Washington Tax Insight Dec 2016

HouseCongressman Paul Ryan (R-WI) will return as Speaker of the

House with Congressman Kevin McCarthy (R-CA) as Majority

Leader and Congressman Steve Scalise (R-L) as Majority Whip.

House Democrats have chosen current Minority Leader Nancy

Pelosi (D-CA) to retain her position, House Ways & Means

Committee Chair Kevin Brady (R-TX) keeps his position and

will lead the House effort on tax reform in 2017. Congressman

Richard Neal (D-MA) replaces Sander Levin (D-MI) as Ranking

Member on the Committee.

The Ways and Means Committee currently has 39 members,

split between 24 Republicans and 15 Democrats with no

announcements yet as to whether that ratio will change.

Two Democrats chose to retire – Congressman Charles Rangel

(D-NY) and Congressman Jim McDermott (D-WA) – and

three Republican seats will be filled due to the departures of

Congressmen Dold (R-IL), Boustany (R-LA) and Young (R-IL).

SenateSenator Mitch McConnell (R-KY) will return as Majority

Leader for the Republicans. His counterpart as Minority Leader

will be Senator Charles Schumer (D-NY), who replaces the

retiring Senator Harry Reid (D-NV). Senator Schumer named

an expanded leadership team of 10 Senators including Senators

Bernie Sanders, Dick Durbin, Patty Murray and Joe Manchin.

Senate Democrats are viewed as the last line of defense against

the Trump agenda due to the general requirement of 60 votes

in the chamber necessary to break a filibuster. In the next

Congress, the Senate will have 51 Republicans, 48 Democrats

and one independent.

Senator Orrin Hatch (R-UT) returns as Chair of the Senate Finance

Committee. Senator Ron Wyden (D-OR) won re-election and

returns to lead the Democrats on the Committee. Several

Republican members won re-election including Senators

Portman (R-OH), Grassley (R-IA), Burr (R-NC), Crapo (R-ID),

Isaakson (R-GA), Scott (R-SC) and Thune (R-SD) with one

member to be replaced, Senator Dan Coats (R-IN), who will

retire at the end of the year.

Lame Duck SessionThe GOP-controlled Congress

will likely want to avoid a

lengthy lame duck session

in anticipation of the new

administration. But with the

current Continuing Resolution

due to expire on December

9th, Speaker Paul Ryan

has announced that House

Republicans will pursue a

short-term spending bill

December 2016 A publication from

Election Results and the Policy AgendaOn November 8th, Donald Trump was elected the 45th president of the United States. During the transition period until inaugurationday on January 20, 2017, he is working to assemble a team of advisors and cabinet members. President-elect Trump discussed taxreform as a priority during his campaign and released a package of tax proposals, but it is difficult to predict what the pace and contentof tax reform will be under a Trump Administration until key appointments are made and a more detailed package of proposals is available. The key appointee for the agenda on tax reform will be Trump’s pick for Treasury Secretary, Steve Mnuchin, a former WallStreet executive who served as the campaign finance manager. Although IRS Commissioner Koskinen’s term does not expire until November 9, 2017, it is unclear whether he will be replaced sooner considering efforts by House Republicans to impeach him.

WashingtongTax Insight

President-elect Trump discussed

tax reform as a priority during

his campaign and released a

package of tax proposals, but

it is difficult to predict what

the pace and content of tax

reform will be under a Trump

Administration until key

appointments are made and

a more detailed package

of proposals is available.

“

Prepared in conjunction with Potomac Law Group PLLC

”

True Partners Consulting | Boston | Chicago | Dallas | Long Island | Los Angeles | New York City | San Jose | Tampa | TPCtax.com

Washington Tax Insight December 2016 Page 2


A publication from

to fund the government at current levels through the end of

March 2017. Senate Majority Leader McConnell has given some

signs that he would also like to move a spending bill that funds

the government at current levels through March 2017.

Delaying action until March on budget and spending issues allows

the Trump Administration the chance to have an impact on the

budget for the rest of the 2017 fiscal year and avoids a fight over

these issues in the lame duck session. Some Republicans have

expressed concerns about this approach, however, noting that this

could result in budget fights early in the Trump Administration,

which could lead to a delay in other key elements of the Trump

agenda in the first 100 days.

Other issues that could be considered prior to the end of the

year include the 21st Century Cures Act (a bipartisan House-

passed bill on the development of new medical treatments

and prescription drugs); water and energy legislation; the Iran

Sanctions Act; and the annual defense policy bill. With a

short-term limited spending bill, the prospects for tax extenders

legislation does not look promising, but staff representatives

of SFC have indicated that a handful of noncontroversial tax

bills could be approved prior to the end of the year including

technical corrections and two pension-related bills.

The 2017 Agenda – the First 100 DaysPresident-elect Trump has called for a broad legislative

agenda that includes tax reform, major changes to the

Affordable Care Act (ACA), expanding the military, and

significant infrastructure building. These are programs that

will cost billions of dollars and the impact on the deficit will

have to be considered by Congressional leadership as these

programs are advanced by the Trump Administration in 2017.

Congressional Republicans have indicated that repeal of the

Affordable Care Act (ACA) will be one of their first priorities,

and they are considering use of the budget reconciliation

process to advance this legislation. The chairmen of the

House and Senate Budget Committees have informally

agreed to do both a 2017 and 2018 budget early in the Trump

Administration which could pave the way for use of the

reconciliation process, which avoids the problems of a

Senate filibuster by requiring only 51 votes for passage.

Treasury and the IRSPost-elections, House W&M Committee Chair Brady indicated

that he hopes the incoming Trump Administration will reverse

position on the Treasury Department’s Section 385 earning

stripping regulations. Several business groups, including the

Business Roundtable, the National Association of Manufacturers

and the Organization for International Investment are also taking

the position that the recently finalized anti-inversion rules,

including the controversial earnings stripping regulations, should

be pulled back when the Trump Administration takes over. The

Treasury Department has indicated that they intend to finalize the

"serial inverter" rule that it proposed in the spring, which aims to

prevent non-U.S. companies from engaging in multiple merger

deals that allow their U.S. partners to rebase in low-tax countries,

if only on paper.

Treasury and the IRS issued final regulations on certain

transactions between controlled foreign corporations (CFCs)

and foreign partnerships. The regulations cover the treatment of

property held by a CFC as United States property in connection

with certain loan or guarantee transactions involving partnerships.

The final regulations also provide rules for determining whether

a CFC is considered to derive rents and royalties in the active

conduct of a trade or business for purposes of determining

foreign personal holding company income (FPHCI), as well

as rules for determining whether a CFC holds US property as a

result of certain related party factoring transactions. These rules

finalize proposed regulations issued in 2015 and a portion of a

1988 proposed rule. The IRS also issued proposed rules under

section 1.956-4(b) so that a CFC that is a partner in a controlled

partnership determines its share of US property held by the

partnership under the liquidation value percentage method,

regardless of the existence of any special allocation of income

or gain from the property.

In Revenue Procedure 2016-55, the IRS announced several

annual inflation adjustments scheduled to be effective

in 2017. Included are: (1) the standard deduction which

will be $12,700 (increase of $100) for married filing jointly,

$6350 (increase of $50) for single filers and married filing

individually, and $9350 (increase of $50) for heads of

households; (2) income limit on itemized deductions of

individuals will start at $287,650 or more (with $313,800



Washington Tax Insight December 2016 Page 3 A publication from


for married couples filing jointly); (3) AMT exemption

increases $400 to $54,300 and phases out starting at

$120,700 (with $84,500 for married couples filing jointly

with phase out to begin at $160,900); and (4) personal

exemption remains unchanged at $4050 subject to a phase-

out beginning at $262,500 in income (with $313,800 for

married couples filing jointly).

IRS Appeals Chief Kirsten Wielobob issued a letter clarifying

certain changes to the IRS appeals process as a result of recent

changes that had caused concern with some practitioners. These

changes included a proposed shift of authority to settle cases away

from the Appeals Team Case Leaders (ATCLs) to their managers,

shifting most Appeals conferences away from in-person meetings

to phone conferences, and allowing Chief Counsel and/or

Compliance to be present for Appeals conferences. The letter

stated that settlement authority would remain with the ATCLs

with possible modifications to existing processes. It also indicated

that Appeals will revise its procedures to be clear that a manager

must review a case and propose any changes prior to the ATCL

finalizing the settlement.

International Issues

OECDThe Global Forum on Transparency and Exchange of

Information held its annual meeting in November with 220

delegates from 84 jurisdictions and 12 international organiza-

tions to further the shared goal of improving tax transparency

and achieving a level playing field. The meeting came at the

completion of the first round of the Forum’s peer review

process, with the release of 17 new reports assessing the level

of compliance with the international standard for exchange of

information on request. A special fast-track review procedure

was agreed at the meeting to enable the Forum to recognize

progress made by mid-2017 and to assess changes being made

in various jurisdictions. A second round of peer reviews

currently in progress will include an assessment of the

availability of and access by tax authorities to beneficial

ownership information of all legal entities and arrangements.

European CommissionThe EU is moving ahead with its proposals for a uniform set

of rules on taxing corporation profits which would require

multinational companies to pay taxes based on where their

assets and employees are located and where their sales take

place. These proposals known as the common consolidated

corporate-tax base (CCCTB) are aimed at curbing creative tax

reporting, tax evasion and sweetheart deals that some European

countries have used to attract companies as reflected in the

information gathered as part of the EU state aid investigations.

To become law, the CCCTB needs unanimous approval from all

28 EU member states and subsequent approval by each of their

national parliaments. If enacted, the law would take effect in

two phases. First, companies whose European operations have

more than 750 million euros a year in revenue would have to

calculate their taxable profits under a set of accounting rules that

apply across all EU countries. In the second phase, companies

would have to pay taxes in member states based on three criteria:

assets, employees and sales. The EU’s Council of Ministers will

discuss the first part of the proposed rules in 2017 and will move

on to the second part of the rules only after agreeing to the first.

The European Parliament Committee of Inquiry Into Money

Laundering, Tax Avoidance and Tax Evasion (PANA Committee)

held a public hearing titled “Anti-money laundering and

tax evasion: Who assures compliance with the rules and enforces

them?” The purpose of the hearing was to “learn from law

enforcement bodies how the rules against money laundering

and tax evasion are enforced.” One of the recommendations

from experts is to set up a European register of beneficial

owners of companies.

Prospects for Tax Reform in 2017With Donald Trump winning the presidential election and Republicans

maintaining control of both the House and Senate, the prospects for tax

reform in 2017 have significantly increased. Following Trump’s pick of

Steve Mnuchin as Treasury Secretary, the next key position to be filled

will be the Assistant Secretary for Tax Policy.

Even though the path to comprehensive tax reform now looks more

promising, many questions and challenges remain. Will the Republicans

want to produce a bipartisan bill and compromise with the Democrats,

and, if so, what approach will the Democrats take? Will Republicans

try to use the budget reconciliation process to move tax reform?

To what extent must tax reform be revenue neutral, and how should

revenue and distributional effects be measured? If Trump pairs tax

reform with infrastructure spending, will both be advanced as part

of a 100-day agenda? Will the costs of an infrastructure bill be totally

offset or will there be a significant increase in the federal deficit if tax

reform fails to cover the costs of the infrastructure plan?

While similar in some respects, there are significant differences

between the Trump tax proposals released during the campaign and key

proposals in the GOP Blueprint on tax reform released this past summer.

Both plans want to lower the 35 percent corporate tax rate, call for a

lower rate on pass-through businesses, and suggest a deemed repatriation

of offshore earnings of US companies, but they differ in many details

including applicable tax rates. Most importantly, the GOP plan for

corporate taxes proposes a destination-based approach that would apply

taxes based on where goods, services and intellectual property are

consumed (rather than produced), and calls for a “border adjustments”

system that would tax US imports but not exports, while the Trump tax

plan does not specifically include these proposals.

A key issue that will affect the pace of tax reform legislation and the

policy therein is whether a bipartisan effort can be successful. A Trump

economic advisor, Stephen Moore, has commented that bipartisan

legislation is important to this effort, and Ways & Means Committee

Chair Brady has stated that he would prefer to take a bipartisan approach

to tax reform. He commented, “We are going to ask for and seek

[Democratic] input, and listen to these ideas as we go forward. Because

at the end of the day, I think tax reform is more durable and long-lasting

and pro-growth if we can find common ground between Republicans and

Democrats.” Ranking SFC Democrat Wyden has also voiced his support

for a bipartisan approach to tax reform. Should bipartisanship not be

workable or achievable, it is likely that Congressional Republicans will

look to the budget reconciliation process to move tax reform legislation,

since this would allow tax reform to be passed in the Senate with only

51 votes, thereby avoiding a potential Senate filibuster.

The HouseSpeaker Ryan has consistently viewed comprehensive tax reform as one

of his priorities for the House agenda. Post-elections, W&M Committee

Chair Brady indicated that he plans to move ahead quickly on tax

reform commenting “Tax reform is going to happen in 2017,” and

adding that the panel will be “ready to move this early.” He plans to

use the House GOP Blueprint released in June as the starting point,

and his staff has been working to produce legislative language reflecting

the Blueprint proposals after meeting for months with business groups

and taxpayers to get their input on the proposals.

The GOP Blueprint calls for cutting tax rates for corporations, pass-

through businesses, and individuals; adopting a territorial system for

taxing foreign-source income of US multinationals; and moving the

US toward a border-adjustable cash flow tax system without adopting

an explicit consumption levy such as a national sales tax or value-added

tax (although the plan functions economically as a subtraction-method

VAT rather than as an income tax). His goal is to produce a revenue

neutral bill measured under a “dynamic” scoring model. Whether and

when legislative language might be released is unclear, and no schedule

for Committee and House Floor action has been released.

House Democrats have targeted inversions and earnings stripping as

well as higher taxes on corporations and wealthy individuals, but they

have not produced a comprehensive blueprint to counter the GOP plan.

The SenateSenate Majority Leader McConnell has not shared the interest of

Speaker Ryan in making tax reform a top priority issue. SFC Chair Hatch

does support moving ahead on tax reform, but he has focused his attention

in 2016 on an alternative approach consisting of a corporate integration

plan lowering the corporate tax rate by combining a dividends-paid

deduction with a withholding tax on dividend and interest payments.

The details of his plan have not been made public to date but a Senate

Finance Committee staff representative recently commented that a

draft could be completed during the lame duck session.

The two leading Democrats on the issue of tax reform are Schumer, the

soon-to-be Minority Leader, and Wyden, who continues as the Ranking

Democrat on the Committee. Wyden has supported moving on the issue

of inversions in the short term, but has also issued several discussion

drafts on tax reform topics in the past several years. Schumer, who has

not always aligned with Wyden on approach and policy, has been active

on the topic of tax reform, supporting international tax reform paired

with infrastructure spending.






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Procedural Issues – Using Budget Reconciliation?The budget reconciliation process has often been used in past years to

advance targeted tax changes through Congress. A budget resolution is

necessary first with the inclusion of budget reconciliation instructions,

after which the legislation then enjoys certain protections including

the requirement of 51 votes for passage (thereby avoiding a Senate

filibuster). Under current reconciliation rules, however, the legislation

must be deficit neutral over a 10-year period. If it is not, the legislation

must sunset after the 10-year period. The plans currently put forward

by Republicans would likely result in a significant increase in the

deficit, so this issue must be addressed by Republican leadership if

they decide to utilize the budget reconciliation process.

An alternative to using the budget reconciliation process would require

compromise with Senate Democrats, who must decide whether they

want to work with Republicans to advance some of their own tax reform

proposals or whether they will choose to block tax reform legislation

under a Trump Administration.

Emerging Key Policy Issues in the Tax Reform DebateOne of the key issues in the tax reform debate is what the treatment

will be of the offshore income being held currently by US companies –

whether there will be a requirement that it be repatriated subject to a

low tax rate and, if so, how will that money be used – to lower rates

generally or to fund infrastructure spending. The GOP Blueprint includes

a one-time deemed repatriation of deferred active foreign-source income

of US multinationals with differential rates for cash (8.75 percent) and

noncash assets (3.5 percent), which could be paid ratably over eight

years at the taxpayer’s election. Chair Brady has stated that the one-time

revenue generated from deemed repatriation should be used to offset

the cost of reducing the corporate tax rate to 20 percent and the

pass-through business rate to 25 percent. In contrast, other key players

have supported using

that revenue for

infrastructure spending,

notably Speaker Ryan

who worked with

Senator Schumer on

legislation, and

potentially the incoming

Trump Administration.

The Trump tax plan

includes a one-time

deemed repatriation of

accumulated deferred

foreign income at a

10 percent tax rate

along with a $1 trillion

investment in

infrastructure spending,

although the two proposals have been linked only by comments after

the election from his advisors including Stephen Moore.

Another proposal in the House GOP Blueprint which has drawn interest

relates to “border adjustments” and provides that exports would not be

subject to US taxes regardless of where they were produced, whereas

imports would be taxed in the US regardless of where goods were made,

with businesses taxed not on where the headquarters are but where

they sell their goods. This proposal was not included in prior year tax

discussion drafts so input from the business community has been

requested. Some advocates of this proposal believe it will gain bipartisan

support, raise over $1 trillion worth of revenue over a 10-year period and

help stop the increase in inversions, but it could also result in a significant

tax increase on retailers, which will make it controversial.

Under current reconciliation

rules, however, the legislation

must be deficit neutral over

a 10-year period. If it is not,

the legislation must sunset

after the 10-year period.

The plans currently put forward

by Republicans would likely

result in a significant increase

in the deficit, so this issue

must be addressed by

Republican leadership if

they decide to utilize the

budget reconciliation process.

“

”

Documents

Washington Tax Insight Dec 2016