The tax reform effort in the U.S. Congress has accelerated this month, with Senate Finance Committee Chairman Max Baucus and Ranking Member Orrin Hatch together issuing a Dear Colleague letter to fellow Senators, asking for their help in crafting a tax reform bill.
The letter announced the committee leaders’ intention to mark-up a tax reform bill this fall, and indicated their desire to start this legislative process with a “clean slate” — i.e., assuming that all “tax expenditures” (special deductions, credits, and similar items) would be considered removed from the U.S. tax code. The letter also asked all Senators to submit by July 26, in writing, any tax expenditures that they would like to see included in the new U.S. tax code, and to include detailed specifications and policy justification. In addition, the letter indicated the Committee leaders’ intent to begin drafting tax reform legislation over the August congressional recess.
Though many continue to dismiss congressional tax reform efforts as likely to bog-down based on macro partisan jousting, we are counseling clients to take this process very seriously. We continue see real movement on tax reform behind the scenes and expect that legislation could begin to take center-stage — with committee action — as early as the late fall of this year. Though it is unlikely that Congress could achieve final enactment of a tax reform bill this year, it is more likely that we could see enactment of tax reform in 2014.
The policy line-drawing exercise on particular tax code provisions that is getting underway in the congressional tax-writing committees presents risks for industries and individual companies on the provisions they care about most. If early policy-calls go against particular provisions, it may become very difficult to reverse these early decisions in the future.
Some key information related to the Baucus / Hatch letter:
- The letter went to all U.S. Senators and submissions have been requested from all Senators, not just committee members.
- The Committee has not yet developed a specific plan for next-steps or a timetable for bill consideration, but they would like to start moving legislation this fall, and will start drafting legislation this August.
- Submitted proposals will be considered by the committee starting immediately following the July deadline. Late submissions will also be considered, but at some point, as the drafting process progresses, it will become more difficult for the committee to consider new ideas.
- Part of the goal in starting with a “blank slate” is that the committee would like to eliminate provisions in the current tax code that no longer have broad support or good policy justifications.
- All current tax expenditures are “on the table” so all constituencies are at risk.
- Proposals with bipartisan support will have a better chance of being included in the new tax legislation.
- The Committee is hoping to see new, fresh ideas and not just proposals to restore or extend current tax code provisions.
Consistent with this process, we continue to believe that the elements that will be included in the U.S. tax reform bill that is finally enacted — whenever that may be — are being drafted now. As part of this effort, beyond the siren-call for a lower corporate rate, in the realm of ‘loophole closers and simplification,’ lies the potential for significant tax increases on U.S. businesses.
Possible elements of a tax reform bill, among many others, include: 1) international tax reform, which would move the U.S. tax code to a (semi) territorial system, but could also impose taxes on all accumulated earnings and profits held offshore by U.S. companies; and 2) derivatives taxation reform, which could tax derivatives on an annual mark-to-market basis with ordinary gain or loss treatment.
Other items likely to be considered include:
- repeal of accelerated depreciation and replacement with slower “economic” depreciation;
- reduction in deductibility of U.S. interest expense to reduce tax bias toward debt financing;
- significant new “earnings stripping” restrictions on the deductibility of outbound interest and other payments from the U.S. affiliate to its foreign multinational parent;
- requiring U.S. multinationals to pay a minimum tax on overseas profits;
- deferral of the U.S. interest expense deduction deemed attributable to U.S. multinationals’ foreign earnings until such earnings are repatriated to and taxed in U.S.;
- imposing current taxation on “excess profits” of U.S. multinationals associated with transfers offshore of high value intellectual property to low tax countries and other “tightening” of transfer pricing rules;
- repealing energy industry tax preferences; and
- imposing an entity-level tax on income of large businesses operated in pass-through (partnership, LLC, S-Corp, MLP) form.
For any business seeking to better understand and/or to influence the potential consequences of a tax reform bill, it is critical to become engaged now, beginning with the task of scrutinizing the details of the emerging tax reform plans and assessing the potential impact on their businesses, including running numbers regarding tax and financial statement impacts.
Our tax policy experts, including several veterans of the 1986 Tax Reform Act, are watching and engaged closely in developments in this area. If you have concerns regarding how U.S. tax reform will affect your U.S. business operations, we would be happy to provide you with our thoughts on the latest developments and how we can assist you in protecting your interests.