This week (March 14-18)

Congress: The House and Senate are in session.

Last week (March 7-11)

Lew on tax reform, inversions: Treasury Secretary Jack Lew March 8 continued to push for legislation to "shut the door to inversions," and said the "right answer" would be to do business tax reform. "Now in our tax reform proposal, we do a lot of things that I think are important to make our tax code more competitive and to help stimulate investment in the United States, but you could pull out the inversion provisions and you could legislate an anti-inversion bill and stop these inversions," Secretary Lew told the Senate Appropriations Subcommittee on Financial Services and General Government during a hearing on the FY 2017 Treasury budget request. In response to questioning from Senator Dick Durbin (D-IL), Lew said the Administration's two notices on the issue have slowed inversions and, "We're still looking at an additional action, Senator, and it will help, but I don't want to mislead. It will help, but it won't shut the door completely." Durbin asked about "the $2 trillion in profits" he suggested is held by US companies overseas to avoid paying US taxes. Secretary Lew said the Administration's tax reform proposal would subject some foreign earnings of US companies to US tax even if it is not brought home. "We have had a proposal for several years now, which I think actually has pretty broad bipartisan support," he said. "We just haven't been able to get it through the Congress."

Inversion bills: Senators Sherrod Brown (D-OH) and Chuck Schumer (D-NY) have introduced bills to require inverting corporations to pay US tax on unrepatriated foreign earnings and to limit inverted companies' ability to strip future earnings out of the US through use of the interest expense deduction. Senator Brown's Pay What You Owe before You Go Act (S. 2662) would amend Code Section 7874 to require the recapture of tax on un-repatriated earnings for inverting corporations. Aside from the effective date (to tax years ending after March 9, 2016), it is identical to the bill of the same name he introduced with Senator Durbin in the last Congress. Senator Schumer's Corporate Inverters Earnings Stripping Reform Act (S. 2666) is identical to legislation of the same name released in the previous Congress to:

— repeal the debt-to-equity safe harbor so that limitations on the interest expense deduction will apply to all inverters, regardless of their financial leverage;

— reduce the permitted deductible net interest expense to no more than 25% (down from 50%) of the taxpayer's adjusted taxable income;

— repeal the interest expense carry-forward and excess limitation carry-forward so that inverters cannot take advantage of the deduction in future years; and

— require the taxpayer to obtain IRS preapproval annually on the terms of foreign related-party transactions for 10 years following an inversion.

Furman on innovation box: White House Council of Economic Advisers Chairman Jason Furman continued the Administration's criticism of the innovation box concept March 11, saying that expanding the R&D credit is a cost effective way to promote innovation while "adopting an innovation box would move tax policy in the wrong direction, increasing complexity and cost without a commensurate boost to innovation." In remarks to an International Tax Policy Forum & Georgetown University Law Center conference, Furman also said an innovation box could involve substantial complexity in that it could be difficult to determine how much income is attributable to development of intellectual property (IP) versus other activities, and corporations would have an incentive to attribute as much income as possible to innovation to take advantage of the preferential tax rate. Furman has previously criticized the innovation box as economically inefficient, and Secretary Lew also expressed opposition to the innovation or patent box idea during a February 11 Ways and Means Committee hearing.

JEC report on patent boxes: On March 10, the Joint Economic Committee (JEC) released a report, "Patent Boxes: A Brief History, Recent Developments, and Necessary Considerations," that noted the increased interest in the concept recently, including in the framework for international tax reform endorsed by Senators Schumer and Rob Portman (R-OH) and the discussion draft of an innovation box proposal circulated by Reps. Charles Boustany (R-LA) and Richard Neal (D-MA) last summer. JEC said arguments in favor of a US patent box include: patent box regimes in other nations providing an incentive for companies to move IP income to other jurisdictions; the OECD BEPS project's nexus requirement means companies have more incentives to shift IP income overseas, as well as the "underlying research investments and related technology and manufacturing jobs"; and that a US patent box would provide an incentive for both US and foreign companies to locate their intangible assets in the United States. Common criticisms, according to JEC, include: the revenue used to create a patent box might be better directed toward lowering tax rates for all businesses; tracking income to the corresponding R&D expenses would be difficult; and the R&D credit already provides an incentive.

CRFB on presidential candidates: On March 10, the Committee for a Responsible Federal Budget (CRFB) held a discussion on "Scoring the Presidential Tax Plans and Understanding Their Fiscal Impacts." CRFB President Maya MacGuineas noted that this year's election has featured a number of detailed proposals that would affect the budget, including some that are "out of touch with the fiscal realities that we're facing as a country." She said different organizations use different assumptions to produce revenue estimates of the candidates' plans, and the selection of those assumptions is sometimes helpful in initiating discussions within the tax community. Panelist Kyle Pomerleau, Director of Federal Projects at The Tax Foundation, said it is a challenge to measure how tax plans impact the economy, and that he thinks it is a positive development that many of the Republican plans propose expensing of new investments.

Budget in Congress: On March 7, Senate Budget Committee Chairman Mike Enzi (R-WY) announced that the Committee will postpone possible action on the FY 2017 budget resolution this month, but that discussions will continue on a path forward for the fiscal blueprint. "The Senate Budget Committee will continue to discuss the budget as well as improvements to the budget process that would increase fiscal honesty, stability in government operations and the ability to help govern our nation," said Chairman Enzi. "The Senate already has top-line numbers and budget enforcement features available this year so that a regular order appropriations process can move forward while we continue to discuss broader budget challenges." The House Budget Committee may proceed with a markup of an FY 2017 budget resolution, possibly as soon as the week of March 14. A previously circulated draft summary described a resolution with FY 2017 discretionary budget caps consistent with the Bipartisan Budget Act of 2015 ($1.07 trillion), with the expectation of moving a $30 billion mandatory savings package as a standalone sidecar bill.

FAA extension: On March 10, Ways and Means Committee Chairman Kevin Brady (R-TX) and Transportation and Infrastructure Committee Chairman Bill Shuster (R-PA) introduced a bill (H.R. 4721) to extend the authorization of Federal Aviation Administration (FAA) programs through July 15, 2016. The legislation also extends key revenue provisions through March 31, 2017. Shuster said the stop-gap measure is necessary to "ensure that the FAA and the federal aviation programs remain fully funded and functional" while the House and Senate work to agree on a longer-term bill. The current authorization and funding expire on March 31.

Quote of the Week

"I think the right answer would be for us to do business tax reform properly, to get rid of the loopholes and the deductions, to lower the statutory rate so we can compete in the world again and to have an international tax system that makes our taxes and taxes overseas work better together." — Treasury Secretary Lew, March 8

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