This week (September 19-23)

Congress in: The House and Senate are in session. Congressional leaders will continue working towards agreement on a continuing resolution (CR) to fund the government beyond September 30 and likely into December, when Congress is expected to reconvene following the elections for a lame-duck session. A Senate procedural vote on the House-passed Legislative Branch Appropriations bill (H.R. 5325), which will serve as the vehicle for the CR, has been scheduled for 5:30 p.m. on September 19.

Possible Ways and Means markup: Chairman Brady has said it is his intention to have a second markup of miscellaneous tax bills the week of September 19. Four bills were on the schedule for the September 14 markup but were not considered due to time constraints.

Possible Senate Finance pension markup: The Senate Finance Committee may hold a markup to consider various pension-related issues.

Last week (September 12-16)

Lew op-ed: In a September 13 Wall Street Journal op-ed, Europe's Bite Out of Apple Shows the Need for U.S. Tax Reform," Treasury Secretary Jack Lew said despite international progress against corporate tax avoidance "the fundamental problem remains: America's broken business tax system." The European Commission's August 30 decision on State aid issues associated with tax arrangements and the bipartisan reaction to it may present a new opportunity for tax reform that should not be lost, Secretary Lew said. He diagnosed the current tax code as being "riddled with loopholes that allow corporations to artificially lower their tax bills by shifting income from higher-tax countries to low- or no-tax jurisdictions," and said that a relatively high corporate tax rate and complicated system for taxing multinationals have facilitated base erosion and made America a less attractive place to do business. Secretary Lew continued to advocate The President's Framework for Business Tax Reform, which was updated in April 2016 to highlight the inversion issue and to include the President's proposal for a 19% minimum tax on foreign earnings and a mandatory one-time 14% tax on CFCs' previously untaxed earnings as a transition to a reformed international tax system. "[T]he president's plan directly addresses the problem of U.S. multinational corporations parking income overseas to avoid U.S. taxes. The plan would make this practice impossible by imposing a minimum tax on foreign income," Secretary Lew said. "After paying such a tax, companies could repatriate all of their overseas income without additional costs."

Visit with Ways & Means: On September 14, Secretary Lew met with members of the House Ways and Means Committee regarding Treasury's proposed Section 385 debt-equity regulations. "During our conversation, I asked Secretary Lew to slow the process down, make all the necessary changes, and conduct a true cost benefit analysis," Ways and Means Committee Chairman Kevin Brady (R-TX) said. Instead of finalizing the regulations now, the Administration should issue new proposed regulations that address stakeholders' serious concerns."

Treasury notice: On September 15, Treasury issued Notice 2016-52, announcing that the government plans to issue regulations under Section 909 that will identify two new foreign tax credit splitter arrangements relating to Section 902 corporations that pay foreign income taxes pursuant to foreign-initiated adjustments. More specifically, the notice identifies as a foreign tax credit splitter arrangement under Section 909, certain transactions that are completed in advance of certain large, foreign-initiated tax payments and that have the effect of separating the foreign taxes from the related income. The notice explicitly refers to payments under European Union State aid law that may result in creditable foreign taxes. In a press statement, Treasury Assistant Secretary for Tax Policy Mark Mazur said the notice would serve to close a tax loophole that erodes the US tax base. "When U.S. multinational corporations repatriate foreign earnings, they generally are able to claim tax credits against their U.S. income tax bills for any related foreign tax assessments," Mazur said, as reported by Tax Notes. "In building on final regulations issued in 2015, today's action protects the U.S. tax base by ensuring that such credits are only available when corporations repatriate their foreign earnings."

Trump revises tax plan: In conjunction with a September 15 speech to the Economic Club of New York, Republican presidential nominee Donald Trump provided new details on his tax plan, proposing to cap itemized deductions at $100,000 for single filers and $200,000 for married filers and to deny the deductibility of interest expense for manufacturers who elect expensing. "Firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense," according to a Trump fact sheet. Trump previously announced his support for expensing during a revision of his tax plan announced on August 8, in a move seen as bringing his plan closer to the House Republican tax reform Blueprint released June 24, which proposed expensing in conjunction with eliminating the deductibility of net interest expense. The Trump fact sheet also stated that most corporate tax expenditures would be eliminated, except for the R&D Credit. In addition to reflecting Trump's call for repeal of the estate tax, the document indicated that a step-up in basis would be disallowed for estates over $10 million: "The Trump plan will repeal the death tax, but capital gains held until death will be subject to tax, with the first $10 million tax-free as under current law to exempt small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent's relatives will be disallowed."

Trump used his speech to highlight the benefits of his proposals for working Americans and the middle class that he said will represent a $4.4 trillion tax cut, or $2.6 trillion under a dynamic growth model, down from a pre-revision cost of around $10 trillion. "By lowering rates, streamlining deductions, and simplifying the process, we will add millions and millions of new jobs. In addition, because we have strongly capped deductions for the wealthy, and closed special interest loopholes, the tax relief will be concentrated on the working and middle class taxpayer … ," he said. "This is a working and middle-class tax relief proposal." The fact sheet proclaims that Trump's economic proposals would add 25 million jobs over a decade, which equates to 200,000 new jobs per month.

Confusion over pass-through rate: Trump's latest tax reform plan revision generated considerable confusion regarding his previously proposed 15% business income tax rate for pass-through entities, intended to match a 15% statutory corporate income tax rate. The proposal had been the subject of concerns that taxpayers could take advantage of the disparity between the proposed 33% top individual income tax rate and the 15% pass-through rate. An initial fact sheet released September 15 mentioned only the 15% corporate tax rate, a Tax Foundation blog post said it would not apply to pass-through businesses, and press reports suggested that businesses would be required to become corporations to qualify for the 15% rate. Later September 15, the fact sheet was revised to replace "corporate" with "business" and to say: "This rate is available to all businesses, both big and small, that want to retain the profits within the business." Politico September 16 reported Trump deputy policy director Dan Kowalski as saying the plan would allow pass-through entities to claim the lower rate regardless of whether they incorporate.

BRT on Apple decision: In a September 16 letter to European Union leaders, the Business Roundtable said the Apple decision must be overturned and State aid investigations halted. "The precedent set by this decision, if upheld, would increase uncertainty significantly with a consequent adverse effect on foreign investment in Europe, making this decision a grievous self-inflicted wound for the European Union (EU) and its citizens," the letter stated. "Absent reversal, other countries outside the EU will interpret the decision as acceptable governmental behavior and will put all companies with cross-border investments — including EU-headquartered companies — at risk of having their assets expropriated by foreign governments seeking extra revenue or seeking to punish a successful foreign competitor."

Child care plan: On September 13, Trump detailed his child care plan to allow working parents to deduct from their income taxes child care expenses for up to four children and elderly dependents, capped at the average cost of care for the state of residence. The deduction would be available to taxpayers who take the standard deduction as well as itemize deductions, but only those earning $250,000 per year or less for individuals and $500,000 for couples. The eldercare exclusion would be capped at $5,000 per year. Additional child care spending rebates would be provided to lower-income taxpayers through the Earned Income Tax Credit. Trump also proposes creating Dependent Care Savings Accounts (DCSAs) that would allow both tax-deductible contributions and tax-free appreciation year-to-year. He also would guarantee six weeks of paid maternity leave by amending the existing unemployment insurance (UI) that companies are required to carry.

Miscellaneous bills in Ways and Means: On September 14, the House Ways and Means Committee approved by voice vote four miscellaneous tax and trade enforcement bills that were described as priorities for members, including:

— The Empowering Employees through Stock Ownership Act (H.R. 5719), sponsored by Rep. Erik Paulsen (R-MN), to allow employees of non-public firms to defer taxes on their stock options;

— The Emergency Citrus Disease Response Act (H.R. 3957), sponsored by Rep. Vern Buchanan (R-FL), to temporarily allow expensing of certain costs of replanting citrus plants lost by reason of casualty;

— The United States Appreciation for Olympians and Paralympians Act (H.R. 5946), sponsored by Rep. Bob Dold (R-IL), to exempt from tax cash prizes and medals won in the Olympic and Paralympic Games; and

— The Prevent Trafficking in Cultural Property Act (H.R. 2285), sponsored by Rep. Bill Keating (D-MA), to improve enforcement against trafficking in cultural property to prevent stolen or illicit cultural property from financing terrorist and criminal networks.

The Committee's efforts to approve miscellaneous member bills, which Chairman Brady anticipates will continue as soon as next week, would be expected to lead to full House consideration of some of the bills on their own, possibly on the suspension calendar for measures such as the Olympics bill. Some could also be considered for possible inclusion in a larger year-end bill. Four other bills were on the schedule for the September 14 markup but were not considered due to time constraints. Those bills address: modifying the credit for production from advanced nuclear power facilities (H.R. 5879); the tax treatment of the Indian Health Service student loan repayment program (H.R. 5406); the tax treatment of student loans that are forgiven due to death or disability (H.R. 5204); and the tax qualification of mutual irrigation and ditch companies organized to help promote access to water (H.R. 4220).

Quote of the Week

"For the remaining months of this administration, we will continue to make the case for business tax reform and infrastructure investment. I hope that the high level of attention following the European Commission's actions will help to lay the foundation for the new Congress to take action in the early days of a new administration. By coupling a new framework for business tax reform with continuing collaborative efforts to strengthen international standards, we can effectively address the problem of corporate tax avoidance. A more efficient business tax system would reap significant economic benefits at home and abroad." — Treasury Secretary Jack Lew, September 13

———————————————