Daily Tax Update - February 1, 2010

WHITE HOUSE RELEASES FY 2011 BUDGET PROPOSAL: Today, the White House released its fiscal year 2011 budget proposal. The budget contains modified versions of the Administration’s FY 2010 international tax budget proposals. The Administration’s FY 2011 budget also proposes several new tax provisions targeting financial institutions and products.

  • International Tax Proposals. The Administration’s FY 2011 international tax proposals are estimated to raise $122 billion over 10 years (substantially less than the $210 billion estimated to be raised by the Administration’s FY 2010 international tax proposals).
    • No Check-the-Box Restrictions. The FY 2011 budget does not contain the Administration’s controversial FY 2010 proposal to reform business entity classification. Under the prior proposal, foreign subsidiaries could not be treated as “disregarded entities” except in certain limited circumstances.
    • Modified Deferral of Deductions Proposal. The FY 2011 budget proposes to defer the deduction of interest expenses allocable to foreign-source income to the extent the US taxation of such income is deferred. The proposal is estimated to raise $25.6 billion over 10 years. This proposal is a modified version of the Administration’s FY 2010 proposal, which would have deferred the deduction of all expenses, except R&D expenses, related to deferred income. The FY 2010 proposal was estimated by the Administration to raise $60 billion over 10 years, and by the Joint Tax Committee to raise $51.5 billion.
    • Includes Foreign Tax Credit Reforms. The FY 2011 budget proposes to require taxpayers to determine foreign tax credits from the receipt of a dividend from a foreign subsidiary based on the consolidated earnings and profits and foreign taxes of all of the taxpayer’s foreign subsidiaries. The proposal also would adopt a matching rule to prevent the separation of foreign taxes and associated foreign income. The proposal is estimated to raise $59.3 billion over 10 years (compared to the $43 billion estimated to be raised from similar FY 2010 foreign tax credit proposals).
    • New Proposals. The FY 2011 budget contains several new international tax proposals:
      • Tax currently excess returns associated with transfers of intangibles offshore. Under the proposal, if a US person transfers an intangible to a related controlled foreign corporation “in circumstances that demonstrate excessive income shifting from the US,” then an amount equal to the excessive return would be treated as subpart F income. This proposal is estimated to raise $15.5 billion over 10 years.
      • Disallow deductions of US non-life insurance companies for certain excess non-taxed reinsurance premiums paid to affiliates. This proposal is similar to H.R. 3424 (2009), proposed by Ways & Means Select Revenue Subcommittee Chairman Richard Neal (D-MA). The Administration’s proposal is estimated to raise $519 million over 10 years.
    • Other Proposals. The FY 2011 budget also proposes to:
      • Limit shifting of income through intangible property transfers by “clarifying” the definition of intangible property ($1.2 billion over 10 years);
      • Limit earnings stripping by expatriated entities ($3.6 billion over 10 years);
      • Repeal 80/20 rules ($1.1 billion over 10 years);
      • Prevent avoidance of dividend withholding taxes by treating income earned by foreign persons with respect to equity swaps that reference US equities as arising from US sources to the extent that the income is determined the be attributable to dividends paid by a domestic company ($1.2 billion over 10 years);
      • Modify tax rules for dual capacity taxpayers ($8.5 billion over 10 years); and
      • “Combat under-reporting of income through use of accounts and entities in offshore jurisdictions” ($5.4 over 10 years).
  • Financial Institution and Products Related Proposals.
    • Financial Crisis Responsibility Fee.” As previously announced, the Administration is proposing to impose a tax on certain financial institutions with assets of more than $50 billion. The tax will equal .15% of the firm’s covered liabilities (generally, liabilities minus FDIC-assessable deposits).
    • Require Accrual of Income on Forward Sale of Corporate Stock. Under the proposal, a corporation that enters into a forward contract to sell its own stock would be required to treat a portion of the payment received when the stock is issued as a payment of interest.
    • Ordinary Treatment from Day-to-Day Dealer Activities for Certain Dealers of Equity Options and Commodities. The proposal would require dealers in securities, equity options, commodities, and commodities derivatives to treat the income (or loss) from their dealer activities as ordinary.
    • Modify Definition of “Control” For Section 249. Section 249 may disallow or limit a corporation’s deduction for a premium paid to repurchase a debt instrument convertible into its stock or into stock of a corporation that is control of, or controlled by, the corporation. The proposal would amend the definition of “control” in section 249(b)(2) by referencing the definition of a controlled group in section 1563(a)(1) to include indirect control relationships.
    • Other Proposals. In addition to the proposals described above, other significant Administration proposals include:
      • Codifying the economic substance doctrine and imposing no-fault penalties on transactions held to lack economic substance;
      • Increasing penalties imposed under current law for failing to file information returns and increasing certain other penalties;
      • Requiring information reporting on certain payments to corporations; and
      • Repealing the 2001 and 2003 individual tax cuts for higher-income earners, including: tax increases on individuals making over $250,000 (married filing a joint return) or $200,000 (single filers); limiting the personal exemption phaseout and limiting itemized deductions for such higher-income earners; imposing a 20% rate on capital gains and dividends of such higher-income earners; and limiting the tax rate at which itemized deductions reduce tax liability to 28%.
  • The tax provisions can be accessed here.
  • For additional information, contact Mark J. Silverman - msilverman@steptoe.com or Philip R. West - pwest@steptoe.com

TREASURY RELEASES "GREEN BOOK" OF ADMINISTRATION’S REVENUE PROPOSALS: Today, the Treasury Department released the “General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals.” 

TAX BILL INTRODUCED JANUARY 29TH:
S.2970: A bill to amend the Internal Revenue Code of 1986 to allow rehabilitation expenditures for public school buildings to qualify for rehabilitation credit.
Sponsor: Sen Webb, Jim [VA] (introduced 1/29/2010)      Cosponsors (1)

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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