Tax Reform Discussions Center Around Anti-Base Erosion Rules

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By Laura Davison, David McAfee, Colleen Murphy, and Kaustuv Basu

Almost daily meetings have continued during a busy August recess for some tax staffers on Capitol Hill as they try to hammer out a tax reform bill in consultation with the White House.

Current discussions are focused on what anti-base erosion rules would look like in the absence of the 20 percent border adjustment tax, which was discarded after pressure from retailers and Republican senators.

No decisions have been made on the main elements of a tax bill, but there seems to be some consensus on a territorial tax system and modifications to current cost recovery rules. The Trump administration is still pushing for a 15 percent corporate business rate, which means that a dividends-paid, corporate integration system that could lower the effective tax rates that corporations pay is being considered.

The discussions came as House Ways and Means Committee Chairman Kevin Brady (R-Texas) and other committee Republicans stressed the need for tax reform at an Aug. 16 event at the Reagan Ranch in Santa Barbara, Calif. “Today we commit to write a new chapter in this great American story. We commit to deliver a new tax code that is written for a new era of American excellence,” Brady said, according to text of his speech.

The pressure on congressional Republicans to deliver on tax reform has increased in recent days because of controversies emanating from the White House, a tax lobbyist told Bloomberg BNA. “All this other noise will make sure that they do tax reform right.”

A major hurdle remains: Passing a fiscal year 2018 budget resolution that includes tax reform instructions. The resolution is the key to passing tax reform using the process known as reconciliation, which helps Republicans avoid a Senate filibuster. But for the bill to fit Senate rules and make permanent changes, it can’t add to the deficit. Republicans could consider legislation that keeps some elements permanent, such as expensing provisions, interest deductibility, and a territorial system, but with tax rates that expire because they would rack up too much debt for the government, a Republican staffer said.

Consensus on International Changes

A shift to a territorial tax system and deemed repatriation are elements with widespread support in the context of a comprehensive tax bill, Rohit Kumar, tax policy services leader at PricewaterhouseCoopers LLP and a former top aide to Senate Majority Leader Mitch McConnell (R-Ky.), told Bloomberg BNA.

There still isn’t agreement on rates for repatriated assets, a GOP staffer said. The House Republican tax reform blueprint set an 8.75 percent tax on cash and a 3.5 percent tax on other assets, and would allow payment over eight years. The White House has previously called for one 10 percent rate on offshore earnings. Sen. Rob Portman (R-Ohio) and Senate Minority Leader Charles E. Schumer (D-N.Y.) have supported deemed repatriation, where accumulated foreign earnings would be taxed at a discounted rate—likely in the 8 percent to 15 percent range.

The international side of tax reform is low-hanging fruit for Republicans, another GOP staffer told Bloomberg BNA. Republicans could comfortably call changes “tax reform” if they include a territorial system and some base-erosion measures, said the staffer, who spoke on condition of anonymity because no decisions are final.

Base erosion protections will also be especially critical now that the border-adjustment provision of the House Republican plan is dead. A minimum tax on intangible income, likely in the high single-digit range, is being considered, a policy researcher said. Such a tax was included in the 2014 proposal offered by former Ways and Means Chairman Dave Camp (R-Mich.), which has been getting more attention from staffers in recent months.

Elements of a bill proposed by Sen. Michael B. Enzi (R-Wyo.) in 2012 to tackle base erosion rules are also getting another look, the staffers and a tax lobbyist said. The bill (S. 2091) would provide a 95 percent exemption from U.S. tax on foreign earnings that already have been taxed in another country and would allow foreign earnings to be brought back to the U.S. at a reduced rate.

How Unprecedented?

Deductions for business investments remain a key discussion point in tax discussions as lawmakers grapple with how quickly to allow companies to write off assets.

House Republicans had previously called for deducting all purchases in the first year, but backed off from that stance last month. “Any tax bill will include something that flushes out the bonus depreciation allowance,” said Henrietta Treyz, managing partner and director of economic policy research at Veda Partners. “It will include some form of increased capital expensing, whether 50, 60, 70, or 100 percent. The question is what they can agree to.”

Brady didn’t offer additional details when asked on Aug. 16, but said lawmakers aren’t considering partial expensing. “We know that when businesses of all sizes can immediately write off their business investment—buildings, equipment, software, and technology—it drives Main Street jobs. It drives productivity in the American worker. That’s what drives wages and gets our economy going, so we are focused with the president and Senate on unprecedented expensing,” he said.

Depreciation options under consideration include provisions in a bill (S. 1144) from Sen. John Thune (R-S.D) that would allow up to $2 million of equipment and property to be written off immediately, a GOP aide said. The bill would also make bonus depreciation permanent as 50 percent expensing and reduce the depreciation period for farm machinery.

This would expand the depreciation option available, particularly to small businesses, but wouldn’t lose as much revenue for the federal government as the full and immediate write-offs House Republicans had initially proposed.

Let’s Integrate

Marc Short, White House director of legislative affairs, said in early August that the administration prefers a 15 percent business tax rate.

That kind of thinking from the White House is giving a boost to a dividends-paid corporate integration idea that was proposed by Senate Finance Committee Chairman Orrin G. Hatch (R-Utah). Corporate income in the U.S. faces a double layer of taxes—at the corporate and shareholder levels.

The Hatch plan would remove one layer. The plan currently being discussed would be a partial dividend-paid corporate integration system where a corporation would be able to deduct 40 percent of the dividends it pays.

A source familiar with the discussions told Bloomberg BNA that the corporate integration idea could be a way to move the effective corporate tax rate closer to the Trump idea of 15 percent. When asked about corporate integration, Brady said, “We continue to explore ideas the White House and the Senate and the House have brought to the table.”

Lawmakers are still struggling to agree on the framework of a tax plan, meaning that the size of the rate reductions, and whether or not those cuts will be permanent, are still up in the air.

Companies are expecting the corporate rate to drop to 28 percent, which is about the maximum the tax rate can be, because multinationals will face additional taxes with deemed repatriation of foreign earnings, said a tax attorney, who requested anonymity because he isn’t permitted to disclose his clients’ views.

There is agreement within the Ways and Means Committee that the bill shouldn’t add to the deficit, a Republican staffer said. But members also worry they might only be told about aspects of the negotiations they agree with—not all elements still under discussion, the aide said.

To contact the reporters on this story: Laura Davison in Washington at lDavison@bna.com; David McAfee in Los Angeles at dmcafee@bna.com; Colleen Murphy in Washington at cmurphy@bna.com; Kaustuv Basu in Washington at kbasu@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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