House Speaker Paul Ryan (R-WI) and Ways and Means Committee Chairman Kevin Brady (R-TX) today (24 June) released the long-awaited House Task Force on Tax Reform policy paper, aka the House Tax Reform Blueprint. The Blueprint proposes a 20% statutory corporate tax rate, a move toward a cash-flow consumption tax through immediate expensing and a limitation on business interest deductions, a border tax adjustment mechanism, a territorial international tax system, and elimination of most business tax credits aside from the R&D tax credit. The plan would also provide a new 25% business tax rate for sole proprietorships and pass-through entities.

The Blueprint proposes a move toward a cash-flow approach for business taxation and a consumption-based tax, in keeping with the American Business Competitiveness Act (H.R. 4377) introduced in January by Ways and Means Committee member Devin Nunes (R-CA). Like the Nunes bill, the Blueprint calls for 100% expensing of all capital expenditures for tangible and intangible assets (including buildings but not land), and elimination of interest expense deductibility for most non-financial businesses by denying the deduction for net interest expense.

As part of the move to a territorial tax system with a 100% exemption for dividends paid from foreign subsidiaries, the Blueprint calls for a 8.75% tax rate on previously untaxed accumulated foreign earnings held in cash or cash equivalents, and a 3.5% tax rate on all other accumulated earnings, with tax liability payable over an eight-year period. This is the same tax treatment of accumulated foreign earnings called for under former Ways and Means Committee Chairman Dave Camp's Tax Reform Act of 2014.

The Blueprint also calls for a move to a destination-basis tax system, under which border adjustments exempt exports from tax while taxing imports, placing the tax jurisdiction as the location of consumption rather than production. The document cites the move toward a cash-flow approach for business taxation and a consumption-based tax as the basis for allowing the United States to counter border adjustments that other nations apply in their value-added tax regimes. Exempting exports from US tax and taxing imports, regardless of where they are produced, will eliminate incentives for US businesses to move or locate operations outside of the United States under a territorial tax system, according to the Blueprint. Therefore, the document states that it is unnecessary to also include new anti-base erosion measures. The plan would also allow US goods, services, and intangibles to compete on a more equal footing globally, the document stated. A WCEY/EY Tax Alert provides more details.

Treasury and the IRS this week announced they will hold a hearing on the proposed Section 385 debt/equity regulations on 14 July, indicating the government probably does not plan to extend the comment period. The current comment period ends on 7 July. There is no further word on when Treasury plans to finalize the regulations.

Meanwhile House Ways and Means Committee Ranking Member Sander Levin (D-MI) and other Committee Democrats wrote to Treasury Secretary Jack Lew on 22 June, asking for consideration of whether "exceptions or special rules, including transition rules," are appropriate for the proposed Section 385 regulations. While expressing support for guidance to combat aggressive corporate tax planning designed primarily to reduce a corporate taxpayer's US tax liability, they wrote that there may be "a number of unforeseen circumstances in which the regulations could adversely affect ordinary course business transactions between related parties" that do not have tax avoidance motives. The legislators further said that certain business sectors, including financial services, insurance, and utilities, may encounter sector-specific challenges under the proposed regulations.

The US and Luxembourg on 22 June announced that as part of ongoing negotiations to amend the current 1996 tax treaty, they have agreed to a specific change that would modify the existing so-called triangular provision to be consistent with the provision in the 2016 US Model Tax Treaty. The announcement also indicates that negotiators are considering other amendments to the tax treaty.

Under the announced change, treaty benefits generally would be denied when a resident of one state earns income from the other state through a permanent establishment (PE) situated outside of the state of residence, and the resident is subject to a significantly lower tax rate on income attributable to the PE. The provision is consistent with a similar provision in the recently revised US Model tax treaty.

The effective date of this provision would be unusual. According to the announcement, a bill is pending in the Luxembourg Parliament on the new triangular provision. The new triangular provision would have effect based on the date that the bill is published in the Luxembourg Official Gazette indicating the bill has become law. It is unclear when the Parliamentary approval would occur. The application of this new provision does depend, however, on including the provision in a protocol and the protocol entering into force. Assuming that this is the case, the new triangular provision would have retroactive effect based on the publication date of the law in the Official Gazette (for amounts paid or credited on or after the third day following publication), rather than the date that the protocol enters into force.

In an historic referendum yesterday (23 June), UK citizens voted to leave the European Union (EU). The so-called Brexit will have major consequences across many areas, including in regard to taxation.

Subject to the terms under which the UK leaves the EU, it is unlikely that the UK will be party to various EU tax initiatives currently under discussion, such as the anti-tax avoidance directive, public country-by-country reporting and the common consolidated corporate tax base. However, where the UK has supported these initiatives, it would be expected the UK would continue to push ahead with similar legislation. It is also possible that certain UK tax reforms, such as implementing interest restrictions under OECD BEPS Action 4 and other changes to the corporate loss rules could be delayed.