NUMBER OF THE WEEK: 9
As in the 9 percent "amusement tax" that the city of Chicago recently extended to online streaming services like Netflix and Amazon Prime, triggering a series of lawsuits alleging that the newly expanded tax was illegally imposed without approval from the city council and that it violates the federal Internet Tax Freedom Act. You can bet other cities around the country will be paying close attention… along with House of Cards fans.
- IRS to Halt Many Spinoff Rulings, Increase Scrutiny.
- New Transfer Pricing Rules on Intangibles.
- Treasury Urged to Curb Earnings Stripping and Publish List of Inverted Companies.
- EU Hopes to Conclude "State Aid" Tax Ruling Investigations Soon.
- EU Financial-Transaction Tax Moving Ahead.
House’s Highway Plan Losing Momentum. First came last week’s surprising news that current highway funding levels can carry the nation’s infrastructure through next summer—well beyond the October 29 expiration of the current authorization for highway spending. Then came the growing clamor from the business community against Rep. Paul Ryan’s effort to pair a long-term highway funding plan with an overhaul of the U.S. international tax system. Bottom line: chances for an international tax/highway funding combo appear to be running low on fuel.
Although precise details of Ryan’s plan have not yet been revealed, it is expected to include some kind of mandatory repatriation of U.S. multinationals’ foreign earnings at a significantly reduced rate, along with a transition to a territorial system of taxation with a foreign dividend exemption and a so-called "innovation box" – a special low tax rate on profits derived from intellectual property. Business groups who also want broad business tax reform (read: a significantly reduced corporate rate with parity for pass-through businesses) are increasingly opposed to Ryan’s international plan, which many believe would cripple future efforts to complete domestic business tax reforms.
Nevertheless, bipartisan and bicameral meetings are taking place this week among tax-writers to determine how best to proceed. Senate Finance Committee Chairman Orrin Hatch (R-UT) and Majority Leader Mitch McConnell (R-KY) have expressed opposition to the international reform-highway funding hybrid plan in the past.
Selection of Permanent "Extenders" Heading for Markup. The House Ways and Means Committee is preparing to mark up several bills that would make some currently expired tax provisions permanent fixtures in the tax code, including a "bonus depreciation" provision (H.R. 2510), which allows accelerated expensing of purchases or construction of qualifying property. Additional provisions expected to be marked up later this week include a bill to make permanent the exemption for subpart F foreign personal holding company income derived "in the active conduct of a banking, financing, or similar business;" the permanent look-through treatment of payments to controlled foreign corporations (H.R. 1430); and the permanent extension of the 15-year recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property (H.R. 765)."
Though the committee has yet to formally announce a markup, it’s reportedly hoping to schedule it as soon as this Thursday. The markup signals that the battle over which extenders to extend and for how long is about to heat up again, as pressure mounts on lawmakers to deal with the tax provisions before the end of the year. Last December, lawmakers extended all of the provisions retroactively for the 2014 tax year, which means they all expired again just days after the vote to extend them. A similar situation is shaping up this year, only House Republicans are hoping they’ll be successful this time in negotiating for a select few provisions to be made permanent.
Meanwhile, Senate tax-writers passed a package in July that would extend all of the 50-plus tax provisions for just two years (retroactively for all of 2015 and through 2016).
The Joint Committee on Taxation, which "scores" tax bills to determine how much revenue is raised or foregone, said the Senate’s two-year package would cost $95 billion, while an earlier attempt last year to make bonus depreciation permanent would, by itself, cost more than $260 billion over 10 years, without accounting for any dynamic impacts to the economy. While short-term extenders (one to two years) are generally not paid for by spending cuts or tax hikes elsewhere, Democrats have battled against House Republicans’ efforts to make some of the provisions permanent without offsetting the cost.
IRS to Halt Many Spinoff Rulings, Increase Scrutiny. Following last week’s news that the IRS declined to issue a ruling to Yahoo! Inc. regarding its potential spin-off of Ali-Baba Group Holding Limited, the IRS announced that it will stop issuing new private letter rulings for a variety of spinoff transactions, including real estate investment trusts (REITs) and regulated investment companies (RICs), in addition to transactions in which the active trade or business is less than five percent of the gross assets or when investment securities are two-thirds or more of the gross assets. The announcement is effective as of Sept. 14.
The IRS also announced in Notice 2015-59, that it will use this hiatus to evaluate issues under Sections 337(d) and 355 related to spinoffs under these circumstances, and it is requesting comment. Explaining the rationale for the non-rule hiatus and the request for comment, the IRS said it believes "that these transactions may present evidence of device for the distribution of earnings and profits, may lack an adequate business purpose or a Qualifying Business, or may violate other [Section] 355 requirements."
New Transfer Pricing Rules on Intangibles. The IRS yesterday released final, temporary and proposed regulations on the outbound transfer of intangibles under Section 367. The final and temporary regulations (T.D. 9738), clarify the interaction of the arm’s-length standard with other sections of the tax code. The proposed rules eliminate the foreign goodwill exception under Section 367 regulations and limit the scope of property that is eligible for the "active trade or business" exception to certain tangible property and financial assets.
Treasury Urged to Curb Earnings Stripping and Publish List of Inverted Companies. In a letter to Treasury Secretary Jack Lew, a group of Congressional Democrats urged him to annually publish a list of inverted corporations and issue new regulations to curb the practice of earnings stripping. The Democratic lawmakers noted that while inverted corporations are prohibited from benefiting from federal contracts, some of these companies have nevertheless been awarded government work. If Treasury is unable to publish this list, the Democrats offered their support in seeking statutory changes. As for reining in earnings stripping, the Senators recommended new regulations that re-characterize debt as equity for inverted corporations under Section 385.
EU Hopes to Conclude "State Aid" Tax Ruling Investigations Soon. The European Union’s Antitrust commissioner, Margrethe Vestager, said last week that the investigations of EU member countries’ tax rulings with certain multinational corporations were a "high priority" and that the findings would be concluded "soon." She also said the European Commission plans to release the findings of their investigations on a case-by-case basis, rather than as a whole. As rumors swirl that Ireland, one of the countries under investigation for its tax agreements with multinationals, was likely to receive an adverse decision soon, there is increased chatter about appealing to the EU Court of Justice.
EU Financial-Transaction Tax Moving Ahead. EU finance ministers from 11 countries emerged from talks over the weekend with news that they’ve made progress towards a reaching a deal on a financial transaction tax. Their goal is to reach agreement before the end of the year and begin enforcing the new levy by 2017. Although details over how to implement the tax and what the rate would be are yet to be ironed out, the group apparently agreed to tax gross trades, rather than net transactions, including high-frequency trading. The only EU nations that have agreed to implement the tax are: Germany, France, Italy, Austria, Belgium, Estonia, Greece, Portugal, Slovakia, Slovenia and Spain.
Relevant Congressional Activity
Senate Finance Committee
The full committee holds a markup of a bipartisan bill to prevent identity theft and tax refund fraud. The bill includes a number of provisions that were a part of Hatch and Wyden’s Tax Refund Theft Prevention Act of 2014, as well as additional measures from Committee members. The Chairman’s Mark of the bill can be found here. A revenue estimate can be found here. A summary can be found here.
Senate Banking Committee
The full committee holds a hearing on the nomination of Adam Szubin to be Treasury’s undersecretary for terrorism and financial crimes. This hearing was originally scheduled for Sept. 10.
House Financial Services Committee
The full committee holds a hearing on "The Dodd-Frank Act Five Years Later: Are We More Free?" Read more here.
House Financial Services Committee
The Subcommittee on Monetary Policy holds a hearing on "Strengthening U.S. Leadership in a Turbulent Global Economy." Read more here.
House Small Business Committee
The Subcommittee on Economic Growth, Tax and Capital Access holds a hearing on "Financing Main Street: How Dodd-Frank is Crippling Small Lenders and Access to Capital." Read more here.
Relevant Agency Activity
Internal Revenue Service
The IRS holds a hearing on proposed regulations that provide guidance regarding when a foreign insurance company’s income is excluded from the definition of passive income under section 1297(b)(2)(B). For more information and registration, please contact Oluwafunmilayo Taylor, 202.317.6901.
Cato holds a discussion on "Blessing or Scourge? Capitalism through the Eyes of Pope Francis. Read more here.
4th OECD Forum on Tax and Crime
The 4th Forum, hosted by the Netherlands Tax and Customs Administration, will primarily focus on the future threats and opportunities for law enforcement agencies to work together in the tax and crime area and the use of technology. Experts will discuss topics that are currently high on the political agenda, such as corruption, terrorist financing, alternative payment methods, the dark web, the use of analytics and exploring emerging tax evasion risks in an era of greater transparency. Read more here.
Financial Services Roundtable
FSR holds a discussion on "The Squeeze on Gen X: The Sandwich Generation," focusing on the challenges Generation Xers face while trying to save for retirement, financially support their aging parents and save to put their own children through college. Register here