United States: Tax Policy Update – May 19 2015
NUMBER OF THE WEEK: 40 percent. The average combined federal and state tax rate paid by most U.S.-based firms, according to a Wall Street Journal op-ed by James Freeman today, entitled “The Tax Takeover Craze.” Freeman claims this is “roughly double the average in Europe and Asia,” and is the driving force behind the continuing trend of companies moving their headquarters overseas. Grain of salt: the conservative-leaning Tax Foundation has warned against using the “average effective tax rate” as a reliable measure,noting that it “is irregular from year to year due to the complexity and instability of the corporate tax code.” A better measure, according to the Tax Foundation, is the marginal effective tax rate (METR) which averages around 35 percent—still higher than in any other developed country.
Transportation Funding: A (Structurally Deficient) Bridge Too Far. With the May 31 deadline just around the corner, lawmakers have little choice but to coalesce around a two-month extension of highway funding authorization—setting the stage for a summer of tough negotiations. The two-month patch, the Highway Transportation Funding Act of 2015 (H.R. 2353), introduced by Congressmen Bill Shuster (R-PA) and Paul Ryan (R-WI), will be up for debate on the House floor on Tuesday. Senate Majority Leader Mitch McConnell (R-KY) has lined up a similar measure, introduced by Senators Tom Carper (D-DE) and Barbara Boxer (D-CA), in the upper chamber.
Democrats and Republicans are pointing fingers at one another for failing to negotiate a longer extension that would carry surface transportation projects at least through the end of the year—with an $11 billion price tag. Republicans were reportedly ready to fork over $5.5 billion in revenue offsets from changes to a mish-mash of relatively obscure tax policies but only if Democrats could come up with the other half through spending cuts. Bottom line—securing a six-year reauthorization bill before the two-month patch expires at the end of July will be an uphill climb.
Meanwhile, House Majority Leader Kevin McCarthy (R-CA) told reporters yesterday he “see[s] a path” for a long-term highway funding bill paid for by tax reform before the end of this year, and House Ways and Means Chairman Paul Ryan continues to hint at efforts at international and corporate reforms this year as a “down payment” for more comprehensive reforms in the next Congress.
R&D Tax Credit Up for Debate. The American Research and Competitiveness Act of 2015 (H.R. 880) is up for consideration in the House on Wednesday. Approved by the Ways and Means Committee in a highly-partisan vote, the legislation aims to simplify and make permanent the Research and Development Tax Credit. Under the proposal introduced by Rep. Kevin Brady (R-TX), the basic research and energy research credits would be made permanent – the base period for the basic research credit would be changed to a three-year rolling average. The alternative simplified method (ASC) for calculating the credit would also be made permanent with the increased rate of 20 percent. Small businesses would be allowed to claim the credit to offset the alternative minimum tax. Click here to read the full text of the bill.
Ways & Means Sets Sight on Medical Device Tax Repeal. The House Ways and Means Committee is expected to mark up a bill that would repeal the medical device tax. The Protect Medical Innovation Act of 2015 (H.R. 160) would cost approximately $29 billion over 10 years – an offset for the loss of revenue has not yet been identified, however. The bill introduced by Rep. Erik Paulsen (R-MN) back in January has garnered substantial support among his Republican colleagues. A similar measure (S. 844) has also been introduced in the Senate by Senator Ed Markey (D-MA) who is looking to eliminate certain tax breaks for oil companies to help pay for the repeal. A repeal of the 2.3 percent medical device tax also enjoys strong support from the Senate Finance Chairman Orrin Hatch (R-UT).
Senate Finance Tax Reform Working Group Spotlight: Individual Income Tax. With the focus of tax reform gradually shifting towards a business-only overhaul, members of the Senate Finance Individual Income Tax Working Group have more or less resigned themselves to offering more modest recommendations for reform. Instead of cutting the 39.6 percent top rate, the working group has turned its attention to provisions with potential bipartisan support, such as those related to education, charitable giving, and tax administration. In the spotlight this week is the comment letter submitted by the Charitable Giving Coalition, which seeks to preserve the full scope and value of the charitable deduction provision.
TAX TALK: PRESIDENTIAL AMBITIONS
Although New Jersey Governor Chris Christie has not officially declared his candidacy, the GOP presidential hopeful has unveiled a tax plan that calls for rate cuts and simplification of the U.S. tax code. Under the proposal, the corporate tax would be slashed to 25 percent from the current 35 percent rate. Christie would also reduce the number of individual income tax brackets to three, where the top rate should not exceed 28 percent. The governor’s plan also seeks to be revenue-neutral by eliminating or modifying “enough deductions, credits and targeted provisions in the code – both on the personal and the corporate sides.” Christie would keep the deductions for charitable giving but would limit the home mortgage interest deduction to the purchase of one’s first home. Read more here.
German Finance Minister Signals FTT Not Ready for 2016. Following a meeting in Brussels amongst EU finance ministers, German Finance Minister Wolfgang Schaeuble indicated that the much vaunted financial transaction tax would not be ready to be introduced next year. Earlier this year, the 11 EU states involved had reached an agreement that it would tax the widest possible base at a low rate, and that implementation in 2016 was viable. However, Austrian Finance Minister Schelling indicated that there continues to be some disagreement as some of the states were trying to exclude interest-rate derivatives. Schaeuble noted that there some points of progress, particularly in the area of where the tax would be levied. The tax would be imposed on equities where the trade occurred, and derivatives where the security was issued.
FATCA Self-Certification Issue Raising Concerns Across Jurisdictions. Many practitioners are focusing their attention on the discrepancy in the self-certification requirement under the Foreign Account Tax Compliance Act. Last month, we had reported that a Treasury official cleared up any confusion that under FATCA, self-certification is a requisite to opening accounts and maintaining existing accounts in jurisdictions that have Model 1 intergovernmental agreements in place. The intergovernmental agreements with United Kingdom and Canada do not provide that self-certification is required, rather so long as the accounts are reportable, they can be opened. With FATCA deadlines soon approaching, certain foreign financial institutions are left in a quandary as to whether they will be subjected to the 30% withholding requirement under FATCA.
OECD Release Discussion Draft on PE Status. On May 15, the Organization for Economic Cooperation and Development released its revised discussion draft on Action 7 (Prevent the Artificial Avoidance on PE Status) of the Base Erosion and Profit Shifting project. The recent draft takes into account the comments received from its prior draft, and proposes to rewrite the rules on permanent establishment based on these comments. Of four options offered in rewriting the rules, the draft opts for the second option, which some practitioners view as lowering the permanent establishment threshold but allowing for more subjectivity. The draft is available here and comments are due by June 12, 2015.