences remain.  The House and Senate will attempt to hammer out these differences over the next few weeks in conference committee. In the meantime, we have prepared a comparison of the more salient provisions of the two bills.

You can view the full text of the bills on our House Bill Navigator and Senate Bill Navigator. We also ran a comparison of the final Senate Bill against the initial legislative text, which is available here.
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Chairman Hatch’s Modifications at a Glance

Last night the Joint Committee on Taxation released a description of Senate Finance Committee Chairman Hatch’s proposed Modifications to the Senate Mark of the Tax Cuts and Jobs Act.  Reports in anticipation of the Chairman’s Modifications had described them as intended to reduce the deficit increases otherwise expected under the initial Senate Mark.  The JCT also released an updated score last night that reflects the impact of the Chairman’s Modification. In addition to modifying the tax brackets applicable to individuals, increasing the child tax credit, and repealing the individual mandate to obtain health insurance under the Affordable Care Act, the Modification make several noteworthy revisions to the original Chairman’s Mark.
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Senate Tax Proposal Establishes Base Erosion Tax

The Senate Finance Committee Chairman’s Mark (Senate Mark) released last Thursday includes a provision that would impose a so-called “base erosion tax” on deductible payments made by certain corporations to their non-U.S. affiliates in taxable years beginning after December 31, 2017.  We previously discussed a similar proposal in the House that would impose a 20% excise tax on certain payments made by U.S. corporations to their non-U.S. corporate affiliates here.

Base Erosion Tax.  The Senate Mark’s base erosion tax would apply to U.S. and non-U.S. corporations (other than regulated investment companies, real estate investment trusts and S corporations) with average annual gross receipts of at least $500 million for the prior three-year period that have a “base erosion percentage” of 4% or higher for the taxable year. 
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Comparing the House and Senate Tax Proposals Affecting Private Equity

The House and Senate versions of the Tax Cuts and Jobs Act would each have a significant impact on private equity firms, investors and portfolio companies.

We have prepared a presentation that summarizes many of the relevant provisions as they currently stand in each version and highlights their differing impact on private equity. This follows our post from last week highlighting the provisions in the House tax bill affecting private equity.
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More on the Senate Mark’s Real Estate-Related Proposals

The text of the Senate Finance Committee’s proposed tax reform bill has not yet been released, but the Senate Finance Committee Chairman’s Mark released in summary form (“Senate Mark”) suggests that it will differ from the House bill as reported to the House floor on November 9 in several material respects. Below, we highlight several of the proposals mentioned in the Joint Committee’s summary that are of interest to the real estate industry.

17.4% Deduction for Certain Pass-Through Income (including REIT dividends).  Subject to the wage limitation mentioned below, the Senate Mark generally allows an individual to deduct 17.4% of its “domestic qualified business income” from a partnership, S corporation, or sole proprietorship.
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Senate Tax Proposal Establishes “GILTI” Patent Box

The  Senate Finance Committee Chairman’s Mark (Senate Mark) released last Thursday includes a provision that effectively imposes a foreign minimum tax on 10% U.S. shareholders of controlled foreign corporations (CFCs) to the extent the CFCs are treated as having  “global intangible low-taxed income” (GILTI). Under a related provision, corporate U.S. shareholders generally would be entitled to a deduction equal to 37.5% of any GILTI plus other foreign-derived intangible income, as described further below. Combined, these provisions amount to a 12.5% “patent box” that would impose current taxation on net income of a CFC that generally exceeds a routine rate of return on the CFC’s tangible depreciable business assets.
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Senate Mark at a Glance

The Senate Finance Committee Chairman’s Mark (Senate Mark) released last night diverges sharply in many respects from the House Bill.  Although in summary form, the Senate Mark describes a comprehensive tax reform proposal that will take some time to analyze. In the meantime, the table below summarizes key features of the Senate Mark, together with a comparison to the final House Bill.

We have also released an initial version of our Senate Bill Navigator, a hyperlinked version of the Senate Mark built to ease your navigation of its text, which you can find here.

Corporates.  As expected, the Senate Mark calls for a permanent reduction in the corporate tax rate to 20%, with implementation delayed until 2019.
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Brady’s Second Amendment at a Glance

Chairman Brady released another manager’s amendment to the House Bill this afternoon. This amendment was promptly approved by the House Ways and Means Committee 24-16 and included in the House Bill reported to the floor.

We have incorporated this amendment into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here. Click here for a comparison that shows the entirety of the bill’s text. Both comparisons are against the bill as amended on November 6th. We will follow up in the morning with an updated Tax Bill Navigator, reflecting the final bill as reported to the House floor.
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The House Tax Bill Provisions Affecting Private Equity

The House tax bill contains several provisions that could significantly affect private equity sponsors, investors and portfolio companies. Below we have highlighted a number of these proposals, including discussions of:

Carried Interest. The House bill generally would limit the favorable taxation of carried interest to investments that have a holding period of more than three years, and treat carried interest attributable to gains on investments held for three years or less as short-term capital gain (taxed at the rates applicable to ordinary income).
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Amendments to the House Bill’s Excise Tax

Chairman Brady’s amendment to the Chairman’s mark modifies in three ways the application of the 20% excise tax on certain payments to foreign affiliates.

Exclusion of Payments to Acquire Securities or Commodities.  First, amounts paid to acquire any security or commodity, each as defined in Section 475, are not subject to the excise tax. In the Chairman’s mark and the original draft bill, amounts paid to acquire securities were included in the definition of “specified amount,” and amounts paid to acquire only certain commodities were excluded.

Calculation of Permitted Deductions.  Second, the amendment changes how to calculate permitted deductions in respect of deemed expenses.
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More on Section 163(n): Additional Limitations on Interest Deductions

The House tax bill would add a new Section 163(n) which limits interest deductions of a domestic corporation (or a U.S. affiliated group that files a consolidated return) that is a member of an “international financial reporting group” (“IFRG”).

  • An IFRG is defined as a group which includes (i) (x) at least one foreign corporation engaged in a U.S. trade or business or (y) at least one domestic corporation and at least one foreign corporation, (ii) prepares consolidated financial statements and (iii) reports gross receipts annually over the past 3 years of at least $100 million.

The Limitation.  In essence, a domestic corporation that is a member of an IFRG would be permitted to deduct interest expense only up to an amount equal to the member’s interest income plus 110% of its allocable share of IFRG net interest expense, which is its pro rata share of the net interest expense of the IFRG allocated based on EBITDA generated by each member.
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Brady’s Amendment at a Glance

Last night Chairman Brady released the first set of amendments to the Chairman’s Mark released last Friday. We have incorporated these amendments into the text of the Chairman’s Mark and have generated a PDF comparison showing the revised sections, which you can find here.  Click here for a comparison that shows the entirety of the bill’s text.

In addition to modifying the earned income tax credit, the Chairman’s amendment limits the favorable taxation of “carried interest,” so that long-term capital gains rates will apply only to gains from investments that have been held for more than 3 years. To address concerns around the House bill’s treatment of deferred compensation in the context of start-ups, the amendment also adds a provision that would defer the recognition of income on the exercise of compensatory options or the settlement of restricted stock units issued to certain employees of private companies for up to five years (in limited circumstances).
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More on the House Bill’s Excise Tax

The House tax bill released last week includes two measures that limit the ability of multinational groups to reduce their U.S. taxes. First, the bill would provide for a foreign minimum tax in the form of a high-profit foreign subsidiaries tax. We discussed that change in detail here.

Second, the bill would impose a 20% excise tax on certain payments made by a U.S. corporation to its non-U.S. corporate affiliates. That change is the subject of this post.

The excise tax is designed to eliminate the tax benefit of the deduction for a broad category of payments by a U.S.
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Weekly Roundup: Key Posts and What’s on Deck This Week

Last week was a busy week at Tax Reform And Transition. House Republicans released text of a tax reform bill on Thursday (view the full bill through our Tax Bill Navigator), followed by an official Chairman’s Mark on Friday. Late Friday night, the Joint Committee on Taxation released an official summary of the Chairman’s Mark, together with their assessment of the revenue effects and distributional effects of the Chairman’s Mark.

You can read our grid summarizing the key provisions of the bill here. Here’s a round up of the tax reform topics covered in our more detailed posts so far:


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House Tax Bill Establishes 10% Minimum Tax on High-Profit Foreign Subsidiaries

Anti-base erosion measures in the draft tax reform bill released last Thursday include a provision that effectively imposes a foreign minimum tax on 10% U.S. shareholders of controlled foreign corporations (“CFCs”) to the extent the CFCs are treated as having earned high net income. The minimum tax would be at a 10% rate for U.S. corporations. Because the determination of a “high return” is based on a percentage of the CFC’s tax basis in tangible assets, foreign subsidiaries that have fully depreciated tangible property or intangible property may have “high returns” with only modest profits. The stated purpose of this provision is to eliminate the incentive to shift profits from the U.S.
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More on the House Tax Bill’s Deemed Repatriation

As widely expected, the tax reform bill released today by House Republicans provides for a one-time transition tax on untaxed accumulated earnings and profits (“E&P”) of certain non-U.S. corporations. Under the “Tax Cuts and Jobs Act,” E&P would be split between cash or cash equivalents and non-cash amounts, with cash and cash equivalents taxed at 12% and non-cash amounts taxed at 5%. The highlights:

Basic Framework.  Under the bill, 10% U.S. shareholders of a non-U.S. corporation generally will include in income their pro rata share of the foreign corporation’s previously untaxed accumulated E&P, determined as of November 2, 2017 or December 31, 2017 (whichever produces more E&P).
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The House Tax Bill at a Glance

The draft legislative text released today comes in at over 400 pages, and will take some time to analyze.  In the meantime, the table below summarizes key features of the bill.  In addition, a section-by-section summary prepared by the House Ways and Means Committee is available here.  We have also released an updated version of our Tax Bill Navigator, a hyperlinked version of the bill built to ease your navigation of its text, which you can find here.

As expected, the bill calls for an immediate and permanent reduction in the corporate tax rate to 20%.  The bill significantly limits the deductibility of interest expense for certain businesses, introducing a cap equal to 30% of earnings before taxes, depreciation and amortization, and limits other deductions but provides for immediate expensing of depreciable assets on a temporary basis.  
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Senate Finance Explores International Tax Reform

In the first hearing on tax reform since the “Big Six” released their framework last week, the Senate Finance Committee focused on international tax reform. The academics invited to testify criticized the framework proposal, which combines elements of a territorial system and a minimum tax, and took the opportunity to advocate their own proposals for international tax reform. While Chairman Hatch (R-UT) expressed support for a move to a territorial regime, Ranking Member Wyden (D-OR) characterized the framework as a “corporate wish list.”

Professor Itai Grinberg voiced a full-throated defense of a territorial system, arguing that the current U.S.
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Foreign Minimum Tax: A Primer

Although light on details, the recent statement on tax reform from the “Big 6” group of Republican Congressional and White House policymakers provided two important hints on the direction that tax reform may be heading. First, the Big 6 remain dedicated to imposing a “system that encourages American companies to bring back jobs and profits trapped overseas.” Whether this means true international tax reform or merely lower tax rates at home is up for debate. However, if international tax reform remains a goal, the joint statement made clear that it will not be accomplished by way of a destination-based cash flow tax (a “DBCFT”).
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An Update on the DBCFT: A Hearing in the House and Trump’s Budget

In advance of yesterday’s House Ways and Means Committee hearing on tax reform, the Joint Committee on Taxation released its own comprehensive report on destination-based taxation and border adjustments. The report gives an overview of the current state of U.S. international taxation and then delves into the economics of border adjustments, including a summary of the academic literature on associated exchange rate (or other wage or price) adjustments such that exporters would not be advantaged and importers would not be disadvantaged (defined as “trade neutrality,” which we’ve previously explored here and here). Although the JCT ultimately does not take a view on whether the proposed destination-based cash flow tax would achieve this “trade neutrality,” the report does suggest that any currency adjustments would not happen quickly or, perhaps, evenly among importers and exporters, citing empirical studies that conclude that changes in consumer prices affected by exchange rate adjustments happen asymmetrically.
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Back to Basics: Camp Plan Revisited

As the Trump administration and House and Senate leaders huddle to find a path to permanent tax reform, the detailed draft legislation released in 2014 by former Rep. Dave Camp will be among the ideas considered.

Relative to the Blueprint, the Camp proposal takes a traditional approach to tax reform, with a focus on broadening the tax base to achieve lower tax rates.  We will consider various elements of the Camp plan and begin today with a recap of certain of its international components.

Territoriality.  In a significant move toward a territorial system, U.S. corporations that receive dividends from 10%-owned non-U.S.
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President Trump To Announce Tax Reform Principles

The Trump Administration is expected to announce its tax reform plan during a 1:30 PM press conference at the White House today. The Administration is boasting that the tax plan will be “the biggest tax cut and the largest tax reform in the history of our country.” We will be covering the press conference, so stay tuned for our summary and analysis of what is proposed. In the meantime, here are our predictions for what we may see:

  • Corporate tax rate reduced to 15%
  • Pass-through business income also taxed at 15%
  • Repeal the corporate AMT
  • Deemed repatriation of accumulated offshore earnings taxed at 10%
  • No destination-based cash flow tax
  • Shift toward territoriality?

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Tax Reform and Revenue Raisers

One of the biggest challenges facing lawmakers in the current tax reform process is finding a way to reduce headline tax rates in a revenue neutral way. Some revenue raisers (like eliminating itemized deductions) would raise significant revenue and simplify the tax code. Other revenue raisers come at the cost of increased complexity, at least in the short term (e.g., implementing a federal VAT or a new carbon tax). Closer inspection of ideas on the table reveals that politically popular reforms are not necessarily the largest revenue raisers. For example, there seems to be bipartisan support for taxing carried interest as ordinary income (more on that here), a relatively small revenue raiser.
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A Future for FATCA?

Certain aspects of the Foreign Account Tax Compliance Act (“FATCA”), the revenue-raising portion of the 2010 stimulus bill known as the HIRE Act, have been a continuing source of controversy since its inception. A spate of recent criticism and introduced legislation raises the question whether FATCA will survive if any tax reform proposals are enacted. For example, on April 5, Senator Rand Paul (R-KY) and Representative Mark Meadows (R-NC 11th) sent an open letter to the Treasury Secretary and the Director of OMB outlining administrative steps that the Trump administration could take to halt, or at least severely slow, the enforcement of the law.
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