Daily Tax Update - February 26, 2014: Tax Reform Plan Released

TAX REFORM PLAN RELEASED:  Today, House Ways and Means Chairman Dave Camp released his comprehensive tax reform draft legislation (“Tax Reform Act of 2014.”)

Under Congressman Camp’s bill, the current seven tax brackets would be consolidated and simplified into two brackets of 10 percent and 25 percent, with a 10 percent surtax. (Note that the Ways and Means explanation describes the proposal as a three-bracket system while the Joint Committee explanation refers to it as a two-bracket system with a surtax). The surtax applies to “Modified Adjusted Gross Income” over $400,000 for single taxpayers and $450,000 for joint filers. The surtax apparently replaces the alternative minimum tax, which would be repealed. The basic and additional standard deductions would be consolidated into a single standard deduction of $22,000 for joint filers (and surviving spouses) and $11,000 for other individual filers.  The deduction for personal exemptions would be repealed and itemized deductions would be phased out at income levels above $250,000 ($300,000 joint filers). The child tax credit would be expanded, but many other deductions would be limited or repealed, including halving to $500,000 the maximum amount of indebtedness with respect to which home mortgage interest is deductible, and repealing the deductibility of student loan interest.

The corporate tax revisions would phase in a flat 25% tax rate over the next five years. The proposal would adopt a 95% exemption system for dividends received from a foreign subsidiary, but would expand the categories of subpart F income subject to immediate taxation to include a new intangible income category: “foreign base company intangible income.” A transition tax would apply to post-1986 foreign subsidiary earnings and profits not previously subject to U.S. taxation.

Congressman Camp said, “This legislation does not reflect ideas solely advanced by Democrats or ideas solely advanced by Republicans, nor is it limited to the halls of Congress. Instead, this is a comprehensive plan that reflects input and ideas championed by Congress, the Administration and, most importantly, the American people.  In other words, it recognizes that everyone is a part of this effort and can benefit when we have a code that is simpler and fairer.”

SENATE SUBCOMMITTEE ON INVESTIGATIONS HEARING ON OFFSHORE TAX EVASION:  Today, a Senate subcommittee led by Senators Levin (D. MI) and McCain (R. AZ) held a hearing bringing a new wave of attention to U.S. efforts at recapturing foregone tax revenues and penalties in connection with tax evasion facilitated by Swiss bank secrecy. The hearing, conducted by the Permanent Subcommittee on Investigations of the Homeland Security and Governmental Affairs Committee, was titled, “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts.”  The witnesses were representatives from Switzerland’s second-largest bank, Credit Suisse, and from the Department of Justice. Credit Suisse is currently under investigation by U.S. authorities and reportedly on the verge of a multi-million dollar settlement. Appearing for the Department of Justice were Deputy Attorney General James Cole and Kathryn Keneally, Assistant Attorney General of the Tax Division. Ms. Keneally is spearheading the Department’s Non-Prosecution Agreement (NPA) Program for Swiss banks, as agreed between the United States and Switzerland last August.

A REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (1.59 MB) was released on the eve of the hearing that was sharply critical of Credit Suisse, the Department of Justice and the NPA program. The perspective of the Report, echoed in opening comments by Senator Levin, is that the level of bank cooperation is still insufficient, and that the Department of Justice’s enforcement is lax. The Report was particularly critical of the NPA program for offering a guarantee against prosecution without obtaining the names of U.S. account holders. At key fact in the controversy is a limitation in the Swiss-US tax treaty that limits information exchange to cases of tax fraud. A 2009 protocol would expand the scope of information exchange to information “relevant to” a tax investigation, but this protocol, while ratified by Switzerland, is still on hold in the United States.

Credit Suisse officials took a cooperative tone, explaining that they have worked to eliminate any non-compliant U.S. accounts and are cooperating in disclosing information to U.S. tax authorities within the limits of existing Swiss law. Senator Levin suggested that Credit Suisse officials should abide by U.S. law when undertaking operations in the United States, notwithstanding that disclosing information required by U.S. law could result in criminal prosecution in Switzerland.  Credit Suisse took the position that the inappropriate behavior at Credit Suisse was by a small number of employees and not a matter of company policy. “Credit Suisse acknowledges that misconduct, centered on a small group of Swiss based private bankers, previously occurred at our Bank. While that employee misconduct violated our policies, and was unknown to our executive management, we accept responsibility for and deeply regret these employees’ actions.” (Mr. Brady Dougan, CEO of Credit Suisse Group AG, Credit Suisse AG).

The questioning to Department of Justice officials focused on the Treaty Protocol and the availability of other means to access account holder names, in particular the use of a John Doe summons. Senator McCain criticized the Swiss government for enacting legislation that would impede the exchange of information for tax matters even after the Treaty Protocol is adopted. (Bundesbeschluss über eine Ergänzung des Doppelbesteuerungsabkommens zwischen der Schweiz und den Vereinigten Staaten von Amerika March 16, 2012). These changes, according to the hearing’s report, require the establishment of a pattern of conduct to which the person to be identified has contributed significantly. Ms. Keneally took the position that the NPA program will make the treaty information exchange much more effective.

Testimony and additional information can be accessed via: http://www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-tax-evasion-the-effort-to-collect-unpaid-taxes-on-billions-in-hidden-offshore-accounts

SENATE FOREIGN RELATIONS COMMITTEE HOLDS HEARING ON FIVE TAX TREATIES: Today, the Senate Foreign Relations Committee heard testimony from the Treasury Department, the Joint Committee on Taxation and private sector witnesses on five tax treaties, including those with Switzerland, Luxembourg, Hungary, Chile and the convention on mutual administrative assistance in tax matters.

Robert Stack, Treasury Deputy Assistant Secretary for International Tax Affairs testified, “The proposed tax treaties before the Committee today are with Chile, Hungary, Luxembourg and Switzerland, in addition to the proposed protocol to the Convention on Mutual Administrative Assistance in Tax Matters (the ‘Multilateral Convention’), and each serves to further the goals of our tax treaty network. The proposed tax treaty with Chile would be the first tax treaty between the United States and Chile, which the U.S. business community has been calling for. The proposed tax treaty with Hungary would replace an existing treaty the revision of which has been a top tax treaty priority for the Treasury Department. It contains a comprehensive ‘limitation on benefits’ article designed to address possible abusive treaty shopping. The proposed protocols with Luxembourg and Switzerland modify existing tax treaty relationships. The proposed protocol to the Multilateral Convention brings the Multilateral Convention, to which the United States is a party, into conformity with the current international standards for exchanges of information between tax authorities to combat tax evasion. We urge the Committee and the Senate to take prompt and favorable action on all of these agreements.”

Testimony can be accessed via: http://www.foreign.senate.gov/hearings/treaties-02-26-2014