Tax-Writers Focused, Looking Toward 2017 for Large-Scale Reforms; Treasury Set to Move on Section 385 Regulations
Lawmakers Look at Specific Tax Policy Priorities with an Eye Toward Tax Reform in 2017
With the House last week having passed various targeted pieces of tax legislation, it is clear that much of the rest of this Congress will be devoted to more narrow asks, though continued efforts in anticipation of tax reform next year are expected.
In particular, lawmakers on both sides of the aisle continue to examine the appropriate response to the Treasury Department’s proposed debt-equity regulations under section 385 of the tax Code. Moreover, Republican lawmakers appear poised to ramp up their efforts on recently-proposed regulations under section 2704 of the tax Code, which would make various changes to Estate Tax rules, including as relates to valuation practices.
Additionally, last week, EU Commissioner Margrethe Vestager was in Washington for meetings with various U.S. officials, including leadership of the Senate and House tax-writing committees, to address the ongoing fallout from the Commission’s recent decision in the Apple EU State aide case. By way of follow-up to his meeting with Commissioner Vestager, House Ways and Means Committee Chairman Kevin Brady (R-TX) took the opportunity to underscore that the decision as yet another reason why tax reform is necessary. On the Senate side, however, while Senate Finance Committee Chairman Orrin Hatch and others on his Committee also agreed that this action by the Commission highlights the need for tax reform, they also hinted at the possibility of a legal challenge via European Courts or the World Trade Organization (WTO).
With regard to tax reform, as the legislative days continue to tick away, tax-writers appear to be preparing themselves for an all-out tax reform effort in 2017. In fact, just last week, Todd Metcalf, former Senate Finance Committee Chief Tax Counsel to Ranking Member Ron Wyden (D-OR) discussed his former boss’s approach. In particular, he confirmed that Ranking Member Wyden’s approach to international reform is not limited solely to anti-inversion proposals, but is broader and makes various larger scale changes to the tax Code. Given the increased attention to finding funding for infrastructure spending (via repatriation), it is quite possible that Senator Wyden may soon reveal more details about his preferred approach.
How Senator Wyden’s proposal will mesh with the House Republican Blueprint (and Senate Finance Committee Chairman Orrin Hatch’s (R-UT) yet-to-be-released “corporate integration”) remains to be seen; however, such a proposal will no doubt serve as a place marker for Democrats in the 115th Congress as lawmakers make another go at tax reform.
Senate Finance Moves Forward with Pension Reform
On Thursday, September 21, the Senate Finance Committee held a markup of two bills: (1) Miners Protection Act of 2016 (The Miners Act); and (2)Retirement Enhancement and Savings Act of 2016 (The Retirement Act).
The Miners Act addresses the impending loss of health care and pension benefits to tens of thousands of mineworkers by permitting unspent funds from the Abandoned Mine Land Fund to cover the health care benefit and pension liabilities of the United Mine Workers of America pension fund. Committee members discussed the importance of the bill while also raising concerns about the precedential impact of using taxpayer money to shore up a private pension fund. The Miners Protection Act of 2016 was voted out of Committee and favorably reported to the full Senate with bipartisan support (18 votes in favor and 8 votes (all Republican) against).
The Retirement Act’s goal is to increase participation by Americans in retirement savings plans. Specifically, it includes a measure to expand employer-sponsored retirement plans including with respect to small businesses. It includes various changes to individual retirement accounts (IRAs) and seeks to improve the portability of retirement and annuity accounts. The legislation also includes a provision to allow multiple employer plans to be open to participation by unrelated employers (Open MEPs). After adjourning the executive session to continue debate about the bill off the Senate floor, the Retirement Act was voted out of Committee and favorably reported to the full Senate in a unanimous vote (26-0).
Looking ahead, it is important to note that Senate Majority Leader Mitch McConnell (R-KY) blocked the Mine Workers bill last year and seems unlikely to move forward with legislation that some Republicans have called a “bailout.” According to his office: “Leader McConnell has met with Kentucky UMWA retirees on a number of occasions to discuss this and other matters impacting the coal industry, and has long been convinced it is an issue that deserves open, transparent debate through regular order. To that end, he appreciates the Finance Committee considering the legislation tomorrow. As for next steps, there are no scheduling announcements at this time.” Given that the Miners Act is likely a necessary prelude to movement on the Retirement Act, timing on next steps remains unclear for both bills.
Treasury Moves Forward on Section 385 Regulations
With the Obama Administration’s tenure coming to a close in short-order, the Treasury Department remains focused on finalizing its debt-equity regulations under section 385 of the tax Code. Recently, Deputy Assistant Treasury Secretary (International) Bob Stack emphasized that Treasury “wants to get it right” and thus cannot precisely identify the timing of the final regulations.
In response to the numerous comments received from industry, it appears that Treasury is working to address six major concerns as relate to: (1) cash pooling; (2) foreign-to-foreign transactions; (3) regulated financial entities; (4) passthrough entities; (5) documentation requirements; and (6) earnings and profits. Treasury Secretary Jack Lew, who testified last week before the House Financial Services Committee, argued that “[c]ritics of the rule quickly asked us to add enough time to the comment period so that it would be impossible to do a final rule, and we did not want to do that…we got a lot of comments. The comments kind of circle around half a dozen issues…We’ve been working on each of those issues to try to come up with policy solutions that address what might be peripheral or unintended impacts, protecting the core objective of the rule. We’re making very good progress.”
It presently appears as though the final rule could come as early as October, despite the fact that it is now the subject of a legal challenge.