International Tax Reform v. Inversions
Following up on Senate Finance Committee Chairman Orrin Hatch’s (R-UT) recent acknowledgment that his “corporate integration” proposal has been delayed, at least by “a few weeks,” it now appears that the House Ways and Means Committee may miss its self-imposed goal of March 31 by which to release a draft of its international tax reform proposal. Nevertheless, while the exact timeline for finalizing the proposal appears to be in flux, the basic framework – which Representative Charles Boustany (R-LA) has acknowledged is “probably unlikely” to become law this year – consists of three main aspects: (1) moving from a worldwide system of taxation to a territorial system of taxation with a dividend exemption regime; (2) lowering corporate tax rates; and (3) implementing an “Innovation Box.”
Moreover, as Republicans and Democrats work out their disagreements over how to approach certain aspects of tax reform (i.e., rates, whether to have an Innovation Box, etc.), Democrats have again set their immediate focus on combatting corporate tax inversions. In fact, just last week, following House Ways and Means Committee Ranking Member Sandy Levin’s (D-MI) bill seeking to restrict earnings stripping practices, Senators Chuck Schumer (D-NY) and Sherrod Brown (D-OH) have also introduced a new set of bills targeting inversions. Senator Brown’s bill, S. 2662, Pay What You Owe Before You Go Act, would require inverting corporations to pay U.S. tax on all deferred overseas profits before reincorporating in a new country, while Senator Schumer’s bill, S. 2666, Corporate Inverters Earnings Stripping Reform Act, is similar to Ranking Member Levin’s legislation and also seeks to limit inverted companies earnings stripping abilities. Still, and despite this new round of bills, it is unlikely that Republicans will address inversions through standalone legislation and will instead continue to focus on tax reform as the solution.
This Week’s Hearings:
- Wednesday, March 16: The House Appropriations Subcommittee on Financial Services and General Government will hold a hearing to examine the Treasury Department’s FY 2017 Budget Request.
Treasury Continuing to Work Through CbyCR Complications; IRS Will Not Accept Voluntary Submissions
With final country-by-country reporting (CbyCR) rules due out by June 30, there remain certain difficulties with domestic implementation of CbyCR regulations. Namely, given the different effective dates between expected U.S. regulations and the Organisation for Economic Co-operation and Development’s (OECD) proposal, which calls for compliance with CbyCR requirements starting for fiscal years beginning on or after January 1, 2016, it is possible that certain multinationals would not yet be required to comply with the requirements domestically, but could face compliance requests from other countries.
Recognizing the potential complications, Treasury is working with the OECD and individual countries to come up with an appropriate solution. One potential option: surrogate reporting. In other words, should the country in which a multinational corporation is headquartered not be prepared to collect data at a time during which the company has a need to collect and report such data, that company can appoint a surrogate country to collect its data instead. However, as confirmed recently by Jeffrey Mitchell, Chief, Branch 2, Office of Associate Chief Counsel (International), the Internal Revenue Service (IRS) will not accept voluntary early filings. Instead, companies “will need to look at the facts in all of the jurisdictions in which they do business and where they have constituent entities, and determine if they have to file, or whether or not they can use a surrogate entity from one of the jurisdictions from which they do business.”
Outside of U.S. CbyCR implementation, last week, European finance ministers reached an agreement that would require EU-wide reporting by covered multinational corporations. It is also expected that, despite objections by several countries, the Commission will publish an additional proposal in April that would make at least certain aspects of the CbyCR Report public. Note, however, that before such regulations are considered binding, individual member countries must first incorporate the regulations into their respective bodies of law via legislation.