Senate Finance Committee Tax Reform Working Groups Release Reports
Last week, on Tuesday, July 8, the Senate Finance Committee released the long-awaited reports from its five bipartisan Tax Reform Working Groups, which were formed to “spur congressional comprehensive tax reform efforts in the 114th Congress.” The groups focused on: (1) Individual Income Tax; (2) Business Income Tax; (3) International Tax; (4) Savings & Investment; and (5) Community Development & Infrastructure. Specifically, the groups were tasked with analyzing current tax law and examining policy trade-offs and available reform options within their designated topic areas.
Despite lawmakers’ best efforts this Congress, comprehensive tax reform (i.e., reform of both individual and corporate income tax laws) is largely considered to be off the table until after the 2016 elections given the two political parties’ diametrically opposed views on individual tax reform. Moreover, while some had hoped that perhaps business-only tax reform was achievable before 2016, that now appears highly unlikely to occur. Significantly, however, the more limited objective of international tax reform has gained traction given the actions that countries are taking with respect to the Organisation for Economic Co-operation and Development’s (OECD’) Base Erosion and Profit Shifting (BEPS) project to address a variety of tax avoidance practices of multinational business enterprises. Our in-depth analysis of the report release by the International Tax Reform Working Group – which is co-chaired by Senators Rob Portman (R-OH) and Chuck Schumer (D-NY) – is available here.
Tax-Writers Likely to Address Highway Funding
Toward to end of this week, the Senate is likely to take up legislation that would fund the Highway Trust Fund for a period of two years. The effort, which is being driven by Senate Majority Leader Mitch McConnell (R-KY), may run into problems given timing constraints, as the Highway Trust Fund will run out of funding by July 31. Alternatively, House lawmakers are in favor of using a short-term patch through the end of the year, with hopes of passing a six-year highway bill, a package of permanent tax extenders, and international tax reform at some point later in the year. Notably, such a proposal may use deemed repatriation described above to help finance both the highway bill and a transition to a hybrid territorial system of taxation.
Confirming the House’s commitment to such an approach, House Ways and Means Committee Chairman Paul Ryan (R-WI) announced on Thursday, July 9 that Congress will act “soon” to enact another short-term highway funding extension, which will set the stage to move forward with international tax reform and other tax priorities when Congress returns from the upcoming August recess. While there seems to be a broad bipartisan consensus on the general parameters for an international tax reform package, there are equally broad areas of uncertainty with respect to many of the critical details that remain to be resolved before international tax reform can successfully navigate the Congressional process and convert that broad consensus into final legislation. Nevertheless, the topic will remain at the forefront of debate for tax-writers for the balance of this year, particularly in light of the two political imperatives for reform (BEPS and the need for revenues) and the fact that the U.S. system for taxing international income is arguably out of step with contemporary international norms.
Separately, it appears likely that Senate tax-writers will take up tax extenders (likely a two-year package) the week of July 20. The House, which appears more focused on making tax extenders permanent, will also likely move soon in an effort to avoid another year-end race to extend these expired provisions.
Congress Renews Focus on Inversions
This week the House is likely to vote on Senator Bob Casey’s (D-PA) anti-inversion amendment to S. 1177, the Every Child Achieves Act of 2015 – the education bill the Senate is presently debating. Similar to the Stop Corporate Inversions Act of 2014, legislation introduced last Congress by former Senator Carl Levin (D-MI) and Representative Sandy Levin (D-MI), Senator Casey’s amendment would lower from 80 percent to 50 percent the section 7874 threshold of the share of stock ownership in an inverted company that can be held continuously by former shareholders or partners in the original domestic business, above which the inverted company would be considered domestic for tax purposes. The amendment would apply to direct or indirect acquisitions completed after July 31, 2015. Importantly, the amendment provides a broader exception to the section 7874 change than legislation last Congress, as it would exempt inverted corporations that had substantial business activities in their new foreign jurisdiction of legal residence compared with their total business activity.
Additionally, the Senate Permanent Subcommittee on Investigations is planning a hearing on inversions later this month. The hearing will likely focus on the impact inversions have on jobs, wages, and benefits in the United States. The Subcommittee will specifically examine the role the tax Code plays in impacting U.S. companies’ level of competitiveness with non-U.S. companies. According to Senator Portman, “we really want to dig into this.”
IRS to Publish Rule on Coverage of Preventative Services
On Tuesday, July 14, the Internal Revenue Service will publish in the Federal Register final regulations regarding coverage of certain preventive services under section 2713 of the Public Health Service Act (PHS Act), added by the Patient Protection and Affordable Care Act, as amended, and incorporated into the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. Section 2713 of the PHS Act requires coverage without cost sharing of certain preventive health services by non-grandfathered group health plans and health insurance coverage. These regulations will finalize provisions from three rulemaking actions: (1) interim final regulations issued in July 2010 related to coverage of preventive services; (2) interim final regulations issued in August 2014 related to the process an eligible organization uses to provide notice of its religious objection to the coverage of contraceptive services; and (3) proposed regulations issued in August 2014 related to the definition of “eligible organization,” which would expand the set of entities that may avail themselves of an accommodation with respect to the coverage of contraceptive services. Comments are due within 60 days after the rule’s publication.