20 May 2016 EY Center for Tax Policy: This Week in Tax Reform for May 20 Second Finance integration hearing: On Tuesday, May 24 (at 10 a.m.), the Senate Finance Committee will hold its second hearing on corporate integration, to explore how such a plan could make the tax code neutral in regards to financing with debt or with equity. Witnesses: — John Buckley, Former Chief Tax Counsel, Committee on Ways and Means, United States House of Representatives, Washington, DC — Jody K. Lurie, CFA, Vice President, Corporate Credit Analyst, Fixed Income Strategy and Research, Janney Montgomery Scott LLC, Philadelphia, PA — Alvin C. Warren, Jr., Ropes & Gray Professor of Law, Harvard Law School, Harvard University, Cambridge , MA In conjunction with the hearing, the staff of the Joint Committee on Taxation has prepared an overview of Federal income tax rules relating to debt and equity and some of the statutory limitations on the tax benefits of each: "Overview of the Tax Treatment of Corporate Debt and Equity" (JCX-45-16). Ways and Means tax subcommittee hearing: On Wednesday, May 25 (at 2 p.m.), the House Ways and Means Tax Policy Subcommittee will hold a hearing entitled "Perspectives on the Need for Tax Reform." An announcement said, "As House Republicans continue work on crafting a comprehensive, pro-growth tax plan, Members will hear from leading experts about the conditions in the current economic environment that underscore the urgent need for commonsense reforms to create a fairer, simpler, flatter tax code and grow the economy." BPC tax reform event: On Tuesday, May 24 (at 10 a.m.), the Bipartisan Policy Center will hold an event entitled "Tax Reform in 2017: A Bipartisan Pathway." Reps. Devin Nunes (R-CA) and Richard Neal (D-MA) will discuss the opportunities for tax reform in 2017. Boustany on reform, innovation box: House Ways and Means Tax Policy Subcommittee Chairman Charles Boustany (R-LA) continued to suggest that development of a comprehensive tax reform blueprint within the House Tax Reform Task Force — part of a Republican conference-wide effort to develop a policy agenda — is delaying the Ways and Means Committee's work on an international tax proposal. The two efforts are increasingly seen as intertwined, with Chairman Boustany telling the Information Technology and Innovation Foundation at a May 19 event that the Task Force blueprint, expected to be completed by the end of June, will determine whether the Committee will pursue an innovation box proposal to provide a lower tax rate on certain income associated with intellectual property. "The key question here is, 'How far can you bring the corporate rate down under any tax reform proposal?'" Boustany said, as reported by Tax Notes, suggesting that a low enough rate would make an innovation box unnecessary. Full Committee Chairman Kevin Brady (R-TX) has said he would like to reduce the statutory corporate income tax rate to below 20%. More broadly, Chairman Boustany said a concept for tax reform must be settled upon before determining how to proceed with international tax changes. "Key questions are, 'Do we stick with an income tax model, or do we move to some kind of consumption/business activity model?'" he said, according to Politico. Finance integration hearing: A May 17 Senate Finance Committee hearing featured discussion about the potential unintended consequences of corporate integration proposals, and the preference for a more comprehensive approach that directly addresses the international competitiveness of US-based corporations. Chairman Orrin Hatch (R-UT) made the case for a dividends paid deduction, which he will include along with a 35% withholding tax on dividends and interest in his forthcoming corporate integration proposal intended to eliminate the double taxation of corporate income to the extent a corporation pays dividends. Ranking Member Ron Wyden (D-OR) said a withholding tax applicable to retirement plan investments in stocks and bonds would compromise the tax-deferred nature of the plans. Witnesses said corporate integration may alleviate international tax issues like the lock-out effect but not earnings stripping and transfer pricing issues, and that a withholding tax on US companies could provide a competitive advantage to foreign-based multinationals. The importance of more direct international tax reform was discussed by Senators Rob Portman (R-OH), Tim Scott (R-SC), and John Thune (R-SD), who questioned whether corporate integration can be done without creating unintended consequences. Chairman Hatch said he is aware of tax-exempt entity and retirement plan concerns with a dividends paid deduction and hopes to address them. On May 24, the Senate Finance Committee is slated to hold a corporation integration hearing focused on debt/equity issues (see below for further details). Potential 385 hearing: During the corporate integration hearing, Senator Portman said he hopes the Committee will hold a hearing on the unintended consequences of recent Section 385 regulations — which would generally treat certain related party debt as equity for US tax purposes — that he views as an "overreach" by the Administration. Chairman Hatch agreed and said he is considering such a hearing. During his May 19 speech, Chairman Boustany said Ways and Means had been receiving input from companies on the effects of the regulations and is now discussing how to address problems they cause. Wyden discussion draft would reform taxation of derivatives: On May 18, Senate Finance Committee Ranking Member Wyden released a discussion draft that aims to provide one set of clear rules for taxing derivatives by requiring the recognition of gains each year ("mark to market") and applying ordinary tax treatment to such gains. Requiring mark-to-market and ordinary tax treatment for derivatives was also proposed by former House Ways and Means Committee Chairman Dave Camp (R-MI) in the Tax Reform Act of 2014, and in President Obama's budget proposals. The Wyden draft goes beyond these proposals, however, to create a more comprehensive regime for taxpayers who both have obligations or rights with respect to a derivative and that own also the underlying investment, in which case in certain instances both the derivative and the underlying investment would be subject to mark-to-market and ordinary tax character treatment. The Joint Committee on Taxation has scored the draft as raising $16.5 billion over 10 years. Importantly, the draft would also exclude from capital treatment, and thus treat as ordinary in character, any bonds or other indebtedness held by most insurance companies. Regulatory authority is included to prevent the avoidance of Federal income tax through sales or exchanges of these types of insurance company assets. The draft would create a special rule, called an Investment Hedging Unit (IHU), in which the taxpayer enters into a derivative while also owning the underlying asset (such as a derivative on corporate stock). If the derivative has a negative delta or correlation between minus 0.7 and minus 1.0 to the asset it would trigger mark-to-market gain on the underlying asset and then ordinary income at the time the contract is entered into. As was the case with his cost recovery discussion draft released in April, Senator Wyden believes the policies in the discussion draft will provide a basis for broader tax reform, but also that the proposals stand on their own merits. Corker letter on treaties: In a May 18 Dear Colleague letter to other Senators, Senate Foreign Relations Committee Chairman Bob Corker (R-TN) defended the eight tax treaties approved by the Committee in November 2015 but blocked from full Senate consideration by Senator Rand Paul (R-KY) over the potential information sharing they would allow. Chairman Corker said the exchange of tax information with other countries is subject to stringent controls that ban "fishing expeditions" and non-tax requests. "The tax treaties before the Senate represent carefully balanced rights and responsibilities among taxpayers and the U.S. government," Corker said. "These treaties are not new and exotic instruments." Senator Paul is reportedly urging other Senators to call for the treaties to be renegotiated. The Corker letter urges Senators to support "the speedy final ratification of these treaties." Ways and Means Health Subcommittee hearing: On May 17, the House Ways and Means Health Subcommittee held a Member Day hearing on "Tax-Related Proposals to Improve Health Care." Chairman Brady opened the hearing by saying, "A number of provisions of the tax code were created to expand health care access and lower costs for the American people, but some of them work better than others and some may not be working at all. It's our responsibility to take a hard look at the tax code, build on what's effective, and fix what's not delivering results." Members presented proposals on a range of issues including: repealing the medical device tax; exempting health savings accounts (HSAs) from the 40% tax on high-cost employer health plans; exempting certain groups from the employer mandate; modifying the orphan drug exemption to the annual fee on branded prescription drugs; and raising the maximum size of businesses eligible for the small business tax credit. "Even a cursory examination of the business tax system demonstrates clearly the problems that arise from our out-of-step corporate tax, which contributes significantly to our anti-competitive business climate and leads sophisticated tax planners to engage in costly efforts — which some would call gamesmanship or tax avoidance — to either minimize their taxes or manage competitive tax pressures from abroad. Without significant reforms to the corporate tax system, we will continue to see an erosion in our overall tax base along with diminished growth and investment." - Senate Finance Committee Chairman Orrin Hatch (R-UT), May 17
Document ID: 2016-0902 | |||||||||||||||
