NUMBER OF THE WEEK: $96 Billion
The amount of lost revenue over 10 years, as projected by the Joint Committee on Taxation, if Congress passed another repatriation tax holiday, allowing U.S. multinationals to bring foreign earnings back to the U.S. at a significantly reduced tax rate. The repatriation “tax holiday” has been floated by Senate Majority Leader Harry Reid (D-NV) and others as a possible way to replenish the drained Highway Trust Fund. Members of the Senate Finance Committee are offering up their proposed alternatives this week for funding the HTF through the end of the year and beyond.
Senate: Tax Reform Hearings to Heat Up This Summer. In a joint statement released on June 5, Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Orrin Hatch (R-UT) announced a series of committee hearings this summer “to examine several issue areas that are essential to a modern, effective tax code.” Education tax incentives will be the focus of the first tax reform hearing later this month, although an exact date has not yet been released. In July, the committee will turn to taxpayer privacy protection, including identity theft, and later in July, the panel will take up corporate tax issues.
The bipartisan statement also indicated agreement between the panel’s leaders over the need to keep revenues collected from repatriated foreign earnings earmarked for tax reform rather than diverting those dollars to fund other needs like the anemic Highway Trust Fund (HTF).
Highway to Compromise? Members of the Senate Finance Committee met June 4, 2014, to discuss options for funding the HTF but have thus far not reached agreement on the road ahead. Wyden and Hatch will likely try to forge an agreement for a short-term funding solution to carry the HTF through the end of the year, putting off tougher negotiations until the lame-duck period after the November elections. Wyden has said he plans to mark up a bill before the July 4 recess. But don’t expect Wyden to embrace cuts to the U.S. Postal Service’s Saturday service as an offset for HTF funding, like House leaders are pushing for.
JCT Estimates Tax Holiday Price Tag at $96 Billion. Finance Committee Ranking Member Orrin Hatch called attention on June 9 to a Joint Committee on Taxation report — conducted at his bequest — that estimates a one-time repatriation tax holiday for U.S. multinational corporations’ foreign earnings would drain $95 billion out of federal coffers over 10 years rather than raise revenue, as some have argued. Hatch issued a press release commenting on the JCT letter and encouraging his colleagues to consider the use of a repatriation tax holiday only in the context of comprehensive tax reform — and not as a viable source for replenishing the Highway Trust Fund.
House: More Extenders on the Floor. Members worked in their home districts last week and return this week with votes expected on three measures to make currently expired tax provisions permanent, including increased and expanded business deductions under Section 179 (more information below under “Looking Ahead”). In addition, two Ways & Means subcommittees will hold a joint hearing on Tuesday to take a closer look at healthcare premium tax subsidies under the Affordable Care Act.
Donor-Advised Funds Seek Relief From Camp Proposals. Community foundations and donors are among those hoping to prevent a proposed five-year spend down requirement from becoming law, as Dave Camp’s tax reform discussion draft proposes. Under the Camp draft, donor-advised funds would be subject to a 20 percent excise tax on DAF contributions that aren’t disbursed to charities within five years. The tax would apply in every year the donor-advised fund fails to make the distribution. Groups rallying against the proposal, including the Alliance for Charitable Reform, have been meeting with Ways & Means staffers who have been receptive toward their concerns, according to Bloomberg BNA.
New Regs Allow Alternative Research Credit on Amended Returns. Taxpayers can now make the election on an amended return to use the alternative simplified credit method for calculating the credit for increasing research activities, the IRS said in a set of final, temporary and proposed regulations. The final rules remove a provision in tax code Section 41(c)(5) that prohibits a taxpayer from making an ASC election for a tax year on an amended return.
FATCA List Filling Up. The Treasury Department has posted the first searchable list of about 77,000 foreign financial institutions (FFIs) around the world that have registered to comply with the Foreign Account Tax Compliance Act, including some large U.S.-based banks with foreign operations. The list includes financial institutions and branches with an approved status as of May 23, 2014.
OECD Meets in D.C., Stirs Up Controversy. The Organisation for Economic Co-operation and Development (OECD) co-hosted an international tax conference in Washington, D.C., last week to discuss its ongoing base erosion and profit shifting (BEPS) project aimed at clamping down on international tax-avoidance strategies. OECD officials joined panels with IRS international tax heads and business representatives to discuss the project’s progress and its related initiatives.
Top Republican tax writers in Congress took the opportunity to join some of the biggest U.S.-based companies in warning that global negotiations to limit businesses from shifting profits to low-tax countries could harm Americans. House Ways and Means Committee Chairman Camp and Senate Finance Committee Ranking Member Hatch released a joint statement warning that other governments may be using the OECD BEPS project as a way to “raid the American Treasury.” The lawmakers say while they are willing to work through the issues until an international consensus exists, “we will not be rushed into a bad outcome.”
COURTS & LEISURE
Manufacturer Battles IRS Over Cross-Border Transaction. The Internal Revenue Service and manufacturer Illinois Tool Works Inc. are battling in U.S. Tax Court over a $356.8 million dispute that highlights a type of cross-border tax avoidance strategy facing increased scrutiny worldwide. Reuters reports that “[a]s governments crack down on tax-driven profit-shifting, the IRS is asserting that a loan used by Illinois Tool to bring foreign cash from a Bermuda-based subsidiary into the United States was not a tax-free transaction. Instead, the IRS argues that the transaction was a repatriation of foreign profits equivalent to a dividend-style distribution.” The outcome of the case could have wide-ranging impacts on U.S. multinationals, which frequently use similar transactions. Read more here.
Supreme Court Won’t Hear Wells Fargo Tax Case.
The U.S. Supreme Court declined on Monday, June 9, to hear an appeal from Wells Fargo & Co. in a case involving a complex financial deal implemented by the banking group that the government said was set up solely to avoid millions of dollars in taxes.
The high court’s order will let stand an appeals court ruling last year that said the Wells Fargo deal, which generated more than $400 million in tax losses, lacked any business purpose or “economic substance” beyond tax avoidance. Read more here.
The House will take up the following tax bills this week: America’s Small Business Tax Relief Act of 2014 (H.R. 4457), the Permanent S Corporation Built-in Gains Recognition Period Act of 2014(H.R. 4453) and the Permanent S Corporation Charitable Contributions Act of 2014 (H.R. 4454) — combining the two S corporation bills into one measure.
House Ways and Means Committee
The subcommittees on health and oversight are holding a joint hearing today, June 10, 2014, to look at potential fraud and data issues in Obamacare. Specifically, the joint hearing will explore the government’s ability to verify income and insurance information in order to ensure the accuracy of premium tax credit payments under the Affordable Care Act.
The Senate is expected to take up a measure this week, S. 2292, that would allow those with higher-interest student loan debt to refinance at the current, lower rate — a measure that would be offset by phasing in higher taxes for the wealthy, also known as the “Buffet Rule.” The measure, which has the backing of President Obama, is not expected to pass.