The Senate Finance Committee released a series of reports Wednesday from five bipartisan tax working groups working on various aspects of tax reform.
The reports focus on the areas of 1) individual income tax; 2) business income tax; 3) savings and investment; 4) international tax; and 5) community development and infrastructure. Together, they offer policy options and recommendations for the committee to consider as part of comprehensive tax reform. While each report is a bipartisan product of each group’s co-chairs, the materials are not necessarily endorsed, in whole or in part, by each member of each working group.
“The Finance Committee’s bipartisan tax working groups have spent the last several months examining various aspects of the code. As a result, members were able to submit thoughtful feedback and provide innovative solutions to addressing the challenges of our nation’s outdated tax system,” said Senate Finance Committee chairman Orrin Hatch, R-Utah, in a statement. “Any remake of the U.S. tax code, should work to lower the rates and broaden the base. We need to simplify the code and make it easier for families and create a system to keep American job-creators competitive around the globe. Now, armed with new ideas, I plan to work with Senator Wyden to review each working groups’ report and examine how they can be used to further advance the Committee’s efforts to achieve this bipartisan goal.”
On Jan. 15, 2015, to coincide with the kickoff of a series of tax reform hearings, Hatch and the ranking Democrat on the committee, Ron Wyden, D-Ore., announced the formation of bipartisan tax reform working groups. In March, after five tax reform hearings, the committee announced it would ask stakeholders and the public to submit ideas to the bipartisan working groups. The committee released those submissions on April 29, 2015
“I’m very appreciative of the time and effort my colleagues put into this exercise,“ said Wyden. “Their constructive feedback and ideas are essential as we push ahead toward our shared goal of modernizing the tax code.”
International Tax Reform
Senators Rob Portman, R-Ohio, and Charles Schumer, D-N.Y., co-chair the working group on international tax reform, whose proposals attracted particular attention. They presented their proposals Wednesday to address a number of international tax reforms, including transitioning to a hybrid, territorial-like system, patent boxes, base erosion, deemed repatriation, and other major areas.
The bipartisan agreement draws from elements included in prior international reform efforts by members of both political parties. “Over the past few months, the working group has examined every aspect of the international tax code in an attempt to find ways to fix a system that is clearly broken,” Portman and Schumer said in the report. “Our current system of international taxation was put into place during the Kennedy Administration and reflects the realities of a different era. By standing still, the United States has fallen behind other countries that have adopted modern international tax rules to help their companies and workers compete in the global marketplace.”
In order to move the U.S. international tax system in a direction that keeps the U.S. economy globally competitive with their foreign rivals, the report calls for adopting a dividend exemption regime in conjunction with appropriate base erosion rules. In terms of patent boxes, which are used in Europe to reduce taxes on intellectual property, or IP, Portman and Schumer agree that the U.S. must take legislative action soon to combat the efforts of other countries to attract highly mobile U.S. corporate income through the implementation of our own innovation box regime that encourages the development and ownership of IP in the United States, along with associated domestic manufacturing. According to a summary of the report, they will continue to work to determine appropriate eligibility criteria for covered IP, a nexus standard that incentivizes U.S. research, manufacturing, and production, as well as a mechanism for the domestication of currently offshore IP.
In the area of base erosion, Portman and Schumer are committed to designing base-erosion proposals that protect the U.S. tax base and address the proliferation of tax havens, while not undermining the ability of American companies to compete abroad. This means creating clear, manageable standards that take into account the fact that losses can cause low effective tax rates in particular years and designing rules that dissuade companies from shifting money to tax haven jurisdictions.
In the area of interest expense limitations, the co-chairs said they agree that it is important to design measures that discourage excessive leverage for both domestic companies operating globally and foreign companies operating in the United States to simply reduce their tax bills. They said they acknowledge concerns raised through the working group process and by experts in the field regarding the administrability of President Obama’s proposed proportionality test and regarding former House Ways and Means Committee Chairman Dave Camp's proposal, which, similar to current law, arguably doesn't provide sufficient limits in light of international norms and unilateral actions of other countries.
As a result, the co-chairs said they will continue working to determine the appropriate net limitation necessary to allow for legitimate intra-group lending while at the same time stopping disproportionate leveraging to avoid U.S. taxation and gaming of interest expense limits in place. In the area of deemed repatriation, a summary of the proposals noted that to account for this untaxed, deferred income in the transition to a new international tax system, both the President's budget proposal as well as Camp's tax reform proposal would impose a one-time transition toll charge at a rate significantly lower than the statutory corporate rate. Camp’s draft provides a bifurcated rate structure with a lower tax rate on “non-cash” holdings to account for the fact that many companies have reinvested a significant part of their foreign earnings in hard, brick-and-mortar assets. In addition, both proposals allow the toll charge to be paid ratably over a number of years, provide a tax credit for foreign taxes paid and specify that certain associated one-time revenues will be used for investment in transportation infrastructure.
Portman and Schumer have agreed to the framework contemplated by Camp and Obama. They plan to continue work to design a toll charge with the appropriate discounted rate, foreign tax credit treatment and ratable transition. In addition, they will continue to examine whether a multi-tiered rate structure is appropriate to account for income already permanently reinvested overseas.
“We need comprehensive tax reform because the American people deserve a simpler tax code that will give our economy a needed shot in the arm,” Portman said in a statement. “Our complex, burdensome, and outdated tax system is standing in the way of more jobs and opportunity, and higher wages. Although we need comprehensive reform, our report clearly demonstrates the urgency of addressing the international tax system, and how the right kind of international reform can be a step in the right direction for more comprehensive reform. The bipartisan international tax reform framework released today by Senator Schumer and me shows that our system of international taxation is woefully out-of-date. It has been 50 years since the U.S. has substantially updated its international tax laws, and by standing still, the U.S. has fallen behind.”
House Ways and Means Committee chairman Paul Ryan, R-Wis., welcomed the report. "Our entire tax code needs to be fixed,” he said in a statement. “High rates and complexity hurt American families and small businesses. Our corporate tax code is crammed with market-distorting carve outs. And the way we tax American businesses selling goods and services abroad is leaving trillions of dollars of capital sitting overseas. The damage is not theoretical: Our tax code is costing us jobs, depressing wages, and chasing companies out of the United States.”
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