Setting priorities in an election year 2016 Tax Policy Outlook January 2016

www.pwc.com/us/taxoutlook
Setting priorities in
an election year
2016 Tax Policy Outlook
January 2016
Washington National
Tax Services (WNTS)
Table of contents
The heart of the matter
2
An in–depth discussion
6
Balance of power
Global tax controversy
Economic outlook
Federal budget outlook
IRS challenges
Administration and congressional priorities
Tax reform
Expiring tax provisions
Regulatory projects
State taxes
Tax treaties and other international agreements
Trade and tariff legislation
Other legislation
7
9
12
14
17
19
19
24
25
25
27
29
30
What this means for your business
32
Appendices
34
Appendix A: Congressional budget process
Appendix B: Tax policymakers
Congressional leadership in the 114th Congress
House and Senate tax-writing committees
Key Treasury and other Administration officials
Appendix C: Comparison of certain presidential candidates tax plans
Appendix D: Senators up for election in 2016
Appendix E: H.R. 1, the Tax Reform Act of 2014
Appendix F: Selected federal tax expenditures
Appendix G: Selected potential revenue-raising proposals
PwC Tax Policy Services team
Acknowledgments
34
35
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49
The heart of the matter
Election-year politics will dominate
legislative action this year as both parties
lay down policy agendas for 2017 and
beyond. We expect President Obama and
the Republican leaders of Congress to
offer competing plans on how to reform
the US tax system and to promote other
policies intended to increase economic
growth and make American companies
more competitive. At the same time, both
Democratic and Republican candidates
seeking their party’s presidential
nomination are advancing tax reform
plans. Leading up to the November 8
elections, we also expect elected officials
to highlight differences between the
two political parties over how to address
national security, terrorism, immigration,
healthcare, energy, the environment,
and other economic and social issues.
2
PwC Setting priorities in an election year
During his final year in office, President Obama likely will
continue to rely on his Administration’s regulatory authority
and the presidential veto to preserve the 2010 Affordable
Care Act (ACA) and other legislative and regulatory actions
taken during his years in office. House Speaker Paul Ryan
(R-WI) has called for House Republicans to vote in 2016
on comprehensive tax reform legislation and on changes
to federal entitlement programs as a way to define and
build support for a conservative legislative agenda. We also
expect Senate Majority Leader Mitch McConnell (R-KY)
to advance a conservative legislative agenda with a focus
on demonstrating an ability to govern and with an eye
on protecting the 54-seat Republican Senate majority.
Despite differences between the two political parties, Congress
last December passed, with bipartisan support, a major
tax bill with an estimated revenue cost of $680 billion over
10 years. The primary focus of the legislation was to provide
for retroactive and permanent extensions of the research credit
and 21 other business and individual tax provisions. More
than 30 other expired provisions were renewed retroactively
and prospectively for a total of either two or five years. The
legislation also included tax provisions delaying or suspending
the ACA medical device excise tax, a health insurance
provider excise tax, and implementation of the ‘Cadillac’
excise tax on high-cost employer-provided health insurance.
Despite divided government, Congress in 2015 also
succeeded in enacting several other significant pieces of
legislation including:
• A long-term replacement for Medicare physician
pay rules, which since 1997 had required passage
of a series of temporary ‘doc fix’ bills.
• A long-term federal highway and transit
program bill for the first time in a decade.
• An overhaul of the 2002 ‘No Child Left Behind’ education law.
• A six-year renewal of presidential ‘trade promotion
authority’ to negotiate trade agreements, although the
outcome remains unclear for a vote in 2016 on the TransPacific Partnership (TPP) multilateral trade agreement.
Overview
As a result of legislative successes in 2015, President Obama
and Congress face a limited number of ‘fiscal policy’ deadlines
this year. A temporary authorization of the Federal Aviation
Administration (FAA) and Airport and Airway Trust Fund
taxes expires on March 31, and a temporary moratorium on
state and local Internet taxes will expire on September 30.
President Obama and Congress face the annual September
30 deadline to fund federal departments and agencies
through fiscal year 2017, but the 2015 bipartisan budget
agreement on spending levels is expected to help the
President and Congress to avoid a government shutdown.
With a House vote last week, on January 6, Congress
completed action on a ‘budget reconciliation’ bill that repeals
key ACA provisions. Last year, budget reconciliation procedures
allowed ACA repeal legislation to clear the Senate with a
simple majority vote instead of the 60-vote supermajority
generally required. While President Obama has vetoed this
legislation, the ability of Congress to pass an ACA repeal bill
using budget reconciliation rules could provide a roadmap
to how a future Republican president and a Republicancontrolled Congress would pursue that objective.
The budget reconciliation process originally was designed
to facilitate the adoption of deficit reduction legislation,
and was used numerous times in the 1980’s and 1990’s to
enact bipartisan budget agreements when the White House
and Congress were controlled by different political parties.
More recently, budget reconciliation has been used when
one party controlled both the White House and Congress,
but did not have a 60-vote ‘filibuster-proof’ majority in
the Senate. Under this procedure, Republicans enacted
the 2001 and 2003 individual tax rate reductions and
Democrats enacted the 2010 health care reform legislation.
The Republican-controlled Congress could choose to use
the FY 2017 budget process to outline proposals for tax or
entitlement reforms. No decision has been made yet on
whether the House and Senate in 2016 will pass a budget
resolution containing reconciliation instructions. For
more on Congressional budget rules, see Appendix A.
• A bipartisan budget agreement setting spending
levels for fiscal year (FY) 2016 and FY 2017 to
reduce the risk of a government shutdown.
• A suspension of the federal debt limit through March 2017,
averting the near-term risk of a default on the federal debt.
The heart of the matter
3
Election-year challenges for tax reform
President Obama will set forth his 2016 legislative goals
in his January 12 State of the Union address and in his
FY 2017 budget, which will be released on February
9 according to White House officials. We expect the
President will continue to advocate many of the tax
reform proposals included in his previous budgets as
part of his 2012 ‘framework for business tax reform.’
Legislative efforts to advance ‘business only’ tax reform
are likely to face the same political obstacles as last year,
when President Obama and Republican leaders in the
House and Senate explored options for lowering corporate
income tax rates, modernizing US international tax rules,
and providing relief to pass-through business taxpayers.
Last year, Congressional efforts to pursue broad business
tax reform were effectively blocked by opposition from
representatives of pass-through businesses, who objected
to a reduction in the US corporate income tax rate without
a reduction in the individual rate paid by such businesses.
They were concerned that S corporations, partnerships,
and sole proprietorships would be harmed unless the focus
remained on comprehensive reform lowering the top income
tax rate for both corporations and individuals. Meanwhile,
comprehensive reform that would lower individual tax rates is
widely acknowledged to be unachievable in 2016, on account
of President Obama’s expressed opposition to lowering the
top 39.6-percent individual income tax rate and his proposals
to raise additional revenues from upper-income individuals.
Both the House Ways and Means Committee and the Senate
Finance Committee will continue work on tax reform proposals
this year. Speaker Ryan and Ways and Means Committee
Chairman Kevin Brady (R-TX) have expressed continued
interest in the possibility of acting this year on ‘international
only’ tax reform. Senate Majority Leader McConnell, however,
has expressed skepticism that President Obama would be
willing to sign the sort of revenue-neutral tax reform legislation
that a Republican-controlled Congress would support. Senate
Finance Committee Chairman Orrin Hatch (R-UT) has said
that work will continue this year to develop comprehensive tax
reform proposals. One item on the Finance Committee agenda
is a plan to integrate the corporate and individual tax systems.
Congress is likely to review both permanent and temporary
tax provisions as part of comprehensive tax reform. The
permanent extensions of the research credit and 21 other
temporary provisions are now part of the federal budget
baseline, which could favorably impact future tax reform
legislation required to be revenue neutral since inclusion of
such provisions no longer will have to be paid for. Provisions
that were renewed only through the end of 2016 as part
of last year’s ‘tax extenders’ package may face a more
challenging environment to secure further extensions.
Focus on international tax reform
Efforts last year to combine a modernization of the US
international tax system with highway funding legislation were
unsuccessful, but key Republican and Democratic policymakers
developed a consensus on the need for international tax
reform. Key focus areas in talks last year included:
• Moving the United States to a dividend exemption
‘territorial’ international tax system.
• A one-time, mandatory tax on the accumulated
foreign earnings of US companies.
• Provisions to address concerns about base erosion, including
the possibility of a minimum tax on future foreign earnings.
Bipartisan support for updating US international
tax laws continues to grow in response to concerns
over the loss of US-headquartered companies as a
result of cross-border mergers and acquisitions.
Congress this year may continue to explore options for enacting
a preferential tax rate for income related to intellectual
property (IP). A July 2015 Senate Finance Committee
international tax working group report called attention to
the increased use of ‘patent box’ regimes by other countries
and expressed support for a US ‘innovation box’ to counter
efforts by other countries to attract highly mobile corporate
income. Later the same month, Ways and Means Committee
members Charles Boustany (R-LA) and Richard Neal (D-MA)
released an ‘innovation box’ proposal that would lower the
effective US corporate tax rate on certain IP-related income.
Bipartisan support for updating US
international tax laws continues to grow.
4
PwC Setting priorities in an election year
Global tax controversy
The Obama Administration and Congress in 2016 will continue
to focus on how US multinational enterprises may be affected
by implementation of the Organisation for Economic Cooperation and Development (OECD) base erosion and profit
shifting (BEPS) Action Plan. Since 2012, G20 countries and
the OECD have pursued an initiative to address allegations
of ‘unfair’ tax avoidance and ‘aggressive’ tax planning. Even
before the OECD negotiators reached consensus last year,
some countries had responded to the rhetoric accompanying
BEPS with increased tax audits, high-profile investigations,
and significant changes in their international tax rules. We
anticipate that foreign governments this year will accelerate
implementation of the BEPS Action Plan, as well as the
enactment of BEPS-inspired legislation and regulations.
Despite congressional concerns, Treasury officials in late
December released proposed regulations implementing
‘country-by-country’ (CbC) reporting. While the OECD
CbC Action Item calls for CbC information to be shared
only among tax authorities, European Commission (EC)
officials have suggested that public disclosure of certain
CbC taxpayer information remains an option. The UK
Conservative Party also promised that UK officials will
‘consider the case’ for making certain CbC reporting
information available to the public. Australia in December
2015 released ‘corporate tax transparency’ data listing ‘total
income, taxable income and tax payable’ in Australia of
over 1500 public and foreign private entities; the failure
of the Australian report to distinguish between total
revenues and total income highlights the reputational risk
posed by a selective release of taxpayer information.
Finally, since 2014, the EC has pursued claims of fiscal State
aid through tax provisions purported to deliver selective
benefits to multinational companies, many of which are
based in the United States. The State aid investigations
are occurring in the context of both the BEPS project and
a European Union (EU) focus on perceived aggressive tax
planning and tax avoidance by multinational companies.
The EC has opened investigations into tax rulings granted by
EU countries to specific companies and is reviewing the tax
ruling practices of EU member states. Last October, the EC
announced the adoption of final decisions in the formal State
aid investigations into two transfer pricing agreements, one
granted by tax authorities in the Netherlands and the other
granted by tax authorities in Luxembourg. Officials in both
countries have announced plans to appeal the EC State aid
ruling. Additional State aid cases pending further action by
the EC include tax rulings issued by Ireland and Luxembourg.
The EC also is reviewing whether certain tax regimes
maintained by other member states constitute State aid.
There is growing concern among many US policymakers that
the BEPS project and foreign tax authorities’ unilateral actions
constitute a ‘revenue grab’ by foreign governments and could
result in double taxation of US companies operating abroad.
These global tax developments will increase the risks faced
by US companies with significant international presence.
The heart of the matter
5
An in-depth discussion
6
PwC Setting priorities in an election year
Balance of power
In the House of Representatives, the second session of
the 114th Congress begins with 246 Republicans and 188
Democrats, plus one vacancy created by the resignation
of former Speaker John Boehner (R-OH) in late 2015. A
special election to fill the vacancy for the remainder of his
term will be held June 7. After initially declining requests to
run, then-Ways and Means Chairman Paul Ryan was elected
as the new House Speaker at the end of last October.
In the Senate, there are 54 Republicans and 46 Democrats
(including two Independents who caucus with Senate
Democrats). Senate procedural rules generally require 60
votes to limit debate on legislation and end a ‘filibuster.’
Under a Senate rule modification adopted in 2013, executive
branch and non-Supreme Court judicial nominations can be
approved by a simple majority of those present and voting
(51 votes if all 100 Senators are present). Senator Mitch
McConnell continues to serve as Majority Leader, while
Senate Democratic Leader Harry Reid (D-NV) has announced
plans to retire from Congress at the end of this year.
President Obama in 2015 vetoed three bills that were passed
by the current Republican-controlled Congress. In contrast,
President Obama vetoed only two bills during his first six years
in office, when the previous Democratic-led Senate generally
blocked bills passed by the Republican-controlled House
that he opposed. With Republicans continuing to control
both the House and the Senate, and President Obama in his
final year in office, the presidential veto could come into play
more often in 2016, especially if Senate Democrats feel less
inclined to employ the filibuster to protect the President from
having to veto legislation he opposes. A two-thirds majority
of both the House and Senate is required for a veto override.
House and Senate tax committees
Rep. Kevin Brady (R-TX) became chairman of the House
Ways and Means Committee following the election of
then-Chairman Ryan as Speaker of the House. Rep.
Sander Levin (D-MI) continues to serve as Ranking
Democratic Member. Rep. Tom Rice (R-SC) was added
to the committee to fill the vacancy on the panel created
when Rep. Ryan was elected Speaker. There currently are
24 Republicans and 15 Democrats on the committee.
The Senate Finance Committee continues to be led by Senator
Orrin Hatch (R-UT); Senator Ron Wyden (D-OR) remains
the Ranking Democratic Member. The Finance Committee
currently is composed of 14 Republicans and 12 Democrats.
A listing of House and Senate tax committee members
and other tax policymakers is provided in Appendix B.
Figure 1: Current composition of the 114th Congress
Republicans
Democrats
Vacancies
House
246
188
1
Senate
54
46*
*Includes two Independents: Senators Bernie Sanders (I-VT) and Angus King (I-ME).
An in-depth discussion
7
Looking ahead to the 2016 elections
Efforts this year by the two political parties and their
Presidential candidates to stake out positions in advance of
the November elections will influence what will be on the
agenda of Congress and how much can be accomplished.
The outcome of the Presidential and Congressional elections
will affect the prospects for tax reform after 2016.
Figure 2: 2016 Congressional legislative schedule
House convenes
January 5
Senate convenes
January 11
President’s State of the
Union address
January 12
House recess
January 14–22
Martin Luther King Jr. Day
January 18
President’s FY 2017 budget
expected
February 9
President’s Day recess
(House, Senate)
February 15–19
House recess
March 4–11
Spring recess (Senate)
March 21–April 1
Spring recess (House)
March 24–April 11
House and Senate recess
May 2–6
Memorial Day recess
(House, Senate)
May 30–June 3
Independence Day recess (House) June 27–July 4
Independence Day recess
(Senate)
July 1–5
Republican National Convention
July 18–21
Democratic National Convention
July 25–28
Labor Day recess (House, Senate)
August 1–September 5
Constituent work period (House)
October 4–7
Veterans Day recess
(House, Senate)
October 10–November 11
Election day
November 8
Thanksgiving recess
(House, Senate)
November 21–25
Target adjournment date
December 16
8
PwC Setting priorities in an election year
Three Democrats and a crowded (but shrinking) field of
Republican candidates are seeking their party’s presidential
nomination in an election season that begins with the
Iowa caucuses on February 1. The Republican and
Democratic national conventions to select their nominees
are scheduled for July. The general election will be held
November 8. A comparison of tax proposals released by
certain Presidential candidates is provided in Appendix C.
All 435 seats in the House are up for election every two
years. Democrats would need to achieve a relatively historic
net gain of 30 seats in the 2016 elections to gain control of
the House. House Ways and Means Subcommittee on Tax
Policy Chairman Charles Boustany (R-LA) will be giving up
his House seat to run for the Senate, and Ways and Means
members Charles Rangel (D-NY) and Jim McDermott (D-WA)
have announced plans to retire at the end of this Congress.
Roughly one-third of all Senate seats are subject to election
every two years. Democrats would need a net gain of five seats
in the 2016 elections to win a 51-seat majority in the Senate.
Majority Leader McConnell has said that one of his top goals
this year will be to protect certain vulnerable incumbents first
elected in the 2010 mid-terms and now seeking re-election in
a presidential year. Ten seats currently held by Democrats and
24 seats currently held by Republicans are up for election. Of
these, all 10 seats now held by Democrats and seven of the
24 seats now held by Republicans are in states that President
Obama won in the past two Presidential elections. Two
additional seats held by Republicans that are up for election
are in states that President Obama won in 2008. This history
suggests that control of the Senate could swing back to the
Democrats as a result of the 2016 elections, but that possibility
will be affected by the outcome of the 2016 Presidential race
and specific factors within individual campaigns and states.
A listing of all Senators whose seats are subject to election in
2016 is included in Appendix D. Senate Finance Committee
members up for re-election are Michael Bennet (D-CO),
Richard Burr (R-NC), Mike Crapo (R-ID), Charles Grassley
(R-IA), Johnny Isakson (R-GA), Rob Portman (R-OH),
Charles Schumer (D-NY), Tim Scott (R-SC), John Thune
(R-SD), Pat Toomey (R-PA), and Ranking Member Wyden.
Daniel Coats (R-IN) has announced he is not seeking reelection this year. Senator Schumer is expected to succeed
Senator Reid as Democratic Senate leader in 2017.
Global tax controversy
OECD BEPS action plan
On October 5, 2015, the OECD released final recommendations
from its base erosion and profit shifting (BEPS) project,
which were endorsed by the G20 leaders at their summit
in Antalya, Turkey, on November 15-16. A number
of non-G20 countries have been involved in work on
the Action Plan and contributed to the proposals.
The OECD’s BEPS Action Plan categorized its various focus
areas into three themes: addressing substance; coherence of
the international tax system; and transparency. Substance
actions seek to align taxing rights with the relevant valueadding activity. Coherence actions aim to remove gaps and
‘black holes’ among countries’ tax systems. Transparency
actions look to provide significant additional disclosure to
tax authorities. In addition to the various actions grouped
under these three themes, the BEPS Action Plan also seeks
to address digital business, improve dispute resolution, and
create a multilateral instrument for rapid updating of bilateral
tax treaties. Finalized proposals for all these items were
included in the package of measures released by the OECD.
There are three fundamental ways in which the OECD’s work
on BEPS will have a practical impact. First, and most obvious,
there will be the direct application of the BEPS package itself,
whether through changes to tax treaties (by amendment of
the OECD model tax treaty or the multilateral instrument) and
transfer pricing guidelines, or through changes to domestic
legislation as a result of individual recommendations of the
BEPS Action Plan. Second, there will be unilateral actions
by some countries, regardless of OECD efforts to discourage
such actions. Countries adopting unilateral measures may
do so because they disagree with the direction of the BEPS
package or think the recommendations do not go far enough.
OECD BEPS actions
are likely to mean
tougher and more
protracted challenges
by tax authorities,
and higher thresholds
for obtaining
advance rulings.
Third, and perhaps most important, there will be a behavioral
impact—specifically, in emboldening the behavior of tax
authorities. This is likely to mean tougher and more protracted
challenges by tax authorities, higher thresholds for obtaining
advance rulings, and increased tax controversies in general.
With regard to specific Action Plan items, the most significant
impacts for taxpayers are likely to be in the following areas:
• Tax treaty access becoming more constrained
and in some cases uncertain.
• Increases in transfer pricing documentation, new
‘country-by-country’ reporting requirements,
and the wider transparency agenda necessitating
company information system changes.
• Increased focus on conduct as a relevant test
in assessing transfer pricing compliance.
• Increases in assertions of permanent establishment (PE)
and erratic interpretation of PE profit attribution rules.
• Restrictions in the relief for interest
and other financial payments.
• Rise in the level of cross-border controversy
and number of disputes.
While almost all the OECD’s 2015 BEPS project objectives were
achieved with the release of the final reports on October 5,
some related work by the OECD will continue in 2016 and
beyond. This ongoing work relates to the following:
• Transfer pricing aspects of financial transactions.
• Attribution of profit to PEs—no changes are
anticipated in the authorized OECD approach but
additional guidance will be needed in how it applies to
commissionaire structures and similar arrangements.
• Use of profit split methods—a clarification
of existing guidelines.
• Implementation of hard-to-value intangibles
proposals—a clarification regarding the
practical approach that will be required.
• Other related work such as treaty abuse
and hybrid arrangements.
An in-depth discussion
9
The OECD has announced that there will be a second phase
of the BEPS project, dealing with implementation and
monitoring of the final reports. There is little detail yet on what
that work will entail, but it will be important for businesses
to follow and engage with the OECD’s continuing work.
With the inclusion of the non-OECD G20 countries in the
OECD’s continuing work, the difficulties faced in achieving
consensus on international tax rules as part of the BEPS
project likely will persist and may be exacerbated, resulting
in increased controversy and risk of double taxation.
All companies with international business activities will be
affected in some way by the BEPS project. Companies are
advised to assess immediate potential vulnerabilities (e.g.,
specific treaty access or PE issues) and consider remediation
actions. Companies will need to address general information
technology systems issues raised by the broad transparency
and documentation requirements. See below for more detail on
US tax treaty developments affected by the BEPS Action Plan.
Wider consideration of business structure and financing
arrangements and monitoring of the response of the tax
authorities in the jurisdictions where businesses conduct key
operations will be critical in this changing environment.
Tax departments will need to prepare for an expected increase
in controversies and disputes in the post-BEPS environment.
Finally, it will be important to ensure all parts of the business
enterprise understand the general impact of the BEPS project.
State aid
According to the European Commission, perceived ‘aggressive
tax planning’ is contrary to the ‘fair competition’ principles of
the European Union’s internal market. Under EU competition
law, Member States cannot grant ‘State aid’—e.g., subsidies
or tax reliefs—to specific companies on the internal market
without prior authorization by the EC. If EC authorities
determine that a tax benefit constitutes an unlawful selective
tax advantage, then the EC may order an EU Member State
to recover the tax benefit from the company with compound
interest for the 10 years from the opening of the investigation.
In June 2013, the EC announced a new focus on fiscal
State aid and tax. Since then, the EC has opened
investigations into specific tax rulings and tax regimes.
The investigations are focused primarily on the application
of transfer pricing rules and the allocation of profit.
Proposed country-by-country regulations
The Treasury Department on December 21, 2015 released proposed country-by-country reporting regulations. The proposed
regulations would require annual CbC reporting by US persons that are the ultimate parent entity of a multinational
enterprise (MNE) and that had at least $850 million in annual revenue for the preceding annual accounting period.
The new reporting requirements are proposed to be effective for taxable years of ultimate parent entities of a US MNE that
begin on or after the date of publication of the Treasury decision adopting these rules as final regulations. Thus, the new
reporting rules would apply for 2017 tax filings, at the earliest, for calendar-year US-headquartered multinational corporations
(MNCs). Unilateral actions by other countries may require filings in those countries by US MNCs at an earlier date.
In response to Treasury’s release of the proposed regulations, House Ways and Means Committee Chairman Brady
issued a statement that the guidance will be reviewed and that “Congress will not allow Treasury to move forward with
BEPS policies that enable foreign governments to misuse information reporting and exploit American companies.”
Ways and Means Subcommittee on Tax Policy Chairman Boustany introduced legislation (H.R. 4297) that would
delay Treasury providing CbC reporting to foreign tax authorities and provide for Treasury to suspend future
reporting to another country if that nation does not safeguard the confidentiality of the reported information.
10
PwC Setting priorities in an election year
The EC has requested that Member States provide information
about their tax ruling practices, including whether they provide
tax rulings and, if so, a list of companies that received rulings
between 2010 and 2013 (this inquiry was extended to all
Member States in December 2014). The EC has also requested
copies of individual tax rulings from 21 Member States.
The EC has extended
the State aid
inquiry to all EC
Member States.
On October 21, 2015, the EC announced the adoption of
final decisions in the formal State aid investigations into two
transfer pricing agreements, one granted by the Dutch tax
authorities to a subsidiary of a US parent company and the
other granted by Luxembourg to a subsidiary of an Italian
company. Having formally decided that each company
benefited from unlawful State aid, the EC ordered full
recovery of the aid. The EC estimates that the amounts to be
recovered are between EUR 20-30 million for each company.
Each final decision by the EC in these investigations pertains
to the use of tax rulings on the application of transfer
pricing rules. In each case, the EC takes the position that the
agreement made between the taxpayer and the Member State
does not reflect economic reality and sets prices that do not
reflect market conditions. The EC concludes that in each case
the agreement reflects the application of transfer pricing rules
in a way that gives rise to a particular (favorable) tax base.
Officials in both the Netherlands and Luxembourg have
moved to appeal the EC State aid ruling. Accordingly, the
Court of Justice of the EU ultimately will decide whether the
investigated transfer pricing arrangements constitute State
aid. Final rulings in these cases may take a number of years.
EC final decisions currently are pending in two other State
aid investigations involving transfer pricing agreements.
One deals with an agreement granted by Irish tax authorities
to a subsidiary of a US parent company, and the other is
a second case involving Luxembourg and an agreement
granted to a subsidiary of a US parent company.
On December 3, 2015, the EC announced a formal
probe of Luxembourg’s tax treatment of a subsidiary
of another US parent company, and there likely will
be further investigations announced during 2016.
It is clear from the EC’s approach to its investigations that
where a company’s tax treatment depends on the application
of transfer pricing principles, those principles need to reflect
market conditions and economic reality. The EC is critical
of the Member States’ (in this case Luxembourg’s and the
Netherlands’) application of transfer pricing principles to
the particular companies concerned as the EC views them
as not satisfying these conditions. In its opening decision,
the EC refers to the standards set by the OECD’s Transfer
Pricing Guidelines as being relevant. It will be important to
see the extent to which the EC follows the OECD guidelines
in its final detailed decisions. Any EC adoption of an arm’slength standard that differs from the widely used OECD
guidelines is likely to give rise to additional uncertainties.
Finally, the EC’s exact position is unclear in the case of Member
States that either do not have transfer pricing rules in their
domestic legislation or have rules that differ from the OECD
guidelines (to the extent they are relevant). The final detailed
decisions in these cases and the conclusions of the other
open inquiries may shed further light on this matter. In the
meantime, if a company has a ruling from an EU member state
or particular tax treatment based on transfer pricing principles,
a robust transfer pricing report based on OECD standards
may be important in defending against a State aid challenge.
An in-depth discussion
11
Economic outlook
While the global economy struggled through 2015, the US
economy continued to grow at a modest pace. Recent OECD
estimates projected that the US economy grew by 2.4 percent
in 2015, compared to 2.0 percent for all OECD countries
and 1.5 percent in the Eurozone. Headline indicators for
the US economy generally showed positive signs in 2015:
• The unemployment rate fell steadily over the year,
leveling out at 5.0 percent by December.
• Average prices, excluding food and energy, rose by
1.9 percent between October 2014 and October 2015;
overall inflation, including food and energy, was virtually
zero as falling oil prices offset other price increases.
• Interest rates on AAA corporate debt averaged
less than 4.0 percent throughout the year and
were 3.95 percent as of November.
This year, the US economy is forecast by the OECD to
grow at 2.5 percent. In spite of these positive signs, the
US economy faces uncertainty as it heads into 2016, with
prospects for stronger growth likely to be hindered by global
headwinds, a strong dollar, a slowly rising interest rate
environment, and continuing challenges in labor markets.
First, the global economy continues to struggle, especially
in emerging markets. Real growth in China, which averaged
10.3 percent between 2004 and 2013, is projected by the
OECD to be 6.8 percent in 2015, with growth continuing
to slow in 2016 and 2017. The slowdown in China has had
ramifications for other emerging economies, which rely on
China as a key customer for their output. The OECD projects
that Brazil and Russia will experience negative real growth
in 2015 and 2016. The Eurozone economies are projected to
continue their climb from the 2014 downturn, but growth is
projected to remain under 2.0 percent. The weakness in the
global economy has contributed to the climb in the value of
the dollar compared to other currencies. This appreciation
has contributed to the low domestic inflation rate, but it also
reduces demand from abroad for US exports. Continued
global weakness will extend these challenging conditions.
Second, the Federal Reserve is expected to continue to
increase the federal funds rate in 2016, following its initial
increase in December. Federal Open Market Committee
members, the officials that determine the target rate,
believe that the appropriate federal funds target will be
1.375 percent by year-end 2016 and 2.375 by year-end 2017.
Rate hikes will lead to higher interest rates for borrowers.
Third, despite the low unemployment rate, the US labor
market continues to face certain challenges. Employment
as a share of the working age population remains at historic
lows. As of December 2015, 77.4 percent of the population
between the ages of 25 and 54 were employed. This ratio
averaged 79.5 percent between 2001 and the beginning
of the recession at the end of 2007 (see Figure 3). While
a portion of this decline represents individuals who will
return to work as the economy continues to improve,
many others have simply given up looking for work.
Finally, modest wage growth continues to be a concern for
households and policymakers. Median real household income
is still below its pre-recession levels. Overall compensation
to workers as a share of total national income also remains
below pre-recession levels (see Figure 4). Slow wage
growth will restrain economic growth as households cannot
increase consumption, a key driver of the US economy.
In spite of these positive signs, the US
economy faces uncertainty as it heads
into 2016, with prospects for stronger
growth likely to be hindered by global
headwinds, a strong dollar, a slowly
rising interest rate environment, and
continuing challenges in labor markets.
12
PwC Setting priorities in an election year
Figure 3: Labor force
82
January 2001: 81.4%
81
Percentage of the population,
age 25-54, that is employed
80.3%
80
79
78
December 2015: 77.4%
77
76
75
74.8%
15
20
20
14
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
20
04
03
20
02
20
20
01
74
Source: Bureau of Labor Statistics, US Department of Labor, November 2015.
Figure 4: Employee compensation as a share of total national income
68%
67%
66%
1990–2015 Avg = 64.2%
65%
64%
63%
62%
20
15
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
90
60%
19
91
61%
Source: Bureau of Economic Analysis, NIPA Table 1.12, December 2015.
An in-depth discussion
13
Federal budget outlook
The federal budget has benefited from an improving US
economy. The federal budget deficit for FY 2015 was $439
billion (2.5 percent of GDP—below the 50 year average of
2.7 percent of GDP); by comparison, the deficit reached
a peak of $1.4 trillion in FY 2009 (9.8 percent of GDP).
In FY 2015, government revenues reached $3.2 trillion,
or 18.2 percent of GDP, the highest share since 2001
and well above the 50-year average of 17.4 percent.
Major legislation enacted in 2015 affected projected budget
deficits over the 10-year projection period. In April, enactment
of the Medicare Access and Children’s Health Insurance
Program (CHIP) Reauthorization Act of 2015 updated the
payment schedule for physicians under Medicare, increasing
budget deficits by $156 billion over the 2016 to 2025 period.
The Bipartisan Budget Act (BBA) of 2015 increased spending
in 2016 and 2017 and provided offsetting spending reductions
in later years. In December, the Protecting America from Tax
Hikes (PATH) Act of 2015 made permanent certain expiring
tax provisions and extended others for two or five years.
As a result, federal budget deficits are projected to jump to
3.3 percent of GDP in 2016. Baseline deficits fall through
2018 but then begin climbing as interest and entitlement
costs rise. By the end of the budget period, deficits are
projected to reach 3.9 percent of GDP (see Figure 5).
Speaker Ryan last December said that the action taken on
expired business and individual tax provisions provides for
more ‘reality-based’ budget scoring since Congress has acted to
make permanent many tax provisions that had been routinely
extended in the past without revenue offsets. Similarly, the
2015 Medicare legislation removed the need for Congress
to enact another temporary ‘doc fix’ measure to prevent
physician reimbursement rates from being cut. At the same
time, the resulting growth in the official projections of federal
deficits will increase the challenge of balancing the federal
budget in the future. House and Senate Republicans in their
FY 2017 budget resolutions are expected to detail how they
would eliminate federal deficits over the next ten years.
Figure 5: Federal deficit as a share of GDP, 2014–2025
-1.5%
-2.0%
CBO August 2015 Baseline
Including April 2015 Medicare/CHIP changes
Including BBA 2015 and PATH 2015
2015
Actual:
-2.5%
-2.5%
50-year Average = -2.7%
-3.0%
2016–25 Deficit: $7.0
trillion
-3.5%
Alternative Projection
- No BCA sequestration
$7.8 trillion
-4.0%
$9.0 trillion
-4.5%
-5.0%
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Source: Congressional Budget Office, An Update to the Budget and Economic Outlook, 2015 to 2025, August 2015, Estimate of the Budgetary Effects of H.R. 1314,
the Bipartisan Budget Act of 2015, as reported by the House Committee on Rules on October 27, 2015; and H.R. 2029, as Cleared for the President’s Signature on
December 18, 2015 (Appropriations, Tax Extenders, and Other Matters), December 18, 2015; PwC calculations.
14
PwC Setting priorities in an election year
CBO’s baseline deficit projections assume that the
spending restraint enacted as part of the Budget Control
Act of 2011 as amended remains in place. However, recent
experience demonstrates that these assumptions may not
hold. For instance, assuming elimination of the budget
sequester would increase cumulative deficits over the
2016-2025 period from $7.8 trillion to $9.0 trillion.
If the sequester provisions remain in place, government
spending still is assumed to increase but at a slower pace.
Underlying these projections are increases in entitlement
spending and net interest payments that are partially offset
by falling discretionary spending. By 2025 discretionary
spending, which covers government functions like national
defense, education, and medical research, is projected to
fall to 5.1 percent of GDP, compared to the 50-year average
of 8.8 percent. However, Congress and the President have
acted to undo the scheduled spending cuts from 2014 through
2017. While the increased spending has been offset over
the 10-year budget window, near-term spending increases
are being funded through additional spending cuts in later
years (see Figure 6). One of the key mechanisms used in
both the Bipartisan Budget Act of 2013 and the Bipartisan
Budget Act of 2015 was an extension of the sequestration
to previously unaffected future years. Based on past
experience, a future President and Congress may again
undo scheduled spending cuts before they can take effect.
The longer-run budget challenges facing the federal
government have not changed: rapidly expanding entitlement
spending associated with an aging population, growing federal
debt, a corresponding growth in federal interest payments
that will claim an increasing share of federal spending, and
overall federal revenue growth that will be restrained by a
slowly expanding economy. Achieving long-term economic
growth will depend on the ability of Congress and the
President to deal with these issues in a substantive way.
An in-depth discussion
15
Figure 6:
A. Deficit impact of Bipartisan Budget Act of 2013
$40
$30
Billions of Dollars
$20
$10
$0
$-10
n.a.
n.a.
2024
2025
$-20
$-30
$-40
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
B. Deficit impact of Bipartisan Budget Act of 2015
$40
$30
Billions of Dollars
$20
$10
$0
-$10
-$20
-$30
$-40
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Source: Congressional Budget Office, “Estimate of the Budgetary Effects of H.R. 1314, the Bipartisan Budget Act of 2015, as reported by the House Committee on Rules
on October 27, 2015; and H.R. 2029, as Cleared for the President’s Signature on December 18, 2015 (Appropriations, Tax Extenders, and Other Matters), December 18,
2015; Cost Estimate for the Bipartisan Budget Act of 2013, as posted on the website of the House Committee on Rules on December 10, 2013, December 11, 2013.
16
PwC Setting priorities in an election year
IRS challenges
Congress last December approved a small increase in the
Internal Revenue Service (IRS) budget as part of a final FY 2016
‘omnibus’ spending bill that funds federal departments and
agencies through September 30, 2016. The FY 2016 funding bill
sets the IRS budget at $11.2 billion, up from the $10.9 billion
FY 2015 funding level. The current IRS budget is still roughly
$1 billion below the agency’s FY 2010 funding level.
Recent reductions in IRS funding have reflected
continued concerns by Congressional Republicans over
the agency’s handling of applications for tax-exempt
status by certain organizations and IRS Commissioner
John Koskinen’s response to these concerns.
At its current funding level, the IRS budget is at its lowest
level in 15 years when adjusted for inflation, notwithstanding
increases in the number of taxpayers and programs, such
as the ACA and the Foreign Account Tax Compliance
Act (FATCA), which the agency must administer.
Impact of budget cuts
While Congressional leaders have said that the IRS needs
to do a better job of managing its resources, the impact of
declining resources is being felt across the organization and
by the taxpaying public. Labor costs are the bulk of the IRS’s
expenses. Staffing has been reduced from roughly 100,000
employees to 87,000 since FY 2010, and a number of senior IRS
officials left the agency last year. A hiring freeze is in effect,
with “only a few mission-critical exceptions.” IRS officials have
said that this staff attrition is having an effect on exam and
appeals cycle times, the currency of examinations, pre-filing
agreements, and industry issue resolutions, as well as IRS
efforts to respond to cybersecurity and identity theft threats.
LB&I reorganization
The IRS Large Business & International Division (LB&I),
responsible for taxpayers with assets of $10 million
or more, similarly has been affected by the decreased
budget. LB&I has lost nearly a quarter of its workforce
since 2011 due to retirements and other natural attrition.
LB&I for several years has been considering ways to
allocate its declining resources more efficiently. Last
September, the IRS announced a major change in how
LB&I will be structured and do business going forward.
From an organizational perspective, the most significant
changes are the return to a single Deputy Commissioner
rather than two (one domestic and one international)
and the replacement of ‘Industries’ with nine Practice
Areas. The Practice Areas are each led by a Director,
who reports directly to the Deputy Commissioner.
There are four regional Practice Areas: Western, Central,
Eastern, and Northeastern, and five subject matter Practice
Areas: Pass-through Entities, Enterprise Activities, CrossBorder Activities, Withholding and International Individual
Compliance, and Treaty and Transfer Pricing Operations. It is
not yet clear how these Practice Areas will work together. LB&I
Commissioner Douglas O’Donnell has indicated that more than
one Practice Area may be involved in the audit of a taxpayer,
but he has also indicated that 60 to 70 percent of LB&I’s 4,500
employees likely will be assigned to one of the four regional
practice areas. These details are still being sorted out.
The potentially revolutionary change is how the IRS proposes
to identify issues (and presumably taxpayers) to be audited.
For a number of years, LB&I has been considering moving
toward a more issue-focused approach to how it conducts
examinations, advocating limited scope examinations for
all taxpayers, and more recently instituting a requirement
that information document requests (IDRs) be issuefocused. Similarly, there have been discussions for several
years about phasing out the continuous audit program for
larger taxpayers and eliminating the Coordinated Industry
Case/Industry Case distinction in classifying taxpayers.
The description of reorganization indicates that LB&I
will identify potential areas of noncompliance and design
campaigns to address them. Campaigns may involve a
combination of ‘treatment streams,’ including examinations,
outreach, and guidance. While acknowledging that it is
still formulating what those campaigns may look like in the
context of large business taxpayers, LB&I cites the Offshore
Voluntary Disclosure Program as an example of a campaign.
An in-depth discussion
17
Perhaps most significantly, agents no longer will be assigned
returns and then be responsible for finding issues to audit.
Rather, risk will be assessed centrally, and agents will be
directed what to examine when they are assigned a return,
though they will not be prevented from examining issues
identified in the course of an examination. However, in the
case of an issued identified during an examination, whether
to devote resources to examining the issue will be determined
centrally. As Commissioner O’Donnell has acknowledged,
this approach presents ‘complicated cultural challenges’ in an
agency where agents have enjoyed relative autonomy for years.
A key component of the reorganization will be an emphasis on
training domestic agents to handle international issues. With
limited funds for training, the agency will need to be creative
in how it accomplishes this, and may need to accept offers by
taxpayer organizations to provide both technical and industry
training to agents in an effort to make audits more efficient
and less costly, both for the government and the taxpayer.
18
PwC Setting priorities in an election year
Partnership audit changes
The complexity of the 1982 Tax Equity and Fiscal
Responsibility Act (TEFRA) partnership audit procedures—
coupled with the IRS’s extremely low audit coverage for
large partnerships as compared to corporations of the
same size—contributed to the enactment of a provision
in the Bipartisan Budget Act of 2015 which completely
revamps the way large partnership audits will be conducted.
Congress enacted certain corrections and clarifications to
this provision as part of last December’s PATH legislation.
In general, the legislation provides for audit adjustments to
be made at the partnership level, with any tax, penalties,
and interest being paid by the partnership. Alternatively,
partnerships can elect to push an adjustment to the partners
to reflect on their individual current-year returns. This is in
contrast to the TEFRA regime, which pushed adjustments
to all the partners in the year under examination, and
frequently required the amendment of numerous prioryear returns. The IRS has indicated it will train agents to
audit partnerships and will draft regulations to implement
the new regime, which goes into effect for partnership
taxable years beginning after December 31, 2017.
Administration and
congressional priorities
Tax reform
Growing support for a more competitive
US tax system
There is widespread agreement that the United States needs
to reform its corporate tax system. The United States has
not enacted a comprehensive overhaul of its tax laws since
1986. In the past three decades, countries around the world
have lowered their corporate tax rates and modernized
their international tax rules to be more competitive,
but US tax laws have remained largely unchanged.
The US corporate tax rate, including state taxes,
currently is the highest among advanced economies. The
combined US federal and state statutory corporate tax
rate now is almost two-thirds higher than the average
of other OECD countries (see Figure 7). At 39 percent,
the US corporate tax rate is nearly double that of the
20-percent corporate tax rate in the United Kingdom,
and more than triple the corporate tax rate in Ireland.
A bipartisan recognition that the US corporate rate places
American companies at a disadvantage in the global economy
has led President Obama to propose lowering the US federal
corporate tax rate to 28 percent, while Republicans in
Congress have called for a rate of 25 percent or lower.
Figure 7: Combined corporate tax rates for OECD countries, 2015
Ireland
Slovenia
Poland
Hungary
Czech Republic
Turkey
Iceland
Finland
Estonia
United Kingdom
Switzerland
Sweden
Slovak Republic
Chile
Denmark
Korea
Netherlands
Austria
Greece
Canada
Israel
Norway
Italy
Spain
New Zealand
Luxembourg
Portugal
Mexico
Australia
Germany
Japan
Belgium
France
United States
2015 non-US OECD avg = 24.6%
US rate = 39.0%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Source: OECD Tax Database
An in-depth discussion
19
There also is a growing consensus among many Republicans and Democrats in Congress that our international tax rules
make it difficult for US-headquartered multinational corporations to compete in the global marketplace. The United
States is the only G7 country that taxes the active earnings of its companies on a worldwide basis. Among the 34 OECD
nations, the United States is now one of only six that have not adopted a dividend exemption tax system (see Figure 8).
Figure 8: Only six of 34 OECD countries have worldwide tax systems
Ireland
United States
Korea
Mexico
Israel
Chile
Source: PwC Worldwide Tax Summaries. OECD countries with dividend exemption systems are shown in dark red.
20
PwC Setting priorities in an election year
Political divisions over individual taxes
While some bipartisan consensus has developed around
the need to lower the US corporate tax rate and modernize
international tax rules, significant divisions exist between
the Democrats and Republicans over how to address
individual tax issues. House Speaker Ryan and Senate
Majority Leader McConnell have said that comprehensive
reform is not possible at this time because President
Obama opposes lowering the top individual tax rate.
Republicans in general have called for lowering both
individual and corporate tax rates in a revenue-neutral
manner as a way to raise incomes and overall economic
growth. Meanwhile, President Obama, as noted below, has
called for increasing the amount of tax revenues collected
from upper-income individuals as part of his budget
proposals to Congress. Democrats in general have called
for increasing the overall amount of taxes paid by upperincome individuals, citing both concerns over ‘income
inequality’ and efforts to achieve ‘balanced’ deficit reduction
goals without requiring some of the more fundamental
changes to Social Security, Medicare, Medicaid, and other
federal mandatory spending programs that Republicans
have proposed. The outcome of the 2016 elections may
determine how these political divisions over individual taxes
affect future prospects for comprehensive tax reform.
Economic policy considerations that may affect tax reform legislation
There are many economic and tax policy issues that
may affect the formulation of future tax reform
proposals. Some key policy considerations include:
Revenue neutrality: Discussions of tax reform raise issues
about how best to measure the impact of various proposals
on the federal budget and the overall US economy. Following
the 1986 Tax Reform Act model, tax reform proposals
traditionally have focused on achieving ‘revenue neutrality,’
i.e., reforms that would not produce a net increase or
decrease in federal revenues. More recently, there have
been divisions along political lines over whether tax reform
should increase overall federal revenues or focus more on the
objective of promoting long-term economic growth, even if
certain proposals increase federal deficits in the near-term.
Distributional neutrality: Another key concept
that has influenced tax reform efforts in the past is
‘distributional neutrality,’ i.e., the idea that the reform
proposals should not result in a re-distribution of tax
burdens from one income quintile to another.
Dynamic revenue estimates: There has been ongoing
debate about how best to measure the effect of tax
legislation on the federal budget. The House in January
2015 approved a rule change requiring Joint Committee
on Taxation (JCT) staff to ‘incorporate’ macroeconomic
analysis ‘to the extent practicable’ in revenue estimates for
major tax legislation, which is defined as having a ‘gross
budgetary effect’ greater than 0.25 percent of GDP in any
year covered by a budget resolution. CBO staff also are
required to provide macroeconomic analysis for major
legislation changing federal mandatory spending levels.
Under one macroeconomic model, JCT staff in 2014
projected that a comprehensive tax reform bill (H.R. 1,
the Tax Reform Act of 2014) proposed by then-Ways and
Means Committee Chairman Dave Camp (R-MI) could have
increased US GDP by as much as much as 1.6 percent over
the 2014-2023 period and increased federal government
revenues by as much as $700 billion more than under the
traditional revenue estimate. An alternative dynamic model
used by JCT staff showed a 0.1 percent increase in GDP, and
tax revenues $50 billion more than the conventional revenue
estimate over the same period. For a summary of former
Chairman Camp’s tax reform proposal, see Appendix E.
Consumption taxes: Many economists consider taxes
on consumption to be less harmful to economic growth
than taxes on income and investment. The United States
is one of the few countries in the world without a federallevel ‘value-added tax’ (VAT) or goods and services tax.
Senate Finance Committee member Ben Cardin (D-MD)
in late 2014 proposed a ‘progressive consumption’ tax
that would tax consumption at a 10-percent rate while
reforming the individual and corporate income tax systems.
Individual income tax reform would have exempted most
households from the individual income tax through a
family allowance ($100,000 for joint filers and $50,000
for single filers) and provided individual income tax rates
of 15 percent, 25 percent, and 28 percent. The bill also
would have reduced the corporate income tax rate to
17 percent. Several Republican presidential candidates
have proposed plans that can be considered forms of
consumption taxation by allowing full expensing of business
investments and denying business interest deductions.
An in-depth discussion
21
White House tax reform efforts
House tax reform efforts
President Obama in his FY 2017 budget is expected to reaffirm
his support for ‘business tax reform’ that would lower the
top US corporate tax rate to 28 percent, with a 25-percent
rate for domestic manufacturing income. The President’s
budget also is expected again to dedicate a large number
of previously proposed tax increases to a reserve fund for
‘long-term revenue-neutral business tax reform.’ His past
budgets have identified only part of the revenue that would
be needed to support his proposed corporate rate reductions.
House Speaker Ryan has called for the House to vote
in 2016 on comprehensive tax reform legislation. In a
December 2015 speech, Speaker Ryan said, “We want
a tax code that rewards good work instead of good
connections. When people know they will keep more
of their hard-earned money, they will work more, save
more, invest more - and create more jobs for all of us.”
President Obama also is expected to re-propose significant
changes to US international tax laws. The President’s budget
last year included a one-time mandatory 14-percent tax on
previously untaxed foreign income and a 19-percent minimum
tax on future foreign income. This year’s budget also is
expected to re-propose limits on ‘excessive’ interest deductions
and certain other revenue raisers included in previous budgets.
Note: The Obama Administration and some Congressional
leaders in 2015 discussed using revenues from international
tax law changes to finance long-term highway legislation.
These discussions also focused on the US moving to a dividend
exemption (territorial) system and the possibility of a
minimum tax on the foreign earnings of US MNCs to address
concerns about base erosion. However, Congress failed to
agree on a proposal and, as discussed below, subsequently
approved a five-year highway bill using non-tax funding
sources to supplement revenues from federal fuel excise taxes.
The President’s budget is expected to re-propose roughly
$1 trillion in tax increases for upper-income individuals,
including proposals to limit the value of itemized deductions,
impose a ‘Buffett rule’ minimum tax on higher incomes,
increase the top capital gains and qualified dividends tax rate
to 28 percent, and limit step-up in basis for inherited property.
Past budgets also have included a large number of tax increase
proposals affecting specific business sectors, and proposals to
‘reduce the tax gap’ through new compliance measures and
increased information reporting. President Obama has called
for revenue from these proposals to be used to offset the cost
of ‘middle-class’ tax reforms and to reduce the federal deficit.
22
PwC Setting priorities in an election year
Ways and Means Committee Chairman Brady has said that
he intends to marshal the resources and ideas of the House
to “create a fairer, flatter and simpler tax code that is built for
growth.” While earlier Republican tax reform proposals have
focused on a 25-percent US corporate tax rate, Chairman Brady
recently said that he was “convinced that we have to be at
20 percent or lower to keep us competitive for the longer run.”
Shortly after becoming Ways and Means Chairman
last year, Rep. Brady said that he would not be
constrained “at the outset” by strict adherence to
traditional revenue neutrality or distributional neutrality
concerns in developing tax reform legislation.
Both Speaker Ryan and Chairman Brady also have expressed
continued interest in discussing the possibility of ‘international
only’ tax reform with the Obama Administration. Before
becoming Speaker, then-Ways and Means Committee
Chairman Ryan had extensive discussions last year with Obama
Administration officials and with Senator Charles Schumer (DNY) about using revenues from international tax law changes
to finance long-term highway legislation. At that time, the
Ways and Means Committee issued statements reaffirming the
need for international tax reform that moves toward a dividend
exemption tax system as a way to “stem the tide” of corporate
inversions and address erosion of the US corporate tax base.
A number of House Ways and Means Committee members
also have expressed support for the United States adopting an
‘innovation box’ tax regime. On July 29, 2015, Ways and Means
Committee members Boustany and Neal released a discussion
draft on an innovation box proposal that would lower the
effective tax rate on certain income derived from intellectual
property (IP). The Innovation Promotion Act of 2015 would
establish a deduction equal to 71 percent of a taxpayer’s
‘innovation box profit,’ resulting in an effective tax rate as low
as 10.15 percent on qualifying income. Most companies would
see a far smaller benefit, however, because the lower rate is
based on the ratio of domestic research and development
expense to total operating expense (excluding interest and
taxes). The Boustany-Neal discussion draft also includes a
proposal intended to allow tax-free repatriation of foreign IP.
proposals to address tax incentives for charitable giving
and higher education, as well as tax administration
and simplification, but also noted the “considerable
division” among members of Congress about how
individual tax reform should be approached.
Senate reform efforts
The savings and investment tax reform working group,
co-chaired by Senators Mike Crapo (R-ID) and Sherrod
Brown (D-OH), focused primarily on proposals with
bipartisan support for dealing with private retirement
savings. The report identifies three key goals to pursue:
(1) increasing access to tax deferred retirement savings;
(2) increasing participation and levels of savings; and
(3) discouraging ‘leakage’ (e.g., early withdrawals from
retirement accounts) while promoting lifetime income.
Senate Majority Leader McConnell has said that the Senate
will continue to focus on comprehensive tax reform but
recently commented that “it would be very difficult” to reach
an agreement with President Obama on any tax reform
legislation this year because of the President’s proposals to use
revenue from tax reform for deficit reduction or spending.
Senate Finance Chairman Hatch recently said that “tax
reform, whenever it happens, will be a long, difficult
process,” but the work of the Finance Committee during this
Congress “will make a difference in how that process plays
out and how the tax reform debate unfolds in the future.”
Last July, Senate Finance Committee bipartisan tax
reform working groups issued reports on international
tax, business income tax, individual tax, savings and
investment, and community development and infrastructure.
The five working groups were established in January
2015 to provide tax reform recommendations to Finance
Chairman Hatch and Ranking Member Wyden.
The 81-page report of the international tax reform working
group, chaired by Senators Rob Portman (R-OH) and
Schumer, contained a bipartisan framework endorsed by
the co-chairs that called for adopting a dividend exemption
system in conjunction with “robust” base erosion protections;
implementing an innovation box regime; limiting interest
deductibility; and requiring mandatory foreign repatriation.
The business income tax working group, co-chaired by
Senators John Thune (R-SD) and Cardin, expressed
general support for principles of business tax reform
that include lowering business tax rates, addressing
structural issues in the taxation of business income,
promoting innovation, and reducing complexity.
The individual tax reform working group, co-chaired
by Senators Charles Grassley (R-IA), Mike Enzi (RWY), and Debbie Stabenow (D-MI), called for action on
The community development and infrastructure
working group, co-chaired by Senators Dean Heller
(R-NV) and Michael Bennet (D-CO), focused on a
funding alternative for the Highway Trust Fund.
Corporate integration
Since late 2014, the Senate Finance Committee Republican
staff has been actively exploring options for integrating
the corporate and individual tax systems. Under current
law, the earnings of corporations generally are taxed
as income at the corporate-entity level and again as
dividends at the shareholder level. Corporate integration
proposals generally have focused on approaches
providing that any distributions made by such entities
either would be deductible by the entity (dividends
paid deduction) or would be excludable by the recipient
(dividend exclusion). A December 2014 report prepared
by the Senate Finance Committee Republican staff
stated that a dividends paid deduction “would generally
be easy to implement and would largely equalize the
treatment of debt and equity.” The Finance staff report
noted that special rules generally are needed in any
integration proposal to address tax-exempt and foreign
shareholders. The Finance Committee may release a staff
discussion draft on corporate integration this year.
An in-depth discussion
23
Expiring tax provisions
President Obama on December 18, 2015 signed into law
legislation (H.R. 2029, P.L. 114-113) that includes $680
billion of tax relief provisions, with the most significant
provisions retroactively renewing more than 50 business and
individual tax provisions that had expired at the end of 2014.
The legislation makes permanent (retroactive to 2015) 22
provisions for business and individual taxpayers, including:
• The current 20-percent traditional research credit
and the 14-percent alternative simplified credit, with
a modification beginning in 2016 for certain small
businesses (less than $50 million in gross receipts)
to claim the credit against alternative minimum tax
(AMT) liability and certain qualified small businesses
(less than $5 million in gross receipts) to utilize the
credit against the employer’s payroll tax liability
• Subpart F exceptions for active financing income
• Increased Section 179 ‘small business’ expensing limits;
modifications of the provision that begin in 2016
include indexing the limitation amount for inflation
• 15-year straight line cost recovery for qualified
leasehold improvement property, qualified restaurant
property, and qualified retail improvement property
• Reduction in S corporation built-in-gains holding periods
• Basis adjustment of S corporation
stock for charitable donations
• Certain charitable giving provisions, including
tax-free distributions from certain individual
retirement accounts for charitable purposes
• Certain regulated investment company (RIC) provisions
• Enhanced child tax credit, American Opportunity
Tax Credit, and Earned Income Tax Credit
• Deduction for state and local sales taxes.
The legislation renews for five years (2015 through 2019):
• ‘Bonus’ depreciation at 50 percent of the cost of property
acquired and placed in service during 2015, 2016, and
2017; at 40 percent in 2018; and at 30 percent in 2019.
In addition, the provision was modified beginning in
2016 to increase the amount of unused AMT credits that
may be claimed in lieu of bonus depreciation, and to
expand the definition of qualified property to include
certain trees, vines, and plants bearing fruit or nuts
24
PwC Setting priorities in an election year
• Look-through treatment for payment of dividends,
interest, rents, and royalties between related controlled
foreign corporations (CFC look-through)
• New Market Tax Credit
• Work Opportunity Tax Credit, with a modification
beginning in 2016 to increase the credit and
expand the categories of eligible workers to include
qualified long-term unemployed individuals.
The legislation extends and phases out certain renewable
energy incentives. The credit for wind facilities was renewed
for construction that begins before 2020, with the amount of
the credit phased out incrementally for construction beginning
after 2016. The credit for solar energy property was renewed
for construction that begins before 2022, with the amount of
the credit phased out incrementally for construction beginning
after 2019, with a special placed-in-service deadline.
Thirty other business and individual tax provisions that also
expired at the end of 2014 are extended for two years (2015
and 2016), including a modified exclusion from gross income
of discharge of qualified principal residence indebtedness,
modified empowerment zone tax incentives, and expensing
rules for qualified film and television productions.
In addition, a moratorium on state and local Internet
taxes was extended through September 30, 2016.
Note: Efforts in 2016 to extend or make permanent
the moratorium on state and local Internet taxes
may be affected by consideration of other state
and local tax issues, as discussed below.
The legislation also includes several provisions affecting
real estate investment trusts (REITs) and US ‘FIRPTA’
tax rules affecting foreign investment in US real estate.
While most of these REIT and FIRPTA proposals are
considered favorable to taxpayers, the legislation includes
a provision denying corporations the ability to gain
REIT status as a result of a tax-free spinoff; the provision
was estimated to raise $1.9 billion over 10 years.
Additional provisions include items relating to Section
529 accounts, hard cider, church plans, and small
insurance companies. The legislation also provides
for C corporation timber gains to be subject to
23.8-percent tax rate, effective for tax year 2016.
The legislation includes a number of IRS administrative
provisions, including a taxpayer bill of rights, a
prohibition on IRS employees’ use of personal email
accounts for official business, and a prohibition on
guidance related to certain Section 501(c)(4) taxexempt organizations, as discussed below.
In addition, Treasury now may have greater capacity
to address more guidance projects, following the
substantial completion of large, high-profile projects,
such as implementation of the FATCA and the ACA.
Finally, the legislation includes significant tax provisions
affecting the Affordable Care Act. The legislation provides
a two-year (2016 and 2017) moratorium on the medical
device excise tax, suspends for one year (2017) a health
insurance provider excise tax, and delays for two years
(2018 and 2019) implementation of the ‘Cadillac’ excise
tax on high-cost employer-sponsored health insurance.
Election-year considerations may affect the issuance
and finalization of regulations. Controversial or
high-profile guidance may be delayed if it could
disadvantage the incumbent party. In addition, because
regulations issued during the 60-day period preceding
the change in administration (so-called ‘midnight
regulations’) could be withdrawn by the incoming
administration, Treasury is likely to try to issue highpriority guidance items before the end of November.
Regulatory projects
State taxes
The Treasury Department is likely to issue significant
regulatory guidance in the last year of the Obama
Administration. Key Administration priorities include
protecting the corporate tax base and preventing
taxpayers from moving US income offshore.
State tax revenue collections grew significantly in 2015,
spurred in large part by robust personal income tax growth,
along with more modest increases in corporate income and
sales taxes. The state revenue outlook for 2016 appears
positive, albeit more moderate than in 2015. Despite
the positive gains and outlook for continued growth,
many states remain focused on increasing tax revenues.
Expansive new nexus positions, ‘tax haven’ proposals, and
retroactive law changes likely will remain the focus of
state legislatures and tax departments in 2016. To address
possible overreach, numerous bills that would help define
state taxing powers have been introduced in Congress,
but continue to face uncertain prospects for passage.
Over the last several years, Treasury has published a
relatively large amount of guidance on important domestic
and foreign issues. Notable items have included guidance
related to the OECD BEPS Action Plan, as discussed above,
multiple notices attempting to curb ‘inversion’ transactions,
guidance on whether high-profile spin-off transactions
may be a device for the distribution of earnings and
profits, proposed regulations relating to management
fee waivers for managed funds that will broadly affect
partnerships, and proposed regulations on the tax-exempt
status of Section 501(c)(4) social welfare organizations.
Note: The FY 2016 funding bill enacted last December includes
a provision that prohibits Treasury and the IRS from using
appropriated funds “to issue, revise, or finalize any regulation,
revenue ruling, or other guidance” clarifying the ‘social welfare’
requirements for Section 501(c)(4) tax-exempt organizations.
One reason for the uptick in published guidance may be
continuity among key Treasury and IRS executives, which
has enabled policymakers to develop efficient procedures and
reach consensus on difficult issues more quickly. Assistant
Secretary of the Treasury for Tax Policy Mark Mazur, Deputy
Assistant Secretary for Tax Policy Emily McMahon, Deputy
Assistant Secretary for International Tax Affairs Robert
Stack, and International Tax Counsel Danielle Rolfes all have
served multiple years in their roles. At the IRS, Chief Counsel
William Wilkins and Deputy Chief Counsel (Technical) Erik
Corwin both have held their positions for over four years.
Expansive nexus provisions
In a concurring opinion in Direct Marketing Ass’n v. Brohl,
decided March 3, 2015 by the US Supreme Court, Justice
Anthony Kennedy took direct aim at the state tax nexus issue
by encouraging the legal system to identify an appropriate
case in which the Court could reexamine Quill Corp. v. North
Dakota, which upheld the physical presence standard for
imposition of a use tax collection requirement. States have
been quick to respond, with Alabama promulgating a new
regulation stating that an out-of-state seller with a substantial
economic presence in that state must collect and remit tax on
its sales into the state, regardless of whether it has an Alabama
physical presence. Washington state lawmakers introduced
a bill to challenge the physical presence nexus standard
in Quill. Other states will consider how best to position
their nexus laws in light of Justice Kennedy’s invitation.
The question is whether the time finally is right for the
Supreme Court to accept a state tax nexus case after years of
repeatedly denying review of state jurisdictional challenges.
An in-depth discussion
25
‘Tax haven’ proposals
In 2015, eight states introduced ‘tax haven’ bills, which specify
lists of so-called tax haven countries or subjective criteria
that seek to identify jurisdictions considered to have created
tax regimes deemed favorable for tax avoidance. Entities
either incorporated or doing business in such countries
would be included in the water’s-edge combined return.
The increased interest in such state legislation may
relate in part to the focus by the OECD on base erosion
and profit shifting, as well to estimates by some
policymakers and economic analysts claiming substantial
revenues lost from corporate profit shifting.
The lack of uniformity in how states treat entities incorporated
or doing business in certain foreign jurisdictions has resulted
in taxpayers spending significant resources fulfilling their
obligations to comply with state laws. With the increased
attention from state legislatures, however, businesses may
assert constitutional challenges to the proposed bills.
Retroactive tax legislation
After the Michigan Supreme Court’s 2014 ruling in IBM v.
Treasury that a taxpayer could elect to use the Multistate Tax
Compact equally weighted three-factor formula, the state
retroactively repealed membership in the Compact to avoid
paying an estimated $1 billion in refunds to other out-ofstate companies with pending claims. The Michigan Court
of Claims in April 2015 ruled that IBM could not make the
election due to the State’s retroactive repeal of the Compact.
About the same time the Michigan legislature retroactively
withdrew from the Compact, Maryland legislators retroactively
changed the rate of interest it would pay on refund claims
relating to a specific matter from 13 to 3 percent. The
law change was a preemptive act in anticipation that the
state might lose the Wynne case that at the time the State
had petitioned for certiorari to the US Supreme Court.
The Wynne case involved Maryland residents who had
been denied a credit against certain Maryland taxes for
taxes paid to other states. After losing that case in May
2015, Maryland began paying out refunds with interest
calculated at the reduced rate. A taxpayer lawsuit was filed
in November 2015 claiming the retroactive law change
violates the 14th Amendment of the US Constitution.
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PwC Setting priorities in an election year
In an effort to protect budgets from revenue loss, state
legislatures are beginning to rely on retroactive tax legislation.
At the federal level, the US Supreme Court has permitted
certain retroactive tax legislation, but only when Congress acts
promptly with actions that are viewed as rationally related to a
legitimate purpose and when the retroactive period is modest.
While protecting the state from paying out large refund claims
might be deemed by courts to serve a legitimate state purpose,
at issue in many of the state cases is whether retroactive
application of laws that in some cases impact periods greater
than six years in the past will survive constitutional scrutiny.
Federal legislation affecting state taxes
Congress is considering a number of bills addressing state tax
issues. The more significant issues include the following:
Internet tax moratorium
As noted above, Congress last December extended a
moratorium on state and local Internet taxes through
September 30, 2016. The House late last year approved a
permanent moratorium on such taxes as part of a HouseSenate conference report on US trade enforcement legislation,
discussed below, but the provision faces opposition from some
Senators who want to link that proposal to legislative action
on state and local remote sales tax collection legislation.
Remote sales tax collection
It is unclear whether Congress will pass remote seller
legislation in 2016. S. 698, the Marketplace Fairness Act
of 2015, was introduced March 10, 2015 by Senator Enzi.
The bill, which is nearly identical to legislation that passed
the Senate in 2013, would allow any state to require
sales and use tax collection by out-of-state retailers if the
state meets certain simplification requirements. Another
remote seller proposal was introduced June 15, 2015
by Rep. Jason Chaffetz (R-UT). H.R. 2775 is similar to
the Marketplace Fairness bill in that it would give states
authority to impose tax collection duties on remote sellers.
Nonresident employees
The Mobile Workforce State Income Tax Simplification Act,
introduced February 5, 2015 by Senator Thune and Senator
Sherrod Brown (D-OH), would protect a nonresident employee
performing employment duties in a state for 30 or fewer days
from the nonresident state’s personal income tax (subject
to limited exceptions). The bill, S. 386, was referred to the
Senate Finance Committee for consideration. A companion
House bill, H.R. 2315, was introduced May 14, 2015 by Rep.
Mike Bishop (R-MI). The House Judiciary Committee on
June 17, 2015 approved H.R. 2315 by a vote of 23 to 4.
Business activity nexus
The Business Activity Simplification Act, H.R. 2584,
introduced June 1, 2015 by Rep. Steve Chabot (R-OH), would
expand Public Law 86-272 protections against imposition
of state income taxes on certain out-of-state sellers, codify
a physical presence nexus standard, and require that
apportionment provisions follow the Joyce standard. Under
the Joyce standard, each member of a unitary group stands
alone in the determination of the sales factor numerator.
Under this rule, a state cannot include in the numerator
of the sales factor sales made by a member of a unitary
group where the member itself does not independently
have nexus in the state. The House Judiciary Committee on
June 17, 2015 approved H.R. 2584 by a vote of 18 to 7.
The agreements need to be approved by a two-thirds
(67 vote) majority of the full Senate before they can
advance in the ratification process. The timing for
possible consideration by the full Senate and ratification
of these agreements during 2016 remains uncertain
because of the continued objections of Senator Paul.
A US tax treaty and protocol with Vietnam was signed on
July 7, 2015, but has not yet been sent to the Senate Foreign
Relations Committee. Tax agreements with Norway and
Romania have been initialed and are awaiting signature.
The United States and the United Kingdom reportedly
are near agreement on a protocol to the US-UK treaty.
Treasury discussions with Brazil, Colombia, and Israel
are continuing. Discussions are said to be underway with
Venezuela, Malaysia, and the Netherlands Antilles, and there
have been reports of correspondence or initial meetings
with South Korea, San Marino, and Liechtenstein. The
Treasury Department reportedly has not decided whether
to pursue tax treaties with Hong Kong or Singapore.
Digital goods and services
New US model treaty
The Digital Goods and Services Tax Fairness Act, H.R.
1643, introduced March 26, 2015 by Rep. Lamar Smith
(R-TX), would prevent states and localities from imposing
multiple or discriminatory taxes on the sale or use of
digital goods and services. The House Judiciary Committee
on June 17, 2015 approved H.R. 1643. A companion
bill, S. 851, was introduced by Senator Thune.
On May 20, 2015, the US Department of Treasury released
for public comment certain proposed revisions to the US
model income tax convention (the Model). Treasury’s
proposed revisions to the Model represent some of the most
significant changes in US tax treaty policy in decades.
Tax treaties and other
international agreements
No new US tax treaties or protocols have entered into
force since 2010 due to ongoing objections raised by
Senator Rand Paul (R-KY) about information-sharing
agreements that generally are part of all US tax treaties.
Last November, the Senate Foreign Relations Committee
approved seven tax agreements, along with a protocol to
a multilateral treaty on mutual administrative assistance
in tax matters to which the United States is a party.
Tax agreements approved by the committee last November
include pacts with Hungary, Switzerland, Luxembourg,
and Chile that previously were approved in 2011, as well
as agreements with Spain and Poland that previously were
approved in 2014. The most recent agreement approved by
the committee is a protocol to the US treaty with Japan.
The Model serves as a template for future US tax treaties
and protocols. Additionally, revisions to the Model may
influence the international community’s discussion of
approaches to ‘treaty abuse’ and harmful tax practices
with respect to the OECD BEPS Action Plan.
Treasury’s proposed revisions address certain aspects
of the Model by changing certain existing provisions
and introducing entirely new provisions. Specifically,
the proposed revisions address income attributable to
permanent establishments (PEs); limitations on treaty
benefits for income subject to reduced home country tax
due to special tax regimes; limitation on treaty benefits for
payments from US entities that are ‘expatriated entities’
under Section 7874(a)(2); extensive new restrictions on
eligibility for treaty benefits under the limitation on benefits
(LOB) article; and partial termination of treaties in the
case of subsequent changes in treaty partners’ tax laws. The
proposals are accompanied by technical explanations.
An in-depth discussion
27
The Model was last updated in 2006. The proposed
revisions are accompanied by a technical explanation
that describes in part the objectives of the provisions
and how they are intended to apply. Various parties
have provided comments on the proposed revisions,
including PwC. PwC’s comment letter can be found at:
https://www.pwc.com/us/en/tax-services/
publications/insights/assets/pwc-commentletter-on-united-states-model-treaty.pdf.
Other guidance
On August 12, 2015, the IRS issued Revenue Procedure
2015-40, which sets forth the standard that the US competent
authority will use to evaluate requests for discretionary relief.
The Revenue Procedure makes significant changes to the
standard under which requests for discretionary relief under
LOB articles of US tax treaties are evaluated. The Revenue
Procedure also introduces new procedural requirements
for discretionary relief requests, including time frames to
notify the competent authority of material changes in facts
or law and a triennial statement necessary to maintaining a
favorable grant of treaty benefits. The Revenue Procedure
incorporates several new limitations on discretionary grants
of treaty benefits that are not part of existing treaties,
including a substantial nontax nexus standard, a double
non-taxation approach, and a special tax regimes rule.
BEPS-related issues
On October 5, 2015, the OECD released its final reports
on the BEPS actions. With particular relevance to tax
treaties are Action 6 on treaty abuse—which recommends
that treaty abuse be addressed through the inclusion of
LOB articles plus anti-conduit rules, a principal purpose
test (PPT), or both—and Action 7 on PE status—which
proposes, among other provisions, broadening the dependent
agent test, narrowing the independent agent exemption,
and tightening exemptions for what constitutes a PE.
Action 15 aims to develop a multilateral instrument for
implementing treaty changes under other action items.
In its participation in the BEPS discussions, the United
States advocated rules that were intended to be clear and
administrable. US Treasury officials expressed a preference
for objective tests, such as the LOB, which is included in
the vast majority of US income tax treaties, rather than a
subjective test like a PPT, which the US government does
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PwC Setting priorities in an election year
not support. One of the objectives in releasing the proposed
revisions to the US Model prior to the finalization of the
BEPS recommendations was to influence the discussion
and, as indicated by a Treasury representative, put forward
a robust LOB that ensures there is nexus to a jurisdiction.
Treasury officials also have expressed concerns with some
countries’ desires to re-write the bright-line rules of the PE
article of the OECD model treaty. This is viewed as negatively
affecting US multinationals that ‘play by the PE rules.’
Citing resource constraints, as well as the fact that US
tax treaties and domestic law already contain anti-treaty
shopping measures and hybrid entity rules, among other
considerations, Treasury officials initially indicated that
the United States would not participate in discussions
surrounding the multilateral instrument. However,
Treasury officials have stated subsequently that the United
States will participate in the discussions because of its
interest in supporting mandatory binding arbitration.
FATCA intergovernmental agreements
The Foreign Account Tax Compliance Act was enacted in
2010 to enhance information reporting by foreign financial
institutions (FFIs) and non-financial foreign entities of
US taxpayer accounts in order to combat tax evasion.
Treasury has collaborated with foreign governments to
develop two alternative model intergovernmental agreements
(IGAs) to facilitate FATCA implementation — Model 1, under
which reporting FFIs satisfy their FATCA requirements by
reporting information about US accounts to their respective
tax authorities, followed by the automatic exchange of that
information on a government-to-government basis with the
United States, and Model 2, under which FFIs report specified
information directly to the IRS in a manner consistent
with the final regulations, supplemented by governmentto-government exchange of information on request.
As of last December, the United States has signed Model
1 and Model 2 IGAs with nearly 80 jurisdictions and has
agreed in substance to IGAs with more than 30 other
jurisdictions. Treasury’s website contains a list of IGAs in
effect and those that have been agreed to in substance:
https://www.treasury.gov/resource-center/taxpolicy/treaties/Pages/FATCA-Archive.aspx.
Trade and tariff legislation
Trade Facilitation and Trade Enforcement Act of 2015
The House last December passed a final House-Senate
conference agreement on the Trade Facilitation and Trade
Enforcement Act of 2015 (H.R. 644), which authorizes US
Customs and Border Protection and puts in place effective
tools to strengthen trade enforcement at the border and
facilitate the efficient movement of legitimate trade and
travel. Although the legislation primarily addresses customs
enforcement, House and Senate conference committee
members added language permanently banning state and
local taxation on Internet access, as discussed above. While
the trade enforcement provisions generally are considered
non-controversial, the prospects for final Senate action on H.R.
644 may be complicated by debate on the proposed permanent
Internet tax moratorium and other state and local tax issues.
Trade promotion authority
President Obama on June 29, 2015 signed into law legislation
renewing trade promotion authority (TPA) for six years. TPA
provides Presidents with authority to negotiate comprehensive
reciprocal free trade agreements with major trading partners
that then are considered in Congress under an expedited
process. Under TPA procedures, trade agreements are
subject to limited debate (i.e., no filibuster) and an up-ordown vote (i.e., no amendments allowed) when all debate
time expires. Also known as ‘fast track’ trade negotiating
authority, TPA is subject to certain conditions, including
Congressional consultation and access to information.
Trans-Pacific Partnership
President Obama on November 5, 2015 notified Congress
of his intention to sign the Trans-Pacific Partnership (TPP)
trade agreement. The Administration also released the full
text of the agreement as negotiated by the United States and
11 countries across the Asia-Pacific region, together with
a summary of Congressional action to be taken on TPP. In
response, Senate Finance Committee Chairman Hatch said
in a November 6, 2015 speech that ‘inadequate’ intellectual
property protections in TPP could complicate its passage.
House Speaker Ryan and Ways and Means Committee
Chairman Brady have said that the House is continuing
to review the TPP. Senate Majority Leader McConnell has
suggested that President Obama delay formally submitting
TPP to Congress for a vote until after the November elections.
Transatlantic Trade and Investment Partnership
In February 2013, the United States and the European
Union announced plans to launch negotiations for a
comprehensive Transatlantic Trade and Investment
Partnership (TTIP) intended to create growth and jobs on
both sides of the Atlantic by removing trade barriers. In
March 2013, the Obama Administration formally notified
Congress of its intention to negotiate with the EU on TTIP.
Recently, there appears to be resistance on the part of
some EU members to move forward with TTIP unless
certain modifications are made. Issues in the negotiations
could include tariff reductions and elimination,
regulatory compatibility and standards, improved
market access for services, investment protection,
enhanced government procurement opportunities,
intellectual property rights protection and enforcement,
and greater agricultural market access. Other issues
to be addressed could include trade facilitation, stateowned enterprises, digital trade, and supply chains.
Miscellaneous tariff bill
Passage of a miscellaneous tariff bill has been complicated
for several years by assertions by some Members of Congress
that such bills constitute ‘tax earmarks’ and would violate
the Congressional earmark ban. This remains a stumbling
block in the path of successful enactment of any targeted
tariff relief measure. However, the House-Senate conference
agreement on H.R. 644, discussed above, includes a
sense of Congress provision reaffirming commitment
to advancing a miscellaneous tariff bill with robust
consultations and consistent with House and Senate Rules.
Generalized System of Preferences
The Generalized System of Preferences (GSP) was first
authorized in 1974 to provide non-reciprocal, dutyfree treatment to certain products from more than 120
developing countries. GSP expired in July 2013, but
was extended through December 31, 2017 as part of the
TPA legislation signed last year by President Obama.
An in-depth discussion
29
African Growth and Opportunity Act
The African Growth and Opportunity Act (AGOA) is a US
trade preference program that provides duty-free treatment
to US imports of certain products from eligible sub-Saharan
African (SSA) countries. Congress passed AGOA in 2000 to
encourage export-led growth and economic development
in SSA countries and deepen US trade and investment ties
with the region. In terms of tariff benefits and country
eligibility requirements, AGOA builds on GSP by providing
preferential access to the US market for more products and
sets out additional eligibility criteria. It also includes other
trade and development components, beyond preferences,
that are not part of GSP. Set to expire on September
30, 2015, AGOA was extended for 10 years by the TPA
legislation signed by President Obama on June 29, 2015.
Doha Round
The World Trade Organization (WTO) Doha Round is
the latest round of multilateral trade negotiations among
WTO countries. Officially launched in November 2001,
the Doha Round’s aim is to achieve major reform of the
international trading system through the introduction
of lower trade barriers and revised trade rules.
The Doha Round has been characterized by differences
among the United States, the EU, and advanced developing
nations on major issues, such as agriculture, industrial
tariff and nontariff barriers, services, and trade remedies.
Given these differences, WTO members have been unable
to reach a comprehensive Doha Round agreement. Some
WTO members have suggested restarting broad Doha Round
discussions that cover many sectors, but other members,
including the United States, are exploring other, more focused
negotiating options with like-minded trading partners.
Trade Facilitation Agreement
In December 2013, member countries at the WTO ministerial
in Bali, Indonesia adopted an ambitious package of trade
liberalization measures. Expectations ahead of the Bali
meeting had been low, but member countries reached a Trade
Facilitation Agreement (TFA), the first multilateral trade
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PwC Setting priorities in an election year
agreement concluded by members since the WTO was formed
in 1994. By December 15, 2015, 63 WTO members have ratified
the agreement. TFA will enter into force once two-thirds of
WTO’s 162 members have completed their domestic ratification
process. The United States is among the remaining WTO
members that have not completed the ratification process.
Other legislation
Taxpayers will be affected in 2016 and beyond
by certain revenue-raising provisions included
in legislation enacted last year.
Transportation infrastructure bills
Congress last year enacted the first long-term reauthorization
of federal highway and mass transit programs since 2005.
The Fixing America’s Surface Transportation (FAST) Act
of 2015 (P.L. 114-94) provides $305 billion for federal
transportation programs over the next five years, with
$235 billion coming from federal fuel excise taxes and the
remaining $70 billion offset by non-transportation sources.
Tax-related provisions in the FAST Act require the IRS to hire
private collection agencies to recover certain outstanding
inactive tax debt and require the State Department to
revoke, deny, or limit the passport of any individual whom
the IRS certifies has more than $50,000 in seriously
delinquent tax debt. According to JCT staff estimates,
these provisions will raise $2.8 billion over 10 years.
An earlier short-term highway bill enacted in July 2015 also
included several tax compliance measures. Most notably, the
legislation adjusts tax-filing deadlines for businesses, generally
for tax years beginning after December 31, 2015. See Figure 9.
Other tax-related provisions in the short-term highway
legislation require lenders to report additional information
on outstanding mortgages, clarify the statute of limitations
on reassessing certain tax returns, require estates to report
the value of property upon the owner’s death, and allow the
transfer of excess pension assets to retiree health accounts.
Figure 9: New filing due dates for C corporations, S corporations, and partnerships
Due date
Extended due date
C corporations—
calendar year
April 15
5-month automatic extension
(September 15) until 2026,
then 6-month
C corporations—fiscal year
other than June 30
3-½ months after year-end
6-month automatic extension
C corporations—
June 30 year
September 15
(until 2026, then October 15)
7-month automatic extension
(April 15) until 2026, then
6-month
Partnerships
March 15 for calendar-year
returns, or 2-½ months after
close of year-end
6-month maximum extension
(September 15 for calendaryear returns)
S Corporations
March 15 for calendar-year
returns, or 2-½ months after
close of year-end
6-month maximum extension
Trust Form 1041—
calendar year
April 15
5-½-month maximum
extension
Trust Form 1041—
non-calendar year
3-½ months after year-end
5-month maximum extension
(6-month for certain types of
trusts)
FinCEN Foreign Bank Account April 15
Reporting (FBAR)
6-month maximum extension
Note: The statute directs the IRS to provide by regulations that the maximum extension for a partnership return shall be
a six-month period ending September 15 for calendar-year taxpayers. The statute further directs the IRS to provide by
regulations other varying maximum extension periods for tax returns filed by tax-exempt organizations or employee benefit
plans and for certain other returns.
Note: For short-period returns covering periods beginning after December 31, 2015, the modified filing dates would apply for
such returns filed beginning in 2016.
2015 Budget Act
In addition to the large partnership audit procedures noted above, the Bipartisan Budget Act of 2015
(P.L. 114-74) includes a provision regarding partnership interests created by gift that is estimated to raise
$1.9 billion over the 10-year period. In addition, the legislation increased Pension Benefit Guaranty Corporation
(PBGC) premiums and extended ‘pension smoothing’ and other pension provisions. The legislation also made
various changes to Social Security and Medicare to address a projected 2016 insolvency in the Social Security
disability trust fund and to reduce scheduled increases in Medicare Part B health insurance premiums.
An in-depth discussion
31
What this means for your business
32
PwC Setting priorities in an election year
While election-year politics will dominate legislative action
this year, comprehensive tax reform remains a priority of
many businesses. Although there is bipartisan agreement
that the US corporate tax rate should be lowered significantly
and that our international tax system should be updated,
there is significant disagreement over key business tax issues,
including how to offset the cost of a corporate rate reduction
and the wisdom of a minimum tax on the foreign earnings
of US companies to limit base erosion. House Speaker Ryan’s
intent that the House vote in 2016 on a comprehensive tax
reform bill will require the continued engagement of business
stakeholders, because reform proposals drafted by House
Republicans in 2016 will affect future tax reform legislation.
The 2016 election year also is expected to highlight the
fundamental differences between the two parties over how
to reduce federal budget deficits and ensure the long-term
sustainability of key federal entitlement programs, such as
Social Security, Medicare, and Medicaid. The appropriate
‘balance’ between spending and revenues likely will be
part of any future debate over the federal budget and
efforts to reform US tax law. The continued involvement
of business leaders is critical to guide actions to reform our
tax system, address the growth in government spending,
and reduce deficits to promote economic growth.
IRS funding and management issues will continue to make it
more difficult for companies to resolve tax disputes. Businesses
will have to consider the impact of tax authorities’ limited
resources and a lack of effective cross-border dispute resolution
procedures in working with both US and foreign tax authorities.
Given their global prominence, US companies likely will
continue to be a primary focal point of the media, foreign
governments, and non-governmental organizations.
Transparency initiatives ultimately could result in public
disclosure of otherwise confidential business information,
such as revenue, profit, and taxes by country. There also is a
risk that proprietary business data will be disclosed related
to supply chains, profit margins, and similar information
that will be included in locally-filed reports. In light of the
risk that business taxpayer information will be publicly
disclosed, companies are well advised to have in place a
formal plan to respond to reports about their tax practices.
We share the concern of many of our clients that the
OECD BEPS Action Plan and unilateral actions of various
countries will result in an increased risk of double taxation
of US MNCs, greater complexity, additional administrative
burdens, and an expansion of disputes with tax authorities.
Efforts by some countries to impose taxes based on market
share or workforce presence—rather than the arm’s-length
principle that has been the international norm—would shift
profits away from the owner of the capital or IP, and also
lead to increased tax controversies. Absent US tax reform,
most US companies should expect their global effective tax
rates and cash taxes to rise, as other countries continue to
enact anti-base erosion and profit shifting legislation.
The continued involvement of business
leaders is critical to guide actions to reform
our tax system.
What this means for your business
33
Appendix A: Congressional budget process
The Obama Administration is required to submit a proposed
federal budget for FY 2017 by the statutory due date of the
first Monday in February (February 1, 2016), but there is
no penalty for submitting a budget beyond this deadline.
White House officials have announced that the President’s
FY 2017 budget will be released this year on February 9.
Congressional hearings on the President’s annual
budget proposals typically take place in February
and March, after which Congress generally adopts
a budget plan (‘budget resolution’) that provides an
overall framework for consideration of subsequent tax
and spending legislation for the budget period.
The statutory deadline for Congress to pass a budget resolution
is April 15, but this date often has slipped in the past. Because
a budget resolution binds only Congress, it does not require
the President’s approval. Congress in 2015 approved a budget
resolution that called for balancing the federal budget within
10 years through spending reductions and changes to federal
entitlement programs, and without any tax increases.
The Bipartisan Budget Act of 2015 enacted before the
departure of former House Speaker Boehner set overall
spending levels for the recently concluded FY 2016
appropriations cycle as well as the upcoming FY 2017 cycle.
Budget reconciliation process
Budget reconciliation bills receive expedited consideration
and have special procedural protections that facilitate passage.
This is especially true in the Senate, where reconciliation bills
cannot be filibustered and require a simple majority to pass.
34
PwC Setting priorities in an election year
Under Senate rules, there are a number of limitations on
the use of budget reconciliation. The Senate, in May 2007,
adopted a rule barring the use of reconciliation in a manner
that would increase the deficit or reduce a surplus. This rule
can be waived only with a 60-vote supermajority. Another
rule requires a 60-vote supermajority to approve provisions
that lose revenue beyond the 10-year budget window. The
2001 and 2003 tax rate reductions were enacted using
budget reconciliation, and thus to satisfy this rule the tax
cuts were set to ‘sunset’ at the end of the budget period.
The Senate in 2007 approved a rule change preventing the
use of budget reconciliation for net tax relief, although a
subsequent Senate could decide to change that rule.
Note: The Taxpayer Relief Act of 2012, which was
not a reconciliation measure, repealed various
sunset provisions from the 2001 and 2003 Acts.
PAYGO
Congress in 2010 passed a pay-as-you-go law (‘PAYGO’)
generally requiring tax increases or reductions in
permanent spending to offset the cost of tax cuts or
new mandatory spending programs. Congress can
waive the PAYGO law by declaring specific spending
or tax reductions to be emergency legislation.
The House has a ‘cut-as-you-go’ rule that requires any
bill that increases mandatory spending to be offset
by spending reductions and not by tax increases. The
House rule provides an exception for certain measures
designated as emergency under the statutory PAYGO
Act. The Senate does not have a similar rule.
Appendix B: Tax policymakers
House and Senate leadership in the 114th Congress
House Leadership
Speaker of the House
Paul Ryan (R-WI)
Majority Leader
Kevin McCarthy (R-CA)
Majority Whip
Steve Scalise (R-LA)
Chief Deputy Whip
Patrick McHenry (R-NC)
Republican Conference Chair
Cathy McMorris Rodgers (R-WA)
Republican Conference Vice Chair
Lynn Jenkins (R-KS)
Republican Campaign Committee Chair
Greg Walden (R-OR)
Republican Conference Secretary
Virginia Foxx (R-NC)
Republican Policy Committee Chair
Luke Messer (R-IN)
Minority Leader
Nancy Pelosi (D-CA)
Minority Whip
Steny Hoyer (D-MD)
Assistant Minority Leader
Jim Clyburn (D-SC)
Democratic Conference Chair
Xavier Becerra (D-CA)
Democratic Conference Vice Chair
Joseph Crowley (D-NY)
Democratic Campaign Committee Chair
Ben Ray Lujan (D-NM)
Democratic Chair of Policy and Communications
Steve Israel (D-NY)
Democratic Steering/Policy Committee Chairs
Rosa DeLauro (D-CT) and
Donna Edwards (D-MD)
Senate Leadership
President of the Senate
Vice-President Joseph Biden (D)
President Pro Tempore
Orrin Hatch (R-UT)
Majority Leader
Mitch McConnell (R-KY)
Assistant Majority Leader
John Cornyn (R-TX)
Republican Conference Chair
John Thune (R-SD)
Republican Conference Vice Chair
Roy Blunt (R-MO)
Republican Policy Chair
John Barrasso (R-WY)
Republican Senatorial Campaign Committee Chair
Roger Wicker (R-MS)
Minority Leader
Harry Reid (D-NV)
Assistant Minority Leader
Richard Durbin (D-IL)
Democratic Policy and Communications Chair
Charles Schumer (D-NY)
Strategic Policy Advisor
Elizabeth Warren (D-MA)
Democratic Conference Secretary
Patty Murray (D-WA)
Democratic Senatorial Campaign Committee Chair
John Tester (D-MT)
Chief Deputy Whip
Barbara Boxer (D-CA)
Democratic Steering Committee Chair
Amy Klobuchar (D-MN)
Appendices
35
Tax-Writing Committees
House Ways and Means Committee
Senate Finance Committee
The Ways and Means Committee membership currently
is composed of 24 Republicans and 15 Democrats.
The Finance Committee membership currently is
composed of 14 Republicans and 12 Democrats.
House Ways and Means Committee Members, 114th Congress
Senate Finance Committee Members, 114th Congress
Republicans
Democrats
Republicans
Democrats
Kevin Brady (R-TX), Chairman
Sander Levin (D-MI),
Ranking Minority Member
Orrin Hatch (R-UT), Chairman
Ron Wyden (D-OR), Ranking
Minority Member
Sam Johnson (R-TX)
Charles Rangel (D-NY)
Charles Grassley (R-IA)
Charles Schumer (D-NY)
Devin Nunes (R-CA)
Jim McDermott (D-WA)
Mike Crapo (R-ID)
Debbie Stabenow (D-MI)
Patrick Tiberi (R-OH)
John Lewis (D-GA)
Pat Roberts (R-KS)
Maria Cantwell (D-WA)
Dave Reichert (R-WA)
Richard Neal (D-MA)
Michael Enzi (R-WY)
Bill Nelson (D-FL)
Charles Boustany Jr. (R-LA)
Xavier Becerra (D-CA)
John Cornyn (R-TX)
Robert Menendez (D-NJ)
Peter Roskam (R-IL)
Lloyd Doggett (D-TX)
John Thune (R-SD)
Thomas Carper (D-DE)
Tom Price (R-GA)
Mike Thompson (D-CA)
Richard Burr (R-NC)
Benjamin Cardin (D-MD)
Vern Buchanan (R-FL)
John Larson (D-CT)
Johnny Isakson (R-GA)
Sherrod Brown (D-OH)
Adrian Smith (R-NE)
Earl Blumenauer (D-OR)
Rob Portman (R-OH)
Michael Bennet (D-CO)
Lynn Jenkins (R-KS)
Ron Kind (D-WI)
Patrick J. Toomey (R-PA)
Robert Casey, Jr. (D-PA)
Erik Paulsen (R-MN)
Bill Pascrell Jr. (D-NJ)
Daniel Coats (R-IN)
Mark Warner (D-VA)
Kenny Marchant (R-TX)
Joseph Crowley (D-NY)
Dean Heller (R-NV)
Diane Black (R-TN)
Danny Davis (D-IL)
Tim Scott (R-SC)
Tom Reed (R-NY)
Linda Sanchez (D-CA)
Todd Young (R-IN)
Mike Kelly (R-PA)
Jim Renacci (R-OH)
Pat Meehan (R-PA)
Key Treasury and other
Administration officials
Kristi Noem (R-SD)
Treasury Secretary
Jack Lew
George Holding (R-NC)
Director, National Economic Council
Jeffrey Zients
Jason Smith (R-MO)
Director, Office of Management
and Budget
Shaun Donovan
Chair, Council of Economic Advisers
Jason Furman
Treasury Assistant Secretary for
Tax Policy
Mark Mazur
IRS Commissioner
John Koskinen
IRS Chief Counsel
William (Bill) Wilkins
Bob Dold (R-IL)*
Tom Rice (R-SC)*
* New members appointed to Ways and Means following the 2015 resignation
of Rep. Aaron Shock (R-IL) and the election of Rep. Paul Ryan as Speaker of
the House.
36
PwC Setting priorities in an election year
Appendix C: Comparison of presidential candidate tax plans
Personal income tax provisions
Candidate
Individual taxes
Capital gains and dividends
Hillary Clinton (D)
• No rate detail
• Limit certain itemized deductions
• Minimum tax imposed on individuals with
incomes over $1 million
• Six-year holding period for individuals in top
39.6% bracket for 20% rate
• 3.8% net investment tax would apply
• Tax carried interest as ordinary income
Bernie Sanders (I)
• Ensure wealthy pay ‘fair share’ in taxes
• Lift Social Security cap on taxable income
above $250,000
• Progressive estate tax for estates over $3.5M
• No detail
Jeb Bush (R)
• Three brackets: 10%, 25%, and 28%
• Expand EITC and double the standard
deduction
• Cap most itemized deductions for wealthy
• Eliminate AMT
• Eliminate Social Security tax for workers over
age 67
• Maximum 20% rate on capital gains,
dividends, and interest
• Eliminate 3.8% net investment tax
• Tax carried interest as ordinary income
Ben Carson (R)
• 14.9% flat-rate tax
• Exempt first $36,375 of income for family of
four
• Eliminate AMT
• Eliminate estate tax
• Eliminate deductions for mortgage interest,
charitable contribution, and state and local
taxes
• 0% tax rate
Ted Cruz (R)
• 10% flat-rate tax
• Exempt first $36,000 of income for family of
four
• Retain child tax credit and expand EITC
• Preserve mortgage interest and charitable
contribution deductions
• 10% flat-rate tax
• Eliminate 3.8% net investment tax
Marco Rubio (R)
• Two brackets: 15% and 35%
• Eliminate most itemized deductions except
for mortgage interest and charitable
contributions
• 0% tax rate
Donald Trump (R)
• Four brackets: 0%, 10%, 20%, and 25%
• Eliminate income taxes for low income
earners
• Cap most itemized deductions for wealthy
• Eliminate AMT
• Maximum 20% rate on capital gains,
dividends, and interest
• Eliminate 3.8% net investment tax
• Tax carried interest as ordinary income
Appendices
37
Corporate and international tax provisions
Candidate
Corporate taxes
International
Hillary Clinton (D)
• No rate detail
• Two-year tax credit equal to 15% of
corporate profits shared with employees
• Reform performance-based exception for
executive compensation
• Manufacturing and investment tax incentives
• End ‘corporate inversions’
• ‘Exit tax’ on unrepatriated foreign earnings of
inverting companies
Bernie Sanders (I)
• Ensure large corporations pay ‘fair share’ in
taxes
• Stop corporations from shifting profits and
jobs overseas to avoid US tax
Jeb Bush (R)
• 20% tax rate
• Eliminate most corporate tax deductions,
including interest expense
• Full business expensing
• Eliminate interest expense deduction
• Move to territorial tax system
• One-time 8.75% tax on overseas corporate
profits, payable over 10 years
Ben Carson (R)
• 14.9% flat tax
• Full business expensing
• Eliminate “tax shelters and loopholes”
• No details
Ted Cruz (R)
• 16% business flat tax levied on revenues
minus allowable expenses
• Full business expensing
• Move to territorial tax system
• One-time 10% deemed repatriation tax on
overseas corporate profits
Marco Rubio (R)
• 25% tax rate (same rate for pass-throughs)
• Eliminate ‘tax extenders’ that expired at the
end of 2014
• Full business expensing
• Eliminate interest deductions for new debt
• Move to territorial tax system
• One-time 6% tax on deemed repatriation of
existing foreign earnings, payable over 10
years
• Include measures to reduce BEPS
Donald Trump (R)
• 15% tax rate
• Reduce corporate tax deductions
• Cap interest expense
• End deferral of tax on foreign income and
retain foreign tax credit
• One-time 10% deemed repatriation tax on
overseas corporate profits
38
PwC Setting priorities in an election year
Appendix D: Senators up for election in 2016
Democrats
Republicans
Bennet, Michael (D-CO)
Ayotte, Kelly (R-NH)
Blumenthal, Richard (D-CT)
Blunt, Roy (R-MO)
Boxer, Barbara (D-CA)*
Boozman, John (R-AR)
Leahy, Patrick (D-VT)
Burr, Richard (R-NC)
Mikulski, Barbara (D-MD)*
Coats, Daniel (R-IN)*
Murray, Patty (D-WA)
Crapo, Mike (R-ID)
Reid, Harry (D-NV)*
Grassley, Chuck (R-IA)
Schatz, Brian (D-HI)
Hoeven, John (R-ND)
Schumer, Charles (D-NY)
Isakson, Johnny (R-GA)
Wyden, Ron (D-OR)
Johnson, Ron (R-WI)
Kirk, Mark (R-IL)
Lankford, James (R-OK)
Lee, Mike (R-UT)
McCain, John (R-AZ)
Moran, Jerry (R-KS)
Murkowski, Lisa (R-AK)
Paul, Rand (R-KY)
Portman, Rob (R-OH)
Rubio, Marco (R-FL)*
Scott, Tim (R-SC)
Shelby, Richard (R-AL)
Thune, John (R-SD)
Toomey, Patrick (R-PA)
Vitter, David (R-LA)*
*Not running for re-election
Senate Finance Committee members shown in bold italics
Appendices
39
Appendix E: H.R. 1, the Tax Reform Act of 2014
Former House Ways and Means Chairman Dave Camp
on February 26, 2014 released a 979-page tax reform
discussion draft that would lower corporate and individual
tax rates, reform US international tax rules, and broaden
the tax base by repealing or limiting business and individual
tax deductions, credits, and income exclusions. Shortly
before the last Congress adjourned, he introduced his
proposal as H.R. 1, the Tax Reform Act of 2014.
Under Camp’s bill, the current 35-percent top corporate
rate would have been reduced by two percentage
points each year over five years to 25 percent.
The Camp bill was designed to be revenue neutral
over the traditional 10-year budget window
under conventional revenue estimates.
Some of the key proposals to broaden the tax
base by limiting deductions, credits, and income
exclusions affecting businesses would have:
• Eliminated the modified accelerated cost recovery
system (MACRS), resulting in longer deduction
periods for the cost of certain property
• Required, after a phase-in period, five-year amortization
of research and experimental expenditures
• Required, after a phase-in period, 10-year amortization
for 50 percent of certain advertising expenses
• Phased out and repealed the domestic
manufacturing deduction (section 199)
• Repealed LIFO and lower-of-cost-or-market
(LCM) inventory accounting methods
• Limited use of the cash accounting method
for certain large passthrough entities
• Repealed special net operating loss (NOL) carryback rules
• Repealed deferral of gain on like-kind exchanges
• Imposed an excise tax on systemically
important financial institutions (SIFI).
40
PwC Setting priorities in an election year
Building on Camp’s 2011 international tax reform discussion
draft, the 2014 Camp bill proposed to move from the current
US worldwide system of taxation to a ‘territorial’ tax system in
which 95 percent of qualified foreign-source dividends received
by US corporations from foreign subsidiaries would not be
subject to US tax (through a dividend received deduction).
Note: S corporations and US partnerships (and their
respective owners) would not have been eligible for
this territorial tax treatment under the Camp bill.
Former Chairman Camp proposed to address concerns about
US corporations shifting profits to low-tax jurisdictions by
taxing certain ‘intangible’ income of foreign subsidiaries
(defined as income earned on sales to customers outside the
US in excess of a 10-percent return on depreciable assets),
at a reduced rate of 15 percent when the income is earned.
Similarly defined ‘intangible’ income of foreign subsidiaries
earned on sales to the US would be taxed at the 25-percent
corporate tax rate when the income is earned. The proposal
also would have limited certain interest deductions.
A one-time transition tax would have applied to all previously
untaxed earnings and profits (E&P) of foreign subsidiaries
of US corporations. The cash portion of previously untaxed
E&P would have been subject to an 8.75-percent rate, and the
remainder would have been subject to a 3.5-percent rate.
Former Chairman Camp also proposed that some of
the revenue from his tax reform bill could be allocated
to federal transportation trust funds. However, this
transfer did not impact the revenues raised under
the tax reform plan, and therefore did not reduce the
revenues available to offset the cost of rate reduction
and other favorable changes in the legislation.
For individuals, the Camp bill would have replaced the current
seven individual income tax brackets—ranging from 10 to 39.6
percent—with two tax brackets of 10 percent and 25 percent.
A new 10-percent surtax would have applied to a broad range
of ‘modified’ adjusted gross income above $450,000 for joint
filers and above $400,000 for single filers. The standard
deduction would have been increased, but personal exemptions
would have been repealed. The bill would have repealed both
the individual and corporate alternative minimum tax.
Appendix F: Selected federal tax expenditures
Tax expenditure
5–year FY 2015-2019 tax
expenditure estimate
($ billions)
Corporations
Credit for increasing research activities (section 41) *
N/A
Deferral of active income of controlled foreign corporations
563.6
Deduction for income attributable to domestic production
activities
61.5
Deferral of gain on like-kind exchanges
57.4
Exclusion of interest on public purpose State and local
government bonds
50.5
Credit for low-income housing
41.2
Deferral of gain on non-dealer installment sales
33.8
Expensing of research and experimental expenditures
27.6
Reduced rates on first $10,000,000 of corporate taxable income
20.8
Special treatment of life insurance company reserves
16.0
Expensing under Section 179 of depreciable business property
8.8
Inventory property sales source rule exception
8.8
Depreciation of equipment in excess of the alternative
depreciation system**
-20.9
Individuals
Exclusion of employer contributions for health care, health
insurance premiums, and long-term care insurance premiums
769.8
Reduced rates of tax on dividends and long–term capital gains
689.6
Net exclusion of pension contributions and earnings for defined
contribution plans
504.8
Deduction for mortgage interest on owner-occupied residences
419.8
Earned income credit
371.4
Deduction of non-business State and local government income
taxes, sales taxes, and personal property taxes
342.3
Subsidies for insurance purchased through health benefit
exchanges
322.5
Net exclusion of pension contributions and earnings for defined
benefit plans
315.6
Credit for children under age 17
267.0
Exclusion of untaxed Social Security and railroad retirement
benefits
210.1
Appendices
41
Tax expenditure
5–year FY 2015-2019 tax
expenditure estimate
($ billions)
Deduction for charitable contributions, other than for education
and health
192.9
Exclusion of benefits provided under cafeteria plans
188.5
Deduction for property taxes on real property
184.5
Exclusion of capital gains at death
171.3
Exclusion of capital gains on sales of principal residences
149.9
Exclusion of interest on public purpose State and local
government bonds
137.2
Credits for tuition for post-secondary education
84.0
Individual retirement arrangements: Traditional IRAs
77.2
Net exclusion of pension contributions and earnings for plans
covering partners and sole proprietors (Keogh plans)
61.1
Deduction for medical expenses and long–term care expenses
58.5
Individual retirement arrangements: Roth IRAs
39.5
Exclusion of miscellaneous fringe benefits
39.2
Exclusion of veterans' disability compensation
36.8
Exclusion of foreign earned income: Salary
35.7
Carryover basis of capital gains on gifts
35.4
Deduction for charitable contributions to educational institutions
33.1
Exclusion of benefits and allowances to armed forces personnel
31.9
Deferral of gain on like-kind exchanges
30.3
Exclusion of employer-paid transportation benefits
27.2
Exclusion of workers’ compensation benefits (medical benefits)
25.6
Deduction for health insurance premiums and long-term care
insurance premiums by the self employed
25.3
Parental personal exemption for students aged 19 to 23
24.7
Credit for child and dependent care and exclusion of employerprovided child care
24.0
Deduction for income attributable to domestic production
activities
23.3
Exclusion of employment benefits for premiums on accident and
disability insurance
22.2
Depreciation of rental housing in excess of alternative
depreciation system
19.8
Deduction for charitable contributions to health organizations
17.0
42
PwC Setting priorities in an election year
Tax expenditure
5–year FY 2015-2019 tax
expenditure estimate
($ billions)
Exclusion of income earned by voluntary employees’ beneficiary
associations
16.4
Build America bonds
16.0
Additional standard deduction for the blind and the elderly
15.3
Exclusion of scholarship and fellowship income
15.2
Exclusion of workers’ compensation benefits (disability and
survivors payments)
15.1
Exclusion of interest on State and local government qualified
private activity bonds for private nonprofit and qualified public
educational facilities
14.0
Exclusion of medical care and TRICARE medical insurance for
military dependents, retirees, and retiree dependents not enrolled
in Medicare
13.9
Deferral of gain on non-dealer installment sales
7.5
Tax credit for small businesses purchasing employer insurance
4.4
* Table reflects legislation enacted by September 30, 2015. While the Section 41 credit for research and experimentation
had expired for amounts paid or incurred after December 31, 2014, this provision was retroactively made permanent last
December. Estimates for other tax expenditure provisions extended or made permanent by the December 2015 legislation
would also be affected.
** Includes bonus depreciation and general acceleration under MACRS. Due to bonus depreciation deductions claimed
in recent years, the tax expenditure estimate for FY 2015-2019 was negative (indicating that projected depreciation
deductions would be less than economic depreciation in this period). The temporary extension and phaseout of bonus
depreciation enacted in December 2015 would change the estimate.
Note: The methodology used by JCT staff to estimate tax expenditures differs from the methodology used to estimate
revenue-raising proposals.
Source: JCT Estimates of Federal Tax Expenditures for Fiscal Years 2015–2019. JCX-141R-15
Appendices
43
Appendix G: Selected potential revenue-raising proposals
Provision
Source of proposal
Revenue estimate over
10 years ($ millions)
International
Impose a 19-percent minimum tax on foreign income
Administration FY16 Budget
262,259
Impose a 14-percent one-time tax on previously untaxed foreign
income
Administration FY16 Budget
217,185
Restrict seductions for excessive interest of members of financial
reporting groups
Administration FY16 Budget
64,236
Close loopholes under Subpart F
Administration FY16 Budget
32,423
Limit the ability of domestic entities to expatriate
Administration FY16 Budget
16,340
Modify tax rules for dual capacity taxpayers
Administration FY16 Budget
11,566
Disallow the deduction for excess non-taxed reinsurance premiums
paid to affiliates
Administration FY16 Budget
8,700
Modify the rule for the sourcing of income from exports
CBO
4,000
Restrict the use of hybrid arrangements that create stateless income
Administration FY16 Budget
2,873
Tax gain from the sale of a partnership interest on look-through basis
Administration FY16 Budget
2,666
Limit shifting of income through intangible property transfers
Administration FY16 Budget
2,631
Modify sections 338(h)(16) and 902 to limit credits when non-double
taxation exists
Administration FY16 Budget
988
Repeal Last-In, First-Out ("LIFO") method of accounting for
inventories
Administration FY16 Budget
104,628
Increase corporate income tax rates by 1 percentage point
CBO
102,000
Implement a program integrity statutory cap adjustment for tax
administration
Administration FY16 Budget
55,255
Tax carried (profits) interests as ordinary income
Administration FY16 Budget
15,644
Eliminate deduction for dividends on stock of publicly-traded
corporations held in employee stock ownership plans
Administration FY16 Budget
10,870
Increase certainty with respect to worker classification
Administration FY16 Budget
10,796
Modify like-kind exchange rules for real property and collectibles
Administration FY16 Budget
10,504
Streamline audit and adjustment procedures for large Partnerships
Administration FY16 Budget
7,447
Repeal Lower-Of- Cost-or-Market ("LCM") inventory accounting
method
Administration FY16 Budget
4,583
Modify depreciation rules for purchases of general aviation passenger
aircraft
Administration FY16 Budget
3,847
Impose liability on shareholders to collect unpaid income taxes of
applicable corporations
Administration FY16 Budget
1,804
Require that the cost basis of stock that is a covered security must be
determined using an average cost basis method
Administration FY16 Budget
1,741
Tax accounting and corporate
44
PwC Setting priorities in an election year
Revenue estimate over
10 years ($ millions)
Provision
Source of proposal
Extend partnership basis limitation rules to nondeductible
expenditures
Administration FY16 Budget
1,435
Limit the importation of losses under related party loss limitation rules
Administration FY16 Budget
1,349
Require current inclusion in income of accrued market discount and
limit the Accrual amount for distressed debt
Administration FY16 Budget
839
Tax corporate distributions as dividends
Administration FY16 Budget
826
Expand the definition of built-in loss for purposes of partnership loss
transfers
Administration FY16 Budget
715
Require a certified Taxpayer Identification Number ("TIN") from
contractors and allow certain withholding
Administration FY16 Budget
419
Deny deduction for punitive damages
Administration FY16 Budget
402
Conform corporate ownership standards
Administration FY16 Budget
215
Repeal technical terminations of partnerships
Administration FY16 Budget
205
Repeal Non-Qualified Preferred Stock ("NQPS") designation
Administration FY16 Budget
128
Increase information sharing to administer excise taxes
Administration FY16 Budget
126
Repeal exclusion of net unrealized appreciation in employer securities
Administration FY16 Budget
36
Provide for reciprocal reporting of information in connection with the
implementation of the Foreign Account Tax Compliance Act ("FATCA")
Administration FY16 Budget
1
Impose a financial fee
Administration FY16 Budget
109,569
Require that derivative contracts be marked to market with resulting
gain or loss treated as ordinary
Administration FY16 Budget
16,496
Financial services
Employee benefits
Tax social security and railroad retirement benefits like defined-benefit
pensions
CBO
412,000
Increase excise taxes on motor fuels by 35 cents and index for
inflation
CBO
469,000
Repeal percentage depletion for oil and natural gas wells
Administration FY16 Budget
17,177
Repeal expensing of intangible drilling costs
Administration FY16 Budget
13,454
Repeal domestic manufacturing deduction for oil and natural gas
production
Administration FY16 Budget
11,980
Repeal exemption from the corporate income tax for publicly traded
partnerships with qualifying income and gains from activities relating
to fossil fuels
Administration FY16 Budget
1,159
Increase geological and geophysical amortization period for
independent producers to seven years
Administration FY16 Budget
1,120
Repeal expensing of exploration and development costs
Administration FY16 Budget
836
Energy
Appendices
45
Revenue estimate over
10 years ($ millions)
Provision
Source of proposal
Repeal percentage depletion for hard mineral fossil fuels
Administration FY16 Budget
704
Repeal domestic manufacturing deduction for the production of coal
and other hard mineral fossil fuels
Administration FY16 Budget
448
Repeal capital gains treatment for royalties
Administration FY16 Budget
420
Repeal exception to passive loss limitations for working interests in oil
and natural gas properties
Administration FY16 Budget
229
Return fees on the production of coal to pre-2006 levels to restore
abandoned mines (sunset 9/30/21)
Administration FY16 Budget
226
Repeal deduction for tertiary injectants
Administration FY16 Budget
60
Individuals
Eliminate the deduction for state and local taxes
CBO
Reduce the value of certain tax expenditures
Administration FY16 Budget
525,075
Reform the taxation of capital income
Administration FY16 Budget
232,847
Curtail the deduction for charitable giving
CBO
213,000
Use an alternative measure of inflation to index some parameters of
the tax code
CBO
150,000
Eliminate certain tax preferences for educational expenses
CBO
150,000
Restore the estate, gift and Generation-Skipping Transfer ("GST") tax
parameters in effect in 2009 with portability of exemption amount
between spouses
Administration FY16 Budget
138,421
Limit the value of itemized deductions
CBO
64,000 to
139,000
Convert the mortgage interest deduction to a 15 percent tax credit
CBO
113,000
Further limit annual contributions to retirement plans
CBO
83,000
Raise the tax rates on long-term capital gains and dividends by
2 percentage points
CBO
53,000
Modify transfer tax rules for Grantor Retained Annuity Trusts ("GRATs") Administration FY16 Budget
and other grantor trusts
1,088,000
10,021
Lower the investment income limit for the earned income tax credit
and extend that limit to the refundable portion of the child tax credit
CBO
6,000
Require non-spouse beneficiaries of deceased IRA owners and
retirement plan participants to take inherited distributions over no
more than five years
Administration FY16 Budget
5,339
Simplify gift tax exclusion for annual gifts
Administration FY16 Budget
2,211
Require consistency in value for transfer and income tax purposes
Administration FY16 Budget
2,015
Improve mortgage interest deduction reporting
Administration FY16 Budget
2,010
Repeal the student loan interest deduction and provide exclusion for
certain debt relief and scholarships
Administration FY16 Budget
1,976
Modify reporting of tuition expenses and scholarships on Form 1098-T Administration FY16 Budget
520
Simplify Minimum Required Distribution ("MRD") rules
460
46
PwC Setting priorities in an election year
Administration FY16 Budget
Provision
Source of proposal
Revenue estimate over
10 years ($ millions)
Insurance
Increase the payroll tax rate for Medicare hospital insurance by
1 percentage point
CBO
800,000
Make the 0.2 percent Unemployment Insurance ("UI") surtax
permanent
Administration FY16 Budget
14,486
Repeal Federal Insurance Contributions Act ("FICA") tip credit
Administration FY16 Budget
12,176
Extend pro rata interest expense disallowance for corporate-owned
life insurance
Administration FY16 Budget
7,187
Modify proration rules for life insurance company general and
separate accounts
Administration FY16 Budget
6,086
Modify rules that apply to sales of life insurance contracts
Administration FY16 Budget
1,021
Conform net operating loss rules of life insurance companies to those
of other corporations
Administration FY16 Budget
376
Increase tobacco taxes and index for inflation
Administration FY16 Budget
85,325
Increase all taxes on alcoholic beverages to $16 per proof gallon
CBO
66,000
Implement the Buffett rule by Imposing a new “fair share tax"
Administration FY16 Budget
45,151
Conform Self-Employment Contributions Act ("SECA") taxes for
professional service businesses
Administration FY16 Budget
33,382
Reinstate superfund environmental income tax
Administration FY16 Budget
16,355
Expand Federal Unemployment Tax Act ("FUTA") base
Administration FY16 Budget
7,248
Reinstate and extend superfund excise taxes
Administration FY16 Budget
5,479
Limit the total accrual of tax-favored retirement benefits
Administration FY16 Budget
4,327
Disallow the deduction for charitable contributions that are a
prerequisite for purchasing tickets to college sporting events
Administration FY16 Budget
2,352
Reauthorize special assessment on domestic nuclear utilities
Administration FY16 Budget
1,676
Levy a fee on the production of hardrock minerals to restore
abandoned mines
Administration FY16 Budget
1,295
Increase oil spill liability trust fund financing rate (to 9 cents per barrel
effective 2016 and 10 cents per barrel effective 2017) and update the
law to include other sources of crudes
Administration FY16 Budget
1,262
Extend statute of limitations for assessment of overstated basis and
State adjustments
Administration FY16 Budget
1,190
Repeal the excise tax credit for distilled spirits with flavor and wine
additives
Administration FY16 Budget
1,179
Reform inland waterways funding
Administration FY16 Budget
817
Increase levy authority for payments to Medicare providers with
delinquent tax debt
Administration FY16 Budget
577
Other
Appendices
47
Revenue estimate over
10 years ($ millions)
Provision
Source of proposal
Enhance UI program integrity
Administration FY16 Budget
516
Repeal tax-exempt bond financing of professional sports facilities
Administration FY16 Budget
423
Eliminate the deduction for contributions of conservation easements
on golf courses
Administration FY16 Budget
272
Restrict deductions and harmonize the rules for contributions of
conservation easements for historic preservation
Administration FY16 Budget
229
Limit Roth conversions to pre-tax dollars
Administration FY16 Budget
224
Explicitly provide that the Department of the Treasury and the IRS
have authority to regulate all paid return preparers
Administration FY16 Budget
135
Provide the IRS with greater flexibility to address correctable errors
Administration FY16 Budget
133
Extend the lien on estate tax deferrals where estate consists largely of
interest in closely held business
Administration FY16 Budget
80
Extend paid preparer EITC due diligence requirements to the child tax
credit ("CTC")
Administration FY16 Budget
43
Increase the penalty applicable to paid tax preparers who engage in
willful or reckless conduct
Administration FY16 Budget
9
Provide authority to readily share beneficial ownership of U.S.
companies with law enforcement
Administration FY16 Budget
1
Source: Administration’s FY 2016 Budget, February 2, 2015 (revenue estimates from Joint Committee on Taxation, “Estimated
Budget Effects of the Revenue Provisions Contained in the President’s Fiscal Year 2016 Budget Proposal,” (JCX-50-2015),
March 6, 2015) and Congressional Budget Office “Options for Reducing the Deficit: 2015 to 2024,” November 2014
48
PwC Setting priorities in an election year
PwC Tax Policy Services team
Tax Policy Services
National Economics and Statistics
Pam Olson
[email protected]
(202) 414 1401
Lindy Paull
[email protected]
(202) 414 1579
Drew Lyon
[email protected]
(202) 414 3865
Rohit Kumar
[email protected]
(202) 414 1421
Don Carlson
[email protected]
(202) 414 1385
Peter Merrill
[email protected]
(202) 414 1666
Brian Meighan
[email protected]
(202) 414 1790
Andrew Prior
[email protected]
(202) 414 4572
Jack Rodgers
[email protected]
(202) 414 1646
Dave Camp
[email protected]
(202) 414 1700
Larry Campbell
[email protected]
(202) 414 1477
Lin Smith
[email protected]
(202) 414 4687
Scott McCandless
[email protected]
(202) 312 7686
John Stell
[email protected]
(202) 312 7583
Ed McClellan
[email protected]
(202) 414 4404
Appendices
49
Acknowledgments
This report represents the analysis and efforts of many individuals within PwC’s
Washington National Tax Services and other offices. This publication was produced
under the direction of Larry Campbell. The text was prepared by a team of professionals,
including Larry Campbell, Laurie Hoffman Colbert, Dick Ruge, John Stell, David
Ernick, Elizabeth Askey, Craig Gerson, Bryan Mayster, Steve Nauheim, Eileen
Scott, Phillip Galbreath, Bob Wells, Nathan Telaraja, and Quinton Dowell.
Special thanks to Pam Olson, Ken Kuykendall, Rohit Kumar, Brian Meighan, Dave
Camp, Lindy Paull, Scott McCandless, Ed McClellan, Drew Lyon, Peter Merrill, Don
Carlson, Andrew Prior, and Ed Geils. We also would like to thank Gretchen Moore,
Brennan Marshall, Jyll Presley, and Angelique Diggs for their assistance.
This publication is printed on Finch Premium Blend Recycled.
It is a Sustainable Forestry Initiative® (SFI) certified stock using
50% post-consumer waste (PCW) fiber and manufactured
in a way that supports the long-term health and sustainability
of our forests.
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