Daily Tax Update - July 27, 2011: CBO Scores Savings In House & Senate Deficit Plans Lower Than Expected

CBO SCORES SAVINGS IN HOUSE AND SENATE DEFICIT PLANS LOWER THAN EXPECTED – BOTH PLANS BEING FINE-TUNED:  The House vote on Speaker John Boehner’s deficit reduction plan was postponed until tomorrow due to lower than predicted scoring by the Congressional Budget Office.  The CBO estimated that spending cuts included in the House bill would save only about $850 billion over the next decade, not the $1.2 trillion originally projected.  The main difference in the House and Senate plans is the length of the debt limit extension, with Democrats demanding the ceiling be lifted until after the 2012 elections and Republicans favoring a two-step process.

  • A spokesman for Boehner said, "We promised that we will cut spending more than we increase the debt limit -- with no tax hikes -- and we will keep that promise.  As we speak, congressional staff are looking at options to rewrite the legislation to meet our pledge."  It remains unclear whether Republicans have the votes needed for passage in the House.
  • Today, the CBO also reported that Senator Harry Reid’s deficit reduction plan would reduce deficit spending by about $2.2 trillion over the next 10 years, $500 billion less than the $2.7 trillion projected.  A spokesman for Reid said, "We are glad Congress' budget referee agrees that the Senate bill cuts the deficit by $1.3 trillion more than Speaker Boehner's bill.  We are also glad to see that CBO credits the Senate bill with a full trillion dollars in savings from winding down the wars, rebutting Republicans' arguments once and for all.  It becomes clearer by the hour that the Senate bill is the only true compromise in Congress, so it's time for Republicans to get serious about averting the economic crisis looming in less than a week and drop their doomed tea party bill."

SENATE FINANCE TAX REFORM HEARING ON HOW TAX CODE AFFECTS HIRING, GROWTH:  Today, the Senate Finance Committee examined how the tax code affects hiring and economic growth, with the questions and answers portion of the hearing focusing on the impact of tax changes on US jobs, how taxes affect business decisions, tax expenditures, repatriation, the international tax rules, and the impact of a corporate rate reduction on companies deferred tax assets.  The hearing was titled "CEO Perspectives on How the Tax Code Affects Hiring, Businesses and Economic Growth."

  • Witnesses at the hearing were:
    • Mr. Michael T. Duke, President and Chief Executive Officer, Wal-Mart Stores, Inc.
    • Mr. Thomas J. Falk, Chairman and Chief Executive Officer, Kimberly-Clark Corporation
    • Mr. Gregory S. Lang, President and Chief Executive Officer, PMC-Sierra, Inc.
    • Mr. Larry J. Merlo, President and Chief Executive Officer, CVS Caremark Corporation
  • In his opening statement, Chairman Max Baucus said, "Last year, we began a comprehensive review of America’s tax system to understand how our tax code became so complex.  More recently, we have held hearings addressing the need for tax reform.  These hearings have looked at the goals we want our tax system to accomplish, and whether it effectively meets those objectives.  Of course, the tax code should raise the revenue necessary to finance the operations of the federal government.  But we also want our tax system to spur long-term economic growth which can benefit more folks in Montana and across the country, and we want to promote fairness and certainty.  Americans need a tax code that helps them get back to work." 
  • In his opening remarks, Ranking Member Orrin Hatch said, "The corporate tax is generally considered to be the most inefficient of all taxes. And tax scholars have debated for years as to who bears the burden of the corporate tax. We know that although corporations cut the checks to the IRS, corporations don’t ultimately pay taxes — people do."  Hatch added, "We also need to consider the issue of repatriation. Many US multinational corporations earn money overseas, and will typically want to bring that money back home to the US However, our corporate tax system discourages or penalizes US multinational corporations from repatriating foreign earnings by imposing a 35 percent residual US tax at the time of repatriation. One way of alleviating the problem of cash that is trapped offshore is for the US to reform its corporate tax and international tax rules by, for example, adopting a territorial tax system."  Hatch added, "Finally, no discussion of corporate tax reform can conclude without consideration of the corporate tax rates. . . . Our corporate tax system is in need of reform, and the high corporate tax rate needs to be a major part of the discussion."
  • The witnesses all argued for a significant reduction in the corporate tax rate.  Other reforms advocated be the CEOs included a less complex tax system, the adoption of a territorial tax system, and permanent research and development incentives.
    • Mr. Duke stated, "We urgently need to modernize our tax code, and I want to thank you for taking on this issue. Modernizing our corporate tax code will be a difficult process, but it is the right thing to do for America and America’s competitive position in the world. Ultimately, this effort must achieve the goal we all share: a strong, vibrant, job-creating US economy."  Duke continued, "The keys to reform are to lower the corporate rate, get rid of existing incentives that benefit some industries over others, and level the international playing field with a territorial system. Pursuing reform in a half-hearted way – for example without the territorial system – will only make the effort more complicated. We would have to begin exploring messy trade-offs and could end up no better off than when we started. But if we take these three steps, we will drive the virtuous cycle I’ve described, with more US exports, more investment, and more job creation at home. We recognize that Congress is facing some significant challenges regarding the federal budget and the fiscal future of the nation, and we agree that tax reform should be considered with these challenges in mind. In our view, the Bowles-Simpson deficit commission’s corporate tax proposal represented a very good start because it endorsed these three key components of reform. We also understand that there will be issues surrounding how the transition to such a system would work. But while the path to reform may be challenging, the destination is actually pretty clear." 
    • Mr. Falk stated, "A good first step to improving the competitiveness of the US tax system is to reduce the combined federal and state tax rate to a level comparable to the combined rates in the rest of the OECD countries.  The current combined US tax rate is more than 50 percent higher than the average of the other OECD countries. A second step would be to adopt a territorial system which exempts dividend income from US taxation and taxes royalty income at a reduced rate. . . . A third step would be to reduce the complexity of the US tax system  The current complexity of the US Tax Code requires US companies to devote significant resources that could be spent on product innovation, job creation and marketing growing activities.  American businesses need a tax system that reduces the cost of administration, is stable and predictable, reduces the risk of error, and is easier to monitor."
    • Mr. Lang’s testimony highlighted three main points:  (1) Reducing the corporate tax rate to align more closely with globally competitive rates; (2) Adopting a territorial tax system that is similar to those used by most of our global competitors, and (3) Enacting a permanent and robust package of incentives for research and innovation that compete with those in other countries.
    • Mr. Merlo stated, "We believe that by lowering the corporate tax rate, you will enhance the competitiveness of US companies, spur job creation, and help the economy grow. Therefore, CVS Caremark supports tax reform that includes a meaningful rate reduction because we believe it will encourage investment in the US by both domestic and foreign companies. Such reform will strengthen our company and accelerate our investment in domestic jobs, technology and infrastructure – all of which will ultimately help us lower health care costs and grow the economy."
  • The witnesses were questioned on what tax expenditures they might be willing to give up to achieve a lower corporate tax rate.  Mr. Duke stated that all tax expenditures "should be on the table" as part of fundamental tax reform.  Mr. Falk agreed, stating that all expenditure should be considered to achieve revenue-neutral tax reform with a combined state-federal corporate tax rate of 25%.
  • Senator Conrad made several observations on the timeline for tax reform, noting that tax reform has been mentioned as part of the debt ceiling negotiations but cautioning that that tax reform is not a "six week or even a six month" process.  Senator Conrad stated that the Joint Committee on Taxation recently told Congress that it doesn't have the modeling capabilities to even score a fundamental tax reform within six months.  Senator Conrad also stated that the United States needs to "get in the game" and develop a tax system that is more competitive. 
  • Ranking Member Hatch noted that a reduction in the corporate tax rate would reduce the value of companies' deferred tax assets ("DTAs") and questioned the witnesses on whether tax reform should take into account the potential impact on companies' financial statements.  The witnesses all stated that the impact of a corporate rate reduction on DTAs should not be a significant factor in tax reform.  Mr. Duke stated that, whatever the impact on DTAs, having a permanent lower rate would be worth it.  Mr. Falk said "don't worry about it" and stated that accounting issues should not get in the way of what is right for the country.  Mr. Lang told the committee that, even though his company has DTAs because of net operating losses, they should "do the right thing" and lower the corporate tax rate regardless of the financial statement impact.
  • Several senators questioned the witnesses on international tax issues.  Chairman Baucus asked about the impact of a territorial tax system on US jobs.  Mr. Duke said that Wal-Mart would grow jobs in the United States, as well as abroad, if a territorial tax system was adopted.  Mr. Falk stated that Kimberly-Clark would continue doing most of its research and development in the United States.  Senator Menendez discussed repatriation and whether a repatriation tax holiday could lead to increased jobs.  He said he would consider supporting a method that would bring back the $1 trillion in overseas earnings while creating jobs in the United States.  Senator Wyden noted that the elimination of deferral could allow Congress to significantly reduce the corporate tax rate.  He said he sees several problems with a territorial tax system, including complexity, additional pressure on transfer pricing, greater incentives for companies to move jobs overseas, and the potential revenue cost.
  • Testimony can be accessed here.
  • For additional information, contact Philip R. West - pwest@steptoe.com or  Amanda Varma - avarma@steptoe.com 

IRS ANNOUNCES INTERNATIONAL OPERATIONS CHANGES:  Today, the IRS announced several steps designed to improve its international operations.  According to the IRS, "First, the IRS Advance Pricing Agreement (APA) Program, concerned exclusively with reaching pre-filing agreements with taxpayers on transfer pricing, will shift from the office of IRS Chief Counsel to an office under the Transfer Pricing Director in the Large Business & International division’s international operation. In addition, the IRS Mutual Agreement Program (MAP), concerned primarily with the bilateral resolution of transfer pricing disputes with US treaty partners, will shift to the same office. The resulting 'Advance Pricing and Mutual Agreement program' will be under the direction of a single executive and the IRS will increase staffing available to the two program areas. The combined office will allow the IRS to reduce the time needed to complete advance pricing agreements and to resolve transfer pricing disputes with its treaty partners. The Office of Chief Counsel will remain a vital partner in the analysis and resolution of legal issues." The IRS added, "Second, to facilitate IRS coordination with treaty partners in an increasingly global environment, the IRS will adjust its competent authority and international coordination functions under an Assistant Deputy Commissioner (International) who will:

    • coordinate international activities across all IRS operating divisions,
    • oversee the IRS Exchange of Information program and IRS participation in the Joint International Tax Shelter Information Centre (JITSIC),
    • manage the activities of the IRS Tax Attaches in the agency’s foreign posts of duty,
    • coordinate IRS participation at the Organisation for Economic Cooperation and Development (OECD) and other non-governmental organizations,
    • support the Department of the Treasury in its negotiations of tax treaties and tax information exchange agreements, and
    • pursue competent authority agreements with treaty partners on issues other than transfer pricing."
  • The realignment may make it easier for multinational companies that have double taxation issues spanning a large number of taxable years to resolve those issues more efficiently.
  • IRS Commissioner Doug Shulman said, "Improving how we manage transfer pricing compliance and continuing to develop our capacity to coordinate effectively with our treaty partners is ever more critical to our job. These latest changes move forward to fulfilling one of my top priorities -- meeting the challenge of tax administration in a global economy." 
  • For additional information, contact Philip R. West - pwest@steptoe.com or Michael C. Durstmdurst@steptoe.com

SENATE FOREIGN RELATIONS COMMITTEE APPROVES TAX ACCORDS:  On July 26, the Senate Foreign Relations Committee approved tax accords with Switzerland, Luxembourg, and Hungary by voice vote.   The accords are expected to be sent to the full Senate "as soon as possible."

  • The Luxembourg and Switzerland pacts, both signed in 2009, are designed to expand information exchange with the United States, while the Hungarian accord, signed in February 2010, provides for significant strengthening of the limitation on benefits provision, among other changes.
  • The relevant accords are:
    • Protocol Amending the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation With Respect to Taxes on Income, signed at Washington on October 2, 1996, signed on September 23, 2009, at Washington, as corrected by an exchange of notes effected November 16, 2010, together with a related agreement effected by an exchange of notes on September 23, 2009 (Treaty Doc. 112-1). Additional information can be accessed here.
    • Protocol Amending the Convention between the Government of the United States of America and the Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed on May 20, 2009 at Luxembourg and a related agreement effected by the exchange of notes also signed on May 20, 2009 (Treaty Doc. 111-8).  Additional information can be accessed here.
    • Convention between the Government of the United States of America and the Government of the Republic of Hungary for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on February 4, 2010, at Budapest, and a related agreement effected by an exchange of notes on February 4, 2010 (Treaty Doc. 111-7). Additional information can be accessed here.

For additional information, contact Philip R. West - pwest@steptoe.com 

IRS POSTS Q&As ON AVIATION EXCISE TAXES:  Today, the IRS posted a series of questions and answers on its website regarding the lapse of air transportation excise taxes after July 22, 2011, because of Congress's failure to extend Federal Aviation Administration funding.

MISCELLANEOUS GUIDANCE RELEASED TODAY:

  • TD 9539 contains final regulations that amend the regulations concerning the election to claim the reduced research credit.  The final regulations simplify how taxpayers make the election and affect taxpayers that claim the reduced research credit.  These final regulations simplify the section 280C(c)(3) election to have the provisions of section 280C(c)(1) and (c)(2) not apply by requiring the election to be made on Form 6765, “Credit for Increasing Research Activities.”  The form must be filed with an original return for the taxable year filed on or before the due date (including extensions) for filing the income tax return for such year.  An election, once made for any taxable year, is irrevocable for that taxable year.

TAX BILLS INTRODUCED JULY 26TH:

1. [112nd] H.R.2644 : To amend the Internal Revenue Code of 1986 to extend the funding and expenditure authority of the Airport and Airway Trust Fund, to amend title 49, United States Code, to extend the airport improvement program, and for other purposes.
Sponsor: Rep Costello, Jerry F. [IL-12] (introduced 7/26/2011) Cosponsors (27)
Committees: House Transportation and Infrastructure; House Ways and Means
Latest Major Action: 7/26/2011 Referred to House committee. Status: Referred to the Committee on Transportation and Infrastructure, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

2. [112nd] H.R.2649 : To amend the Internal Revenue Code of 1986 to treat certain amounts paid for physical activity, fitness, and exercise as amounts paid for medical care.
Sponsor: Rep Brady, Kevin [TX-8] (introduced 7/26/2011) Cosponsors (9)
Committees: House Ways and Means
Latest Major Action: 7/26/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112nd] H.R.2655 : To amend the Internal Revenue Code of 1986 to extend the new markets tax credit through 2016, and for other purposes.
Sponsor: Rep Gerlach, Jim [PA-6] (introduced 7/26/2011) Cosponsors (6)
Committees: House Ways and Means
Latest Major Action: 7/26/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

4. [112nd] H.R.2656 : To amend the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 to make technical modifications relating to the Worker, Retiree, and Employer Recovery Act of 2008 and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010.
Sponsor: Rep Kind, Ron [WI-3] (introduced 7/26/2011) Cosponsors (2)
Committees: House Education and the Workforce; House Ways and Means
Latest Major Action: 7/26/2011 Referred to House committee. Status: Referred to the Committee on Education and the Workforce, and in addition to the Committee on Ways and Means, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

5. [112nd] H.R.2662 : To amend the Internal Revenue Code of 1986 to provide for equity relating to medical costs.
Sponsor: Rep Ribble, Reid J. [WI-8] (introduced 7/26/2011) Cosponsors (None)
Committees: House Ways and Means
Latest Major Action: 7/26/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

6. [112nd] S.1417 : A bill to amend the Internal Revenue Code of 1986 to modify the credit for qualified fuel cell motor vehicles and to allow the credit for certain off-highway vehicles, and for other purposes.
Sponsor: Sen Schumer, Charles E. [NY] (introduced 7/26/2011) Cosponsors (None)
Committees: Senate Finance
Latest Major Action: 7/26/2011 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance. 

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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