Daily Tax Update - November 19, 2013: Baucus Releases Proposals for International Tax Reform

BAUCUS RELEASES PROPOSALS FOR INTERNATIONAL TAX REFORM:  Senate Finance Chairman Max Baucus today released a staff discussion draft of international business tax reform proposals that are far-reaching, ambitious, and controversial. The stated aims of the proposals include simplifying the current international tax system and improving the competitive position of U.S.-based multinationals. While these goals are salutary and include a few elements that corporate taxpayers may find appealing, they may well be considered overtaken by other goals and proposals that would accelerate and increase U.S. corporate tax bills.

Perhaps the most significant proposed change is the elimination of deferral on profits of CFCs and the application of a minimum tax. Two alternatives have been floated:

-- “Option Y” would subject CFC profits to a minimum tax at 80% of the US corporate tax rate.  What is unstated in the Staff summary but of critical importance is that this minimum tax is applied on a “per item” basis. This means that income taxed abroad at less than the 80% threshold will be topped-up (since the foreign taxes will be fully creditable), but income taxed abroad at a rate above the 80% threshold is exempted, so foreign tax credits are stripped away, with no opportunity for blending.

-- “Option Z” is a variant on Option Y, which basically gives a 20% benefit/detriment depending on whether the earnings in question are from “active business operations.” So the minimum tax becomes 60% of the US rate for CFC earnings from active business operations, and 100% of the US rate for all other earnings. 

-- “Round-tripping” exception: In both proposals, income from selling products and providing services into the Unites States is taxed without deferral at full US rates (subject to some limited exceptions).

Other significant parts of the proposal include the elimination of the section 902 indirect foreign tax credit and a broadened definition of intangible property (focusing on goodwill and workforce but also providing a catch-all, so that intangible property includes “any item not attributable to tangible property or the services of any individual.”) There are a number of anti-base erosion proposals, including the limitation of deductions for interest paid to CFCs in certain cases and for related party hybrid payments. Also, parts of the “check-the-box” rule would be eliminated for foreign subsidiaries. Taxpayers are likely to welcome proposed changes to accelerate the election to apportion interest expenses on a worldwide basis and the repeal of the dual consolidated loss rules.

A one page summary can be found here.

An overview of the discussion draft along with a detailed summary can be found here.

The full discussion draft in legislative language can be found herehere and here.

The Joint Committee on Taxation’s technical explanation can be accessed via: JCX-15-13

MISCELLANEOUS GUIDANCE RELEASED:

Revenue Ruling 2013-26 provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, the adjusted federal long-term tax-exempt rate. These rates are determined as prescribed by § 1274. The rates are published monthly for purposes of sections 42, 382, 412, 1288, 1274, 7520, 7872, and various other sections of the Internal Revenue Code.

Revenue Procedure 2013-36 sets forth for purposes of section 846 of the Internal Revenue Code the loss payment patterns and discount factors for each property and casualty line of business for the 2013 accident year.  These factors are to be used by property and casualty insurance companies in discounting unpaid losses.

Revenue Procedure 2013-37 sets forth for purposes of section 832 of the Internal Revenue Code the salvage discount factors and payment patterns for each property and casualty line of business for the 2013 accident year.  These factors are to be used by property and casualty insurance companies to discount estimated salvage recoverable.

TAX BILLS INTRODUCED NOVEMBER 18:

1. [113rd] H.R.3520 : To amend the Internal Revenue Code of 1986 to reform rules relating to 501(c)(4) organizations and provide certain taxpayer protections, and for other purposes.
Sponsor: Rep Boustany, Charles W., Jr. [LA-3] (introduced 11/18/2013)      Cosponsors (None) 
Committees: House Ways and Means 
Latest Major Action: 11/18/2013 Referred to House committee. Status: Referred to the House Committee on Ways and Means.


2. [113rd] H.R.3523 : To amend the Internal Revenue Code of 1986 to provide for audits of the Internal Revenue Service to ensure that employees and service contractors of the Internal Revenue Service file their Federal tax returns on time and pay Federal tax debts owed.
Sponsor: Rep Kingston, Jack [GA-1] (introduced 11/18/2013)      Cosponsors (None) 
Committees: House Ways and Means 
Latest Major Action: 11/18/2013 Referred to House committee. Status: Referred to the House Committee on Ways and Means.