After a slow start to the new year, Congress and Treasury are gearing up for a busy first half of 2019. Congress has the following items under consideration: tax extenders, technical corrections to the Tax Cuts and Jobs Act (“TCJA”), and additional substantive tax reform proposals. Treasury, of course, has a deadline looming to finalize regulations to make them effective as of the TCJA’s enactment date. Not to be left out, the OECD just released a public consultation document on the challenges of the taxing the digital economy.
When the new Congress was sworn in in January, there were changes to the make-up and leadership of the tax writing committees. The Senate Finance Committee lost four members at the end of the 115th Congress. Senator Orrin Hatch (R-UT), who served as chairman of the Committee during the 114th and 115th Congresses, retired after serving seven terms in the Senate. Senators Dean Heller (R-NV), Bill Nelson (D-FL) and Claire McCaskill (D-MO) lost their reelection bids. The Committee added five members for the 116th Congress, three Republicans and two Democrats: Senators James Lankford (R-OK), Steve Daines (R-MT), Todd Young (R-IN), Maggie Hassan (D-NH), and Catherine Cortez Masto (D-NV). Although not a member of the Committee at the time, Senator Daines played an active role in the TCJA. The membership is currently 15 Republicans and 13 Democrats.
Senator Chuck Grassley (R-IA) has become the chair of the Committee. Under Senate Republican rules, he can serve as Chairman for two years, and then will need to hand over the gavel to either the next Republican in line (Senator Crapo (R-ID)) or a Democrat if the Senate changes control in the 2020 elections. Senator Grassley, who has previously served as Committee Chairman, has a strong interest in hearings and oversight. Tax extenders are a particular priority for Chairman Grassley and he tried (unsuccessfully) to get tax extenders included in the appropriations funding that was passed in mid-February. We expect him to continue to search for legislative vehicles where he can add the extenders provisions. Senator Ron Wyden (D-OR) retained his position as ranking member of the Committee.
Because Democrats won control of the House, the leadership of the House Ways and Means Committee changed, as did the number and composition of Committee members. In the 116th Congress, there are 25 Democrats and 17 Republicans on the Committee. Representative Richard Neal (D-MA) has taken over as chair of the Committee, and Representative Brady now serves as the ranking member. Chairman Neal will focus on pension and retirement issues and has already stated that he will introduce a bipartisan retirement security bill in 2019. Representative Mike Thompson (D-CA) is the chairman of the Select Revenues Measures Subcommittee with Adrian Smith (R-NE) serving as ranking member. Chairman Neal has announced that the Ways & Means committee will hold several hearings on the TCJA, and we expect Representative Thompson to take the lead in organizing those hearings over the next few months. Although a schedule has not yet been announced, we understand that the committee will organize the hearings by subject matter--likely addressing individual tax provisions first, followed by the business and international provisions.
There have been several staff changes at both committees--after the passage of the TCJA, many staff members moved on to other opportunities. At Senate Finance, Mark Warren (formerly tax and trade counsel to Senator Thune) has become Chief Tax Counsel to the majority staff. At Ways & Means, Andrew Grossman (formerly legislation counsel to the Joint Committee on Taxation) has been appointed as Chief Tax Counsel to the majority staff. Both Warren and Grossman, as well as several other staff members, were involved during the TCJA legislative process, ensuring that critical knowledge of the decisions made during the TCJA process is maintained at the staff level.
Tax extenders are an area that is ripe for bipartisan agreement. Roughly 30 provisions expired at the end of 2017, and Congress will need to take up extenders in 2019. As noted above, Chairman Grassley is interested in promptly enacting tax extenders, and is currently considering legislation that would include extenders for both 2018 and 2019.
During the 115th Congress, Representative Brady introduced a discussion draft of technical corrections on January 2, 2019, immediately prior to the beginning of the 116th Congress (the “Brady bill”). Provisions in the Brady bill included provisions relating to qualified improvement property (“QIP”), the net operating loss effective date, transition tax overpayment, and revisions to downward attribution (in particular as applicable to controlled foreign corporations) designed to limit the application to decontrolling transactions by foreign-parented multinational businesses. The Brady bill expired on January 3, 2019, when the 116th Congress began, and the provisions contained in the Brady bill will not become law unless they are reintroduced in new legislation in the 116th Congress. While both committees are interested in technical corrections, there isn’t universal agreement that all of the provisions in the Brady bill qualify as technical corrections (generally, technical corrections are scrivener’s errors or other changes to implement clear Congressional intent). Chairman Neal, in particular, has indicated that Ways & Means Democrats will engage in a thoughtful and methodical review of any proposed technical corrections, and we expect Senate Finance Democrats to adopt a similar approach. One possible approach is for Congress to quickly enact non-controversial provisions, such as fixing the QIP glitch and the NOL effective date provision, and consider more controversial provisions on a separate track.
As regular readers know, Treasury and the IRS intend to finalize most or all of their high-priority TCJA guidance by June 22, 2019 to avail themselves of the rule in section 7805(b)(2) that permits any guidance finalized by that date to be retroactive to the date of the TCJA’s enactment. Although this is an ambitious deadline, we expect Treasury to finalize most of the regulations implementing the international provisions by June 22. The last remaining proposed regulations in this area are the Foreign-Derived Intangible Income (FDII) proposed regulations. The Office of Information and Regulatory Affairs (OIRA) completed its review of the FDII proposed regulations on February 21.
After Treasury’s self-imposed deadline of June 22, 2019 for issuing final regulations on the high priority provisions passes, we expect Treasury to turn its attention to regulations implementing other provisions of the TCJA that were not as time-sensitive.
Treasury representatives continue to be busy at the OECD, which has released two pieces of guidance on taxing the digital economy in 2019 (policy note on January 29th and public consultation document on February 13th). A public consultation is scheduled for March 13-14, 2019. Members of Baker & McKenzie’s policy practice are expected to attend, and possibly testify at, the public consultation.
The coming year promises to be an extremely busy year in US tax policy. Opportunities continue to exist for taxpayers to interact with Treasury and the IRS to seek favorable guidance implementing the TCJA’s provisions--in particular, taxpayers have been active in drafting comment letters, testifying at public hearings on proposed regulations, and meeting with Treasury and IRS to discuss forthcoming guidance on behalf of taxpayer-clients and trade associations. At the Congressional level, there continue to be opportunities to seek legislative changes, without the time pressure that existed during the TCJA legislative process. For example, the Fair Credit Coalition seeks equal treatment for all tax credits under the BEAT. Clients who are interested in joining the Coalition or advancing other legislative and regulatory goals should be considering such actions at this time.