Blog Posts Tagged With Territoriality

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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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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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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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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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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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The Big Six Framework “Arrives”

The Big Six tax reform framework has arrived, sort of. The Big Six officially released “The Unified Framework for Fixing our Broken Tax Code” this morning, in a format (and in many ways content) that resembles the House Republican blueprint from 2016. Although more detailed than the proposal put forward by the Trump administration in April, the Framework leaves a number of key decisions up to the House and Senate tax writing committees. Without further ado, here is a summary of what the Framework contains:

A few initial observations:

Not a Lot of Detail.  While the framework sets forth a rough outline of a tax reform bill, the level of detail contained in the framework and the number of instances where the framework specifically leaves discretion to the tax writing committees indicates that the plan is very fluid at this stage.
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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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(Re)Setting the Stage for Comprehensive Tax Reform: Big Six Send First Signals

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).
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Prospects for Tax Reform in 2017?

House Speaker Paul Ryan (R-WI) addressed the National Association of Manufacturers on Tuesday in an effort to build support for tax reform, emphasizing the unique, and diminishing, window of opportunity that exists to enact permanent tax reform ahead of next year’s primaries and midterm elections. According to his press office, this speech marks the beginning of his “sales pitch” for tax reform in 2017. Speaker Ryan’s prepared remarks are available here. You can also watch his speech here (starting at 1:41:34).

Here are the key takeaways:

  • Republicans Are Aiming for End of 2017:  Speaker Ryan said that lawmakers would “begin to turn” their plan into legislation to put in front of Congress, and promised to “get this done in 2017.” We have heard this line before, both from Speaker Ryan and from Treasury Secretary Steve Mnuchin during the press conference unveiling Trump’s tax principles.

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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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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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Sanders/Schatz Tax Reform Bill: A Recent Data Point from the Democrats

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).
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Who’s Afraid of the WTO?

One concern voiced about the destination-based cash flow tax (DBCFT) is that the border-adjustment feature may not be compatible with World Trade Organization (WTO) rules. Although much of the current discourse on the topic is muddled, the border adjustment feature of the DBCFT proposal is not intended to be trade policy (and, as we have discussed before, many economists believe that it should have no impact on trade). Instead, it is intended to be tax policy – i.e., a means to achieve territoriality within a cash flow tax-based system, taxing only cash flows associated with consumption in the United States.

It is on this basis that House Speaker Paul Ryan and House Ways and Means Committee Chairman Kevin Brady (R-TX) have repeatedly defended the proposition that the DBCFT is a consumption tax that meets WTO standards.
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What does “Territoriality” really mean?

“Territoriality” is one of the key buzz words in this year’s tax reform lingo, with many proposals urging a shift away from our current “worldwide” system of income taxation for business income. This post expands on what features a “territorial” system might include.

The Basics.  A worldwide system of income taxation taxes residents of the taxing jurisdiction on all of their income, both foreign and domestic (usually with a credit for foreign taxes paid). A territorial system, on the other hand, theoretically taxes only income earned in the taxing jurisdiction. In practice, however, the lines between a territorial and worldwide system are rarely, if ever, this clear.
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Setting the Stage for Comprehensive Tax Reform

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.

Setting the Stage for Comprehensive Tax Reform, December 2, 2016

 
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