12 February 2016 EY Center for Tax Policy: This Week in Tax Reform for February 12 Brady at TCPI: House Ways and Means Committee Chairman Kevin Brady (R-TX) February 12 laid out principles for the Committee's tax reform efforts, including creating a tax code that is built for economic growth and doesn't simply "place America back in the middle of the pack." To that end, Brady called for budget scoring that recognizes the growth aspects of tax reform (i.e., dynamic or macroeconomic scoring) and suggested he will not sacrifice growth prospects for the sake of a strict adherence to revenue neutrality. "I won't leave economic growth on the table because of disagreements over a dime or two," he said. Delivering the keynote address at the Tax Council Policy Institute's 17th Annual Tax Policy & Practice Symposium, Chairman Brady continued to describe a two-pronged effort this year to produce a House Republican "blueprint that details our consensus vision for comprehensive pro-growth tax reform," and immediate drafting of international tax reform as a down payment on comprehensive report that could be enacted as soon as 2017. With regard to what a reformed tax code should look like, Chairman Brady said, "President Reagan had the right approach: broaden the base and lower the rates." He mentioned global pressures that heighten the urgency for international tax reform, such as the OECD BEPS project, that were a focus of the Committee's hearing on the Budget this week. Chairman Brady said he was encouraged by Treasury Secretary Jack Lew's comments during the hearing about wanting to work with Republicans on business tax reform this year. President's FY 2017 Budget: The President's FY 2017 Budget released February 9 is similar to last year's version, including an international tax plan calling for a 19% minimum tax on the foreign earnings of US-based multinational corporations. A 14% one-time tax on previously untaxed foreign income is still proposed to provide revenue ($176 billion/10 years) for infrastructure investment but (in light of the highway bill's enactment in 2015) in a new package that also calls for a new oil fee. The 21st Century Clean Transportation Plan "continues the President's call to utilize one-time revenues from business tax reform to provide a temporary near-term surge in investment to set us on the right path for the years ahead," while the new oil fee "raises the funding to make the new investments we need while also providing for the long-term solvency of the Highway Trust Fund to ensure we maintain the infrastructure we have." The Budget continues to group some items as "elements of business tax reform" — previously called a "reserve for business tax reform that is revenue neutral in the long run" — including a package of international tax reform proposals that are essentially the same as last year's. The active financing exception under Subpart F was made permanent under the 2015 year-end legislation and therefore not included, but the Budget does make permanent the CFC look-through rule that was only extended for five years as part of the tax extenders bill. One significant change: the 19% minimum tax proposal is estimated to raise $350 billion/10 years, considerably more than the $206 billion estimated last year. Treasury attributed the increase to another year's worth of earnings retained abroad and larger amounts of income shifting. Among the handful of new provisions is a proposal, outside of business tax reform, to expand the reach of the 3.8% net investment income tax to additional pass-through business income of high-income taxpayers. An EY Alert on the international tax provisions has details. Lew hearings in Congress: During appearances before congressional tax writing committees to discuss the FY 2017 Budget this week, Treasury Secretary Lew told both Democratic and Republican members who are interested in acting on business and international tax reform that the Administration is prepared to work with them to reach bipartisan agreement on the issue this year. If such an agreement cannot be reached, Lew told both panels, separate legislation should be undertaken this year to prevent inversions, which is an approach that is generally supported by Democrats but opposed by Republicans. Appearing before the Senate Finance Committee on Wednesday, February 10, Secretary Lew said the Administration continues to believe tax reform transition revenue from the one-time 14% tax should be dedicated to a one-time expenditure like infrastructure investment because it cannot be used to cut rates without creating a system that loses revenue in the long run. "If we're going to ever get a business tax reform bill that has real bipartisan support, it has to include the infrastructure investment," he said. Lew was responding to Senator Chuck Schumer (D-NY), who said that without the infrastructure tie-in "it's going to be hard to pass something." Schumer said Speaker Paul Ryan (R-WI) understood that in negotiations last year, and "I just hope that people on the other side won't pull away from that because it will make it much harder to pass." Both Ways and Means Committee Chairman Brady and Senate Majority Leader Mitch McConnell (R-KY) want revenue from tax reform to be used solely for rate reduction. Schumer also said the steep increase in the revenue from the 19% minimum tax proposal should be a "warning signal or shot across the bow" to policymakers. At the Ways and Means Committee on Thursday, February 11, Chairman Brady said he worries the United States is becoming more and more isolated in its tax policies, but senses that Chairman Lew is committed to working with lawmakers to change that. Tax Policy Subcommittee Chairman Charles Boustany (R-LA) noted the urgency of international tax reform given problems with the OECD BEPS project, state aid investigations, a hostile tax environment, and mergers, acquisitions, and inversions. "It's time for action," he said. Boustany called for international tax policy that frees up capital and brings it back to the United States; lowers the corporate tax rate; moves to a dividend exemption system; tries to deal with base erosion in a fair way; and looks at some sort of patent/innovation box. Lew called for lowering rates, closing loopholes, using one-time revenue to pay for infrastructure investment, and closing down inversions, but admitted that there are some ideas he has problems with. "We are not going to pretend that we love the patent box idea," he said. Ryan unsure of Administration: During his regular news conference February 11, Speaker Ryan said Chairman Brady is moving forward on international tax changes with Senator Schumer and others, in part because "inversions are happening by the day." Speaker Ryan noted, however, that with the long-term highway bill having been passed last year, "that opportunity is gone." He said he would like to think "people would want to fix these international tax law problems for the sake of fixing these international tax law problems," and no other reason is necessary. "But having said that, I just don't know if the Administration will be there at the end of the day," he said. Lew state aid letter: In a February 11 letter to the President of the European Commission, Treasury Secretary Lew expressed concern that the Commission's use of a "sweeping interpretation" of the EU legal doctrine of state aid, in investigations of tax rulings granted to US companies, creates "disturbing" international tax policy precedents and should be reconsidered. The letter listed concerns similar to those expressed by Treasury Deputy Assistant Secretary for International Tax Affairs Robert Stack during December 1 hearings in Congress, that state aid investigations are disproportionately targeting US companies for income that Member States have no right to tax under well-established international tax standards, in an approach that could undermine US tax treaties with EU Member States. During the February 11 hearing, Chairman Brady commented, "I appreciate the letter that you sent, because what the EU is doing is going beyond simply addressing the income shifting, it is a money grab targeted on US companies in a variety of ways, not just to generate revenue but to make it more uncompetitive for US companies to compete around the world." "Our work on international tax reform will be an integral part of our work on comprehensive tax reform. Our work here will be a down payment that clears the way to focus on the work on lowering rates and simplifying the code for all businesses and individuals, so that we are ready to enact comprehensive tax reform in 2017. We will send a clear signal to American companies and shareholders that help is on the way — that we won't stand idly by while our tax code drives them overseas or makes them a target for a foreign takeover." — House Ways and Means Committee Chairman Kevin Brady (R-TX), February 12
Document ID: 2016-0317 | |||
