Blog Posts Tagged With Transition Issues

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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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House Ways and Means Committee Report on the Tax Cuts and Jobs Act

The House Ways and Means Committee’s official Report on H.R. 1, the Tax Cuts and Jobs Act, the tax reform bill that passed the House, includes additional explanations of the bill that were not previously included in the Committee’s initial section-by-section summary (or additional summary) or the Joint Committee on Taxation’s description of the bill.  The Committee Report also addresses certain technical issues with the bill.

Deemed repatriation inclusion mechanics.  For example, the Committee Report acknowledges that the bill’s mandatory deemed repatriation provisions requiring U.S. shareholders to include their pro rata share of their specified foreign corporation’s earnings and profits could be interpreted to require multiple inclusions with respect to the same earnings and profits in certain cases. 
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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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More on the Senate Mark’s Deemed Repatriation

Like its House bill, the Senate Mark released Thursday provides for a one-time transition tax on untaxed accumulated earnings and profits (“E&P”) of certain non-U.S. corporations. The proposal splits E&P between cash and non-cash amounts with cash taxed at a 10% effective rate and non-cash taxed at a 5% effective rate. The highlights:

Basic Framework.  Under the proposal, 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 9, 2017 or some undefined other appropriate measurement date (whichever produces more E&P). Non-U.S.
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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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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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DBCFT Still Not Dead (to Brady)

At a WSJ conference yesterday, House Ways and Means Committee Chairman Kevin Brady (R-TX) gave a few tantalizing hints as to the content of the much anticipated house tax reform bill. Most notably, Brady suggested that the bill would include a DBCFT that is phased in over a five-year transition period. This is intended to respond to a number of concerns, including the fear that currencies may not adjust immediately (click here for the Tax Foundation’s summary of the concerns alleviated by, and new concerns raised by, a five-year transition).

Brady also reaffirmed that certain industries (financial services, communications, insurance and digitally-focused businesses) would be subject to “special treatment” under the 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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Drafting “Tax Calls” In Anticipation of Tax Reform

Elimination (in whole or in part) of the deduction for net interest expense is a common element of recent tax reform proposals.  Many observers predict that, if we do get corporate tax reform, this feature will be part of the package in one form or another.  As a result, debt issuers and bankers have been considering the pros and cons of including a “tax call” in newly-issued debt, in the form of a right on the part of the issuer to redeem the debt at par plus accrued interest if the law changes such that the issuer cannot claim a deduction for interest paid on the debt.
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Transition Issues For a Move to the Destination Based Cash-Flow Tax

Two weeks ago, we previewed the destination based cash-flow tax (or DBCFT), the centerpiece of the House Republicans’ Blueprint for tax reform. In this post, we focus on one aspect of that proposal—the immediate deduction for capital expenditures—and how transition to immediate expensing might be implemented.

Policy choices for transition rules must take into account short-term and long-term effects on businesses, revenue effects and political considerations. Pro-growth rationales for tax reform tend not to favor prolonged phasing-in of expensing, but generous transition rules for the “losers” in tax reform may need to be offset, to some extent, by the phasing-in of expensing to achieve revenue neutrality.
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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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