Legislative Activity

House to Vote on Repealing Medical Device Tax

House Majority Leader Kevin McCarthy (R-CA) announced last week that the House plans to take up legislation to eliminate the excise tax on medical devices during the week of June 15. The Protect Medical Innovation Act (H.R. 160), which was introduced by Representative Erik Paulsen (R-MN), was marked up by the House Ways and Means Committee on June 2, and would repeal the 2.3 percent excise tax and refund manufacturers who have paid it thus far, with interest. The bill, which was scored at losing $24.4 billion over a10-year scoring window, does not include replacement funding. The score is accessible here.

Tax-Writers Focus on International Tax Reform

As lawmakers continue their push to accomplish some sort of reform of the U.S. Tax Code this Congress, both the Senate Finance and House Ways and Means Committees remain focused on what appears to be the most achievable option – international tax reform. While international tax reform is by no means a sure thing, given lawmakers’ political divergence over other reform efforts, coupled with concerns related to the Organisation for Economic Co-operation and Development’s (OECD) efforts to prevent base erosion and profit shifting (BEPS Project), such reforms are likely the best (and only) opportunity for tax-writers to bring about significant changes to the U.S. system of taxation this Congress. To help alleviate concerns and protect an already shrinking tax base, tax-writers in both the House and Senate have begun to develop proposals that would fit into the OECD’s broad tax reform efforts (i.e., developing “patent boxes,” etc.). In fact, Chairman Paul Ryan (R-WI) and other tax-writers have indicated that they plan to hold hearings to review the OECD’s recommendations in the coming weeks.

Moreover, with regard to specific efforts by congressional tax-writers, the Senate Finance Committee’s International Tax Working Group has found the most common ground of all the Committee’s Working Groups and will likely provide its recommendations to the Committee – including recommendations on a patent box regime – in the near future. On the House side, Representative Charles Boustany (R-LA) is hard at work figuring out how revamp the international Tax Code and plans to introduce his legislation “soon.”  Notably, while he has not yet released many details about his plan, he indicated this week that he has “a real problem with taking something like international tax and using that for surface transportation funding.”  Instead, Representative Boustany urged that the revenue raised from his proposal be used to lower corporate rates – an issue that is unlikely to be addressed this Congress, due mostly to difficulties lawmakers are having in achieving tax parity for small businesses.

Stakeholders Raise Concerns About Reporting Provision in Trade Bill

Last month, the Senate passed the Trade Preferences Extension Act of 2015 (H.R. 1295) by a vote of 97-1 1. The bill, which now heads to the House for consideration, has recently caused banks and credit unions to raise concerns regarding an overlooked provision that would require these financial institutions to begin reporting interest earned on all accounts, even if less than $10 (as presently provided under law). Specifically, there has been concern from some in the financial services industry that the bill provides financial institutions “little time to adapt their systems for compliance” and “will impose substantial costs on the financial services industry that far exceed the revenue that will be gained by the proposal.”  According to lawmakers, the measure is not a new tax, but merely a stronger enforcement mechanism for taxes already owed; consumers who fail to comply with the reporting requirement would face a penalty. The provision, which would go into effect for the 2015 tax year, would raise an estimated $90 million over a 10-year period.

Regulatory Activity

IRS Issues Regulations on Expanded Affiliate Groups

Last week, the Internal Revenue Service (IRS) issued final regulations regarding when an expanded affiliated group will be considered to have substantial business activities in a foreign country. These regulations, which affect certain domestic corporations and partnerships and foreign corporations that acquire substantially all of the properties of such domestic corporations or partnerships, implement Tax Code Section 7874, which aims to stop corporate tax inversions. The guidance –which became effective upon its publication in the Federal Register – retains much of the June 2012 proposed and temporary regulations, with a few changes. Specifically, the regulations retain most of the bright-line test, under which a group is considered to have substantial activities if at least 25-percent of the group’s employees, assets, and income are in or derived in the foreign country in question.  According to the IRS, the test is consistent with Section 7874 and its underlying policies, “has proven more administrable than a facts-and-circumstances test, and has the benefit of providing certainty in applying Section 7874 to particular transactions.”

Treasury, IRS Request Comments on Financial Accounting Changes

The Department of Treasury and the IRS have issued a request for comment to determine how the Financial Accounting Standards Board’s (FASB) new standards – Revenue from Contracts with Customers – will impact taxpayers’ methods of accounting. In publishing Notice 2015-40, Treasury and the IRS suggest that the new financial accounting revenue recognition standards “raise a number of substantive and procedural issues for the IRS, including whether the new standards are permissible methods of accounting for federal income tax purposes, the types of accounting method change requests that will result from adopting the new standards, and whether the current procedures for obtaining IRS consent to change a method of accounting are adequate to accommodate those requests.”