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”). Continue Reading
The Legislative Calendar: Six Months In. With yesterday’s late night last ditch failed effort by the Senate to pass a so-called “skinny” repeal of the Affordable Care Act, the Republican controlled chamber has nearly run the clock on its strategy for passing major legislation by majority vote, which relied on reconciliation instructions under the FY 2017 budget resolution (a process we highlighted back in December). Congress will soon need to adopt budget resolutions for the 2018 fiscal year if regular order is to be readopted and any progress is to be made on the President’s budget proposals (which are traditionally only a starting point for negotiations). Continue Reading
Thursday morning the Senate publicly released a discussion draft of its version of a healthcare bill to repeal the Affordable Care Act. The tax provisions in the bill are materially the same as those in the bill the House passed in May (which we covered here and here), the differences mainly relate to effective dates for the various provisions, which generally vary by only a year (we expect these effective dates to be the subject of negotiation between the House and Senate, especially depending on the CBO’s analysis of this Senate draft).
Notably, the Senate draft retains the House bill’s retroactive repeal (effective for taxable years starting after December 31, 2016) of the 3.8% tax on certain net investment income under Section 1411 of the Code. Continue Reading
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. Continue Reading
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. Continue Reading
Last month, Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) re-introduced bipartisan legislation intended to force government agencies to specify which payments made pursuant to out-of-court settlement agreements will be nondeductible under a newly expanded Section 162(f). Under the proposed new Section 162(f), amounts constituting restitution or paid to come into compliance with law (which generally are deductible under current law) would be deductible only if identified as such in the court order or settlement agreement. Amounts paid or incurred as reimbursement to the government for the costs of any investigation or litigation in relation to the violation or potential violation of law would not be deductible. Continue Reading
As noted in yesterday’s summary, the basic outline of the Trump Administration’s tax plan is largely similar to the Trump campaign proposals, with fewer details and with one notable shift toward the House Blueprint’s approach – the move toward territoriality. The table below shows how this latest plan compares to the House Blueprint and the Trump 2016 campaign plan.
In the press conference to announce the “broad-strokes” plan, both Treasury Secretary Mnuchin and National Economic Council Director Cohn said that they were in agreement with members of Congress over the four driving goals of tax reform – grow the economy and create millions of jobs, simplify the tax code, provide tax relief to American families, especially middle-income families and lower the business tax rate from one of the highest in the world to one of the lowest. Continue Reading
Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn announced the Trump Administration’s tax plan in “broad-strokes” at a White House press conference this afternoon. The proposal is in line with what we predicted earlier today, with a handful of changes and a bit of additional detail. A more detailed comparison between what was announced, Trump’s campaign proposals and the House Blueprint will follow. For now, here is a brief summary of what we heard:
- Corporate tax rate reduced to 15%
- Pass-through business income also taxed at 15% (with rules to prevent individuals from flowing personal income through pass-throughs to secure the lower rate)
- Repeal the corporate AMT?
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?
While House Republicans could use the budget reconciliation process to pass tax reform without the need for Democratic support, leaders in the Senate have indicated a desire for bipartisan reform. White House press secretary Sean Spicer’s statement earlier this week on the tax reform process also suggests that input from the Democrats may be relevant.
With that in mind, we thought it would be useful to highlight a bill introduced in the Senate by Senators Bernie Sanders (I-VT) and Brian Schatz (D-HI) – the “Corporate Tax Dodging Prevention Act of 2017.” A companion bill was introduced in the House of Representatives by Representative Jan Schakowsky (D-IL). Continue Reading
On March 8th we published two blog posts detailing pending legislative changes. The first, Details on the House Health Care Bill’s Numerous Tax Changes, summarized the tax changes contemplated by the House Republican’s bill (the American Health Care Act, or AHCA) to repeal and replace the Affordable Care Act. The second, Proposed Expansion of New York State Real Estate Transfer Tax, described legislation introduced in the New York State Legislature that would amend the existing New York State Real Estate Transfer Tax (“NY State RETT”) to tax transfers of minority interests in certain entities holding real estate located in New York. Continue Reading
On Monday night the House of Representatives unveiled legislation to repeal and replace the Patient Protection and Affordable Care Act (the “ACA”), which would reduce numerous federal taxes by eliminating almost all of the tax increases that were introduced as part of the ACA. A copy of the bill is available here. According to analysis released yesterday by Congress’ Joint Committee on Taxation, the bill, titled the American Health Care Act (“AHCA”), is expected to reduce taxes by approximately $600 billion over ten years. Although the bill leaves untouched the economic substance doctrine that was codified with the ACA, the bill notably provides significant taxpayer relief by:
- Repealing the 3.8% tax on certain net investment income under Section 1411 for taxable years starting after December 31, 2017
- Repealing the 0.9% Medicare surtax under Sections 3101 and 1401 on wages above certain thresholds starting after December 31, 2017
- Reducing to zero the penalty/tax on employers that do not offer qualifying health insurance, effective starting in 2016
- Reducing to zero the penalty/tax on individuals who do not purchase qualifying health insurance, effective starting in 2016
- Repealing the annual fees imposed on health insurance providers and certain manufacturers and importers of branded prescription drugs, effective starting in 2018
- Delaying from 2020 to 2025 the imposition of an excise tax on certain high-value health insurance plans (commonly referred to as “Cadillac plans”)
- Generally lowering the threshold for deductibility of medical expenses for taxable years starting after December 31, 2017 and extending through 2017 the lower threshold under current law for taxpayers aged 65 or older
- Repealing the tax on medical devices under Section 4191 for sales after December 31, 2017
- Repealing the limitation on salary reduction contributions for health flexible spending arrangements under Section 125(i) for taxable years beginning after December 31, 2017
- Increasing the maximum contributions to Health Savings Accounts (“HSAs”) under Section 223 and lowering the applicable tax on distributions from HSAs includible in income for taxable years beginning after December 31, 2017
- Expanding the definition of qualified medical expenses to include non-prescription over-the-counter medicine for purposes of HSAs, Archer MSAs under Section 220, and Health Flexible Spending Arrangements and Health Reimbursement Arrangements under Sections 105 and 106 for taxable years beginning after December 31, 2017
- Repealing the sales tax on indoor tanning services under Section 5000B starting in 2018
- Eliminating the limitation on deductibility of remuneration for services paid by health insurance providers under Section 162(m) for taxable years beginning after December 31, 2017
Unlike prior versions of the bill leaked to the press in recent weeks, the AHCA does not include a cap on the exclusion from income for employer-provided health insurance under current law. Continue Reading
On TaxVox, Howard Gleckman of the Tax Policy Center highlights five challenges the House GOP will face in implementing a destination-based cash flow tax (DBCFT). In particular, lawmakers will have to decide what exemptions to offer, figure out how to distinguish imports from exports, think through exchange rate impacts and transition rules, and deal with ramifications of the DBCFT for international tax agreements. Continue Reading
Last week, at a U.S. Chamber of Commerce event, Senate Finance Committee chairman Orrin Hatch (R-UT) signaled that the Senate would take its own path to tax reform, saying “a major concern on tax reform is producing a bill that can get through the Senate, and that is likely going to require a separate Senate tax reform process, which will almost surely end up looking different from what passes in the House.”
With only a 52-vote Republican majority, Hatch will need to craft bipartisan legislation or (if the filibuster-proof budget reconciliation process is used) wrangle support from all but two of his Republican colleagues in the Senate to pass a tax reform bill. Continue Reading
The Trump administration and House Republicans have each proposed tax law changes that, if enacted, would significantly impact private equity, both directly and (potentially more significantly) through the businesses in which private equity funds invest. The consequences of the proposed changes vary by industry and therefore the proposals may have an uneven impact across the private equity sector. We highlight a few of the major proposed changes below.
Lower Tax Rates. The House and Trump plans would cut corporate tax rates to 20% and 15%, respectively.
Treatment of Pass-Through Entities (Including, Potentially, Private Equity Management Companies). The House plan would tax the “active business income” of pass-through entities at a maximum rate of 25%. Continue Reading
The chairman of the Council of Economic Advisors under President George W. Bush has weighed in on the destination-based cash-flow tax (DBCFT) at the heart of House Republicans’ tax reform plan. Greg Mankiw wrote on his blog yesterday that the DBCFT is “in effect” a retail sales tax on consumer goods and services that would replace the corporate income tax and finance a reduction to the payroll tax. Mankiw favors the DBCFT. Continue Reading
As House Republicans and President Trump debate the merits of a destination-based cash flow tax (DBCFT), Treasury’s Office of Tax Analysis released a working paper that attempts to unpack the consequences of the tax by running a simulation. The paper, by Elena Patel and John McClelland, applies a hypothetical DBCFT to a sample of corporations for the period 2004 to 2013. Continue Reading
One of the key features of the destination-based cash-flow tax proposed by House Republicans is the immediate deductibility of capital expenditures. The conventional wisdom is that immediate deductibility would reduce the after-tax cost of investing in business assets and thus would encourage additional investment relative to the current system of depreciation/amortization over a fixed period. Professor Lily Batchelder challenges this perspective in a post on the Tax Policy Center blog. Continue Reading
This morning, the American Action Forum released four primers on how a destination-based cash flow tax (DBCFT) would work in practice – one that sets forth an example of how a DBCFT would affect importers, one on the effect on exporters, a third on how a DBCFT would remove incentives for U.S. firms to move manufacturing and production overseas for sales back to the U.S., and a fourth that discusses how a DBCFT would diminish the use of transfer pricing by U.S.-based multinationals to shift income to low-tax jurisdictions.
The European Commission contracted a study on cash flow taxes (CFT) that culminated in a 250+ page Final Report published in May of 2015. Here are five things we learned from the report:
- Some countries ignore simplification as a goal and apply CFT systems in parallel with corporate income tax systems. Many countries have adopted “mixed systems” that include CFT elements, or sector-specific CFTs.
- No country has adopted a destination-based CFT, despite its theoretical appeal.
- Existing CFT systems do not show evidence of having been based on the CFT models discussed in the academic literature, but they do seem to have the desired effects of encouraging investment and eliminating the tax incentive to finance with debt rather than equity.
The destination-based cash-flow tax (or DBCFT) at the heart of House Republicans’ “Blueprint” for tax reform has already attracted high-level attention, pro and con. Proponents and detractors are aligned, however, in one respect: the DBCFT would be a radical departure from the current corporate tax system. In this post, we provide an introduction to the key distinctions by describing what a DBCFT is in broad terms. At base, a DBCFT contains two related but distinct changes to the current U.S. corporate tax: the change to a “cash-flow” tax and the change to a “destination-based” tax.
Cash-Flow Tax. Continue Reading
The IRS recently issued guidance applying the accumulated earnings tax, a rarely imposed penalty that could take on increased importance if the tax rates proposed by the Republican “Blueprint” for tax reform are enacted.
The accumulated earnings tax is a 20% surcharge on the taxable income of a corporation formed or availed of for the purpose of avoiding shareholder taxes by permitting corporate earnings to accumulate rather than being distributed. As discussed below, the significance of the accumulated earnings tax was diminished in the 1980s when individual tax rates were lowered so as to align more closely with corporate rates, reducing the incentive to defer taxation at individual rates. Continue Reading
Tax reform will be one of the top priorities for the 115th Congress. Hopes for pursuing tax reform to a successful conclusion are high, given one-party control of the government (and exuberant campaign promises). Following the 2016 election, Davis Polk laid out the background and context in which tax reform measures will be considered, with links to summaries of the leading proposals and details on the politics of tax reform. Although life in Washington has moved forward since this memo was published, the key points and players remain the same. Read on for things to watch.