The House Ways and Means Tax Policy Subcommittee held a tax reform hearing on 25 May that, in part, focused on concerns about the Obama Administration's recent proposed Section 385 regulations. Those regulations would treat certain related-party debt as equity for US tax purposes. The hearing, titled "Perspectives on the Need for Tax Reform," also highlighted the need to hear from and educate the public about tax reform.

Subcommittee Chairman Charles Boustany (R-LA) said the Administration's recent Section 385 regulations are punitive and are hurting American companies — not just large US companies that are trying to be competitive abroad, but companies and businesses here in the United States. He said the proposed regulations are "making the United States less competitive and a less attractive place to do business and invest." Chairman Boustany also reiterated concerns about the competitive climate faced by US companies here as well as abroad, pointing to the OECD Base Erosion and Profit Shifting (BEPS) project and ongoing European state aid investigations as examples of the difficulties faced by US multinationals. A WCEY Alert provides details.

House Speaker Paul Ryan (R-WI) was also quoted this week as saying that a policy framework for international tax reform will be included in the House tax reform blueprint, which is on track for release sometime in June. The House GOP tax task force will be one of several detailed policy papers issued on various topics over the course of June.

And House Ways and Means Committee member Richard Neal (D-MA) said he is working with Tax Policy Subcommittee Chairman Charles Boustany (R-LA) to refine their innovation box proposal that they released last summer. Their original innovation box proposal received a lukewarm response from many quarters, including some in the business community. Chairman Boustany was quoted as saying an innovation box could be interim solution or part of a final tax reform proposal. He also indicated that an innovation box may make its way into the tax reform blueprint document.

On the Senate side, the Finance Committee held a second hearing on corporate integration on 24 May that highlighted certain concerns with Chairman Orrin Hatch's (R-UT) yet-to-be-released integration plan. Members and witnesses said that a corporate integration plan with a dividends paid deduction would, by reducing corporate tax liability, diminish the effectiveness of current tax incentives such as the R&D credit and accelerated depreciation. It could also disadvantage start-up companies that are more likely to retain their earnings rather than pay dividends to shareholders.

Chairman Hatch attempted to clear up what he said were some misunderstandings about his plan, acknowledging that "there's a graveyard near the White House filled with corporate integration proposals." The Chairman said the dividends paid deduction under his corporate integration proposal would not be mandatory: companies would not be forced to pay out their taxable income in dividends, and some would decide to retain all or some of their income and benefit from tax preferences. A WCEY Alert provides details.

And a bipartisan group of Senate tax leaders sent another letter to Treasury Secretary Jack Lew on 23 May urging the Obama Administration to put further pressure on the European Community in regard to the ongoing EU state aid investigations. The Senators wrote "the Commission appears to be ignoring the national practice and law of its Member States and to be imposing its own new standard for transfer pricing determinations." The letter further stated the Commission "appears to be asserting supremacy over and becoming the final arbiter of transfer pricing and other international tax determinations in the EU."

As if in response, the European Commission on 19 May published the Notice on the notion of State aid, which contains general guidance on the scope and definition of the EU State aid rules as they are applied by the EC. A Global Tax Alert provides details. The Obama Administration has continued to take the position that the EU state aid investigations are unfairly targeting US multinationals retroactively and applying law that is inconsistent with international tax standards.

In a major EU development, the Economic and Financial Affairs Council of the European Union (ECOFIN) met yesterday (25 May) and agreed only on a general approach regarding the Anti-Tax Avoidance Directive, with a view to adopting the Directive at the upcoming ECOFIN meeting on 17 June, subject to certain amendments. The Finance Ministers also reached final legal agreement on the adoption of the Directive on the exchange of tax information (non-public country-by-country Directive) and the third country aspects of tax transparency, without further discussion. The ECOFIN further adopted conclusions related to two elements of the Commission's anti-tax-avoidance package: a communication on an external strategy for effective taxation and a recommendation on implementation of OECD measures against tax treaty abuse.