Budget Reconciliation and Tax ReformSenate Majority Leader McConnell (R-KY) has announced

that he plans to address tax reform and repeal of the ACA by

using two budget resolutions and the budget reconciliation

process. The budget reconciliation procedure involves the

approval of a budget resolution that sets broad tax and spending

goals and instructs committees to report legislative language to

meet those goals. Budget resolutions are non-binding, but budget

reconciliation legislation requires the President’s signature.

Typically, there is one budget reconciliation bill that is subject to

rules that limit Senate debate and bar filibusters and unrelated

amendments with a simple majority needed for passage. Senator

McConnell has stated that the first budget resolution will repeal

the ACA, and a second in the spring will deal with tax reform.

If tax reform is passed as part of the budget reconciliation process,

it must be deficit-neutral and it will expire at the end of a 10-year

period. If a narrow tax and infrastructure package is advanced, it is

possible that Democratic support could be developed, but a more

comprehensive tax reform package may face challenges getting

the more than 60 votes needed in the Senate to prevent a

filibuster. Another potential obstacle will be the position of

key conservatives in Congress on the two budget resolutions

since comments have indicated that they may be willing to

allow the first resolution to advance but insist on the second

resolution containing proposals of importance to conservatives.

House Speaker Paul Ryan (R-WI) has also stated that he believes

the budget reconciliation process is the best way to proceed with

advancing tax reform. Ways & Means Committee Chair Brady has

stated that Democrats will be offered an opportunity to contribute

their ideas and engage on tax reform, but he has acknowledged

that Republicans will be willing to move tax reform using the

reconciliation process.

The Senate Finance CommitteeSenate Finance Committee

Chair Hatch (R-UT) has

indicated that he will turn his

efforts from his corporate

integration plan to a focus

on comprehensive tax reform

since Republicans will

control the White House

and the Congress. Hatch

commented, “Given the

current reality, any substan-

tive tax reform proposal will

need to be considered and

evaluated in the context of

January 2017 A publication from

Politics and Congressional ActivityPresident-elect Trump will take office on January 20, 2017. Typically, a new President will deliver a policy and budget address to ajoint session of Congress in late February that is similar in content to a State of the Union address, but a date for such speech by thePresident-elect has not been announced.

Congress convened on January 3, 2017. Based on comments from the Republican leadership and President-elect Trump, it is expectedthat the Congressional agenda in the early months of 2017 will include repeal of the Affordable Care Act (ACA), tax reform, andchanges to environmental regulations, as well as the need to consider confirmation of several nominees for key positions in the TrumpAdministration and to address several foreign policy issues.

WashingtongTax Insight

It is expected that the

Congressional agenda in the

early months of 2017 will

include repeal of the Affordable

Care Act (ACA), tax reform,

and changes to environmental

regulations, as well as the

need to consider confirmation

of several nominees for

key positions in the Trump

Administration and to address

several foreign policy issues.

“

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”

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Washington Tax Insight January 2017 Page 2

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A publication from

what has quickly become a much broader discussion.” He has said

that he continues to want to consider how integration fits into the

tax reform debate. Chair Hatch has also signaled that he may be

reconsidering his intention to retire in 2018. Under Senate rules,

he is eligible to continue as Chair of the SFC through 2020.

Senator Claire McCaskill (D-MO) will take the SFC seat held by

Senator Chuck Schumer, who becomes the new Senate Minority

Leader. No replacement has been announced for the seat held by

Senator Dan Coats (R-IN), who retired.

The Ways & Means CommitteeW&M Committee Republicans held a two-day strategy

session in December to “review the decision points on tax reform

and health care” and to consider the feedback they received on

the GOP tax reform blueprint. Chair Brady has downplayed the

differences between the Trump tax reform proposals and the GOP

blueprint by commenting that they will be the subject of discussion

between the Congress and the White House and are “more than

manageable.” A key variance is that Trump proposes a 15%

corporate rate while the blueprint calls for a 20% rate, and Trump’s

plan would use revenue from a deemed repatriation proposal

for infrastructure spending, while Chair Brady prefers investing

that revenue into offsetting the cost of the corporate rate cut.

MiscellaneousW&M Committee Chair Brady and SFC Chair Hatch introduced

identical bills in the House and Senate on December 6th that would

make a variety of technical changes and clarifications to provisions

included in recently enacted tax legislation. The bipartisan bills

were cosponsored by W&M Ranking Democrat Neal and SFC

Ranking Democrat Wyden. The technical corrections legislation

includes clarifications to current law on bonus depreciation, the

research credit, the American Opportunity Credit, the partnership

audit rules, and REIT income testing rules. The introduction of

the bills prior to Congress recessing for the year was done to lay

groundwork for the changes to be made in the new Congress and

to allow taxpayers an opportunity to comment on the language

of the bills.

The Congressional Budget Office (CBO) issued a 316-page

summary of spending and tax policy changes titled “Options

for Reducing the Deficit: 2017 to 2026” for consideration by

Congress to reduce the deficit. The options were collected from a

number of sources including previously proposed legislation and

budget proposals from prior administrations. The report includes

several proposals targeting corporations, foreign income and

business-related activities, including changes to the rules for R&D

expensing, depreciation, LIFO, publicly traded partnerships,

foreign tax credit pooling, and deferral, and new fees on large

financial institutions, financial transactions, greenhouse gas

emissions, and a Value Added Tax. The report includes an estimate

of the effects of each proposal on the budget and a discussion of

the pros and cons, but does not make recommendations.

Treasury and the IRSThe IRS issued proposed and temporary regulations that provide

guidance on distributions of stock or securities of a controlled

corporation without recognition of income, gain or loss.

The regulations provide guidance on determining whether a

corporation is a predecessor or successor of a distributing or

controlled corporation for purposes of the exception under

Code section 355(e) to the nonrecognition treatment afforded

qualifying distributions. They also provide certain limitations on

the recognition of gain in certain cases involving a predecessor

of a distributing corporation. In addition, the regulations also

contain rules regarding the extent to which Code section 355(f)

causes a distributing corporation (and in certain cases its share-

holders) to recognize income or gain on the distribution of stock

or securities of a controlled corporation.

In Notice 2016-73, the IRS announced its intent to issue regula-

tions modifying the “triangular reorganizations” rules under

Code section 367 for foreign corporations where a subsidiary

acquires its parent’s stock and uses that stock to acquire a target

corporation. These rules will target transactions that repatriate

earnings and basis of foreign corporations without incurring

US tax by exploiting the Code section 367(a) priority rule.

The regulations will also modify the “all earnings and profits”

amount that must be included in income as a result of certain

inbound asset acquisitions that repatriate “excess asset basis.”

Treasury and the IRS issued final regulations under Code section

367 regarding transfers of certain intangibles (foreign good-

will and going concern value) to foreign corporations through

“nonrecognition transactions.” This rulemaking finalizes

regulations proposed in September 2015 and finalizes parts of

the temporary regulations issued in 1986. These final regulations

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eliminate the foreign goodwill and going concern value exception

in Treas. Reg. §1.367(d)-1T(b) and narrow the scope of the Code

section 367(a)(3) active trade or business exception to apply

only to certain tangible property and financial assets. The final

regulations do not take a position on whether goodwill and going

concern should be characterized as a Code section 936(h)(3)(B)

intangible, so taxpayers may elect to apply either Code section

367(a) or Code section 367(d) to transfers of such items.

Treasury and the IRS issued final regulations under Code section

6038A that treat a domestic disregarded entity that is wholly

owned by a foreign person as a domestic corporation separate

from its owner for the limited purposes of the reporting, record

maintenance, and associated compliance requirements that

apply to 25% foreign-owned domestic corporations. This

guidance makes three changes to the proposed regulations that

were issued in May 2016 including changing the effective date to

apply to taxable years of entities beginning on or after January 1,

2017, and ending on or after December 13, 2017. The regulations

also ease compliance with the filing of Form 5472 by providing

that corporations have the same taxable year as their foreign owner

if the foreign owner has a US return filing obligation, and they

make it clear that the reporting should apply without regard to

certain regulatory exceptions generally applicable under

§1.6038-2(e)(3) and §1.6038A-2(e)(4).

The IRS issued three sets of guidance on the tax treatment of

foreign currency gains or losses by subdivisions of taxpayers

within a larger multinational company, known as “qualified

business units (QBUs),” under Code Section 987. In final

regulations, the IRS addressed the determination of the taxable

income or loss of a corporation or an individual with respect

to a QBU subject to Code section 987 as well as the timing,

amount, character, and source of any Code section 987 gain or

loss. Temporary and proposed rules address the recognition and

deferral of foreign currency gain or loss of QBUs in situations

where taxpayers terminate a QBU and situations involving

partnerships. The IRS also issued Notice 2017-07 which

modifies the effective dates for the deferral rule under these

anti-abuse rules under Code section 987.

The IRS issued temporary and proposed regulations under

Code section 901(m) addressing transactions that generally are

treated as asset acquisitions for US income tax purposes but

treated as stock acquisitions or disregarded for purposes of

determining foreign income and the foreign tax credit. The

regulations target certain “covered asset acquisitions” that the

IRS has identified as abusive avoidance transactions using the

foreign tax credit by limiting the ability of taxpayers who buy

and sell foreign assets in such transactions to claim the foreign

tax credit.

The IRS issued Notice 2016-76 providing for the phased-in

application of the Code section 871(m) regulations issued

in 2015 related to compliance with dividend equivalent

payment regulations. The guidance states that changes to

these regulations are expected with an explanation of several

compliance challenges including the creation of systems for

withholding and reporting for dealers, issuers, and other

withholding agents; implementing new system requirements

for paying agents and clearing organizations; and enhancing

and developing data sources for determining whether trans-

actions are Code section 871(m) transactions.

The IRS issued proposed regulations providing new guidance

on the fractions rule and the application of Code section

514(c)(9)(E) to partnerships that hold debt-financed real prop-

erty and have one or more tax-exempt qualified organization

partners as well as other partners. The fractions rule limits the

ability of such partnerships to allocate a disproportionate amount

of income to the tax-exempt qualified organizations.

The IRS issued proposed regulations under Code section 472

dealing with the establishment of dollar-value last-in, first-out

(LIFO) inventory pools by taxpayers that use the inventory

price index computation (IPIC) pooling method. The proposed

regulations amend the IPIC pooling rules to clarify that manufac-

tured or processed goods and resale goods may not be included

in the same dollar-value LIFO pool.

The IRS issued final regulations to increase user fees for those

who seek to pay their liabilities through installment agree-

ments effective on January 1, 2017. The fee for an installment

agreement plan will be $225 (increased from $120) with the

fee for low-income taxpayers continuing at $43. The IRS is also

introducing two new online installments subject to separate user

fees including an online payment agreement at $149 and a direct

debit online payment agreement at $31.

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Treasury and the IRS issued final regulations relating to the

health insurance premium tax credit under Code section 36B.

The final regulations affect (1) individuals who enroll in

qualified health plans through Health Insurance Exchanges

and claim the premium tax credit and (2) Exchanges that make

qualified health plans available to individuals and employers.

These regulations expand the intentional or reckless disregard for

the facts exception to the section 36B safe harbor for household

income below 100% of the federal poverty level.

In Notice 2016-79, the IRS set the business mileage rates for

taxpayers for 2017, which will be 53.5 cents per mile (a half-

cent decrease from 2016), and sets the driving rates for medical,

moving and charitable purposes. The IRS also issued Revenue

Procedure 2010-51, which provides rules for “using optional

standard mileage rates in computing the deductible costs of

operating an automobile for business, charitable, medical, or

moving expense purposes.”

In Revenue Procedure 2017-12, the IRS issued guidance stating

that it will treat as debt an instrument that provides total loss-

absorbing capacity (TLAC). The covered TLAC is issued by

an intermediate holding company of a foreign global systemically

important bank (GSIB) pursuant to Federal Reserve regulations

and will be treated as indebtedness for federal tax purposes “to

the extent that the internal TLAC has not been subject to a debt

conversion order.” The purpose of this guidance is to help foreign

banks address certain Federal Reserve Board loan requirements.

International Issues

OECDThe Organization for Economic Cooperation and Development

(OECD) issued new guidance to assist in the implementation

of the BEPS initiative regarding country-by-country (CbC)

reporting. Under the BEPS Action 13 Final Report on “Transfer

Pricing Documentation and Country-by-Country Reporting,”

the OECD is setting the reporting standards for multinational

enterprises (MNEs) with cross border operations. This guidance

addresses the “parent surrogate filing,” the application of CbC to

investment funds and partnerships, and CbC reporting notification

requirements for MNE Groups during the transitional phase.

Under BEPS Action 15, the OECD released the text of a

multilateral instrument to implement tax treaty-related

measures that was negotiated by more than 100 jurisdictions

with a signing ceremony set for June 2017. The new multilateral

convention is expected to introduce results from the BEPS

project into more than 2000 tax treaties globally.

European CommissionA summary of the arguments included in Ireland’s appeal filed in

November 2016 to overturn the August decision by the European

Commission to recoup nearly $14 billion in unpaid taxes from

Apple Inc. as part of its state aid investigations were publicly

released. The central issue is whether two Irish tax rulings in 1991

and 2007 gave a form of special treatment to Apple. Ireland has

argued that the rulings did not depart from “normal” taxation

because they followed a part of the Irish tax code that states that

nonresident companies should not pay income tax on profit that

isn’t generated in Ireland. Apple Inc. has also filed an appeal to the

decision but did not release the text of its appeal. The US Treasury

issued a statement about the case noting that the EU’s decision is

“retroactively applying a sweeping new State aid theory that is

contrary to well-established legal principles, calls into question

the tax rules of individual countries, and threatens to undermine

the overall business climate in Europe.” The General Court of

the European Union will render the decision on the appeal and

whether the tax must be collected.

The European Commission announced a series of proposals

to improve the Value Added Tax (VAT) environment for

e-commerce businesses in the European Union. The proposals

will be submitted to the European Parliament for review and

consultation, and then to the European Council for adoption.

The proposals include new rules that allow companies to sell

goods online to manage all their EU VAT obligations in one

place, rules on actions against VAT fraud from outside the EU,

and simplification of VAT rules for startups and micro-businesses

selling online with cross-border sales under 10,000 euros.

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Tax Reform UpdateAs President, Donald Trump will have significant authority over tax law

and regulations, and it is expected that the new Administration and the

new Congress will consider comprehensive changes to the current tax

code and regulations. Although tax policy was a topic for debate and

discussion during the election campaign and a Trump tax proposal was

issued in September of 2015, there remains a great deal of uncertainty as

to how tax legislation will develop in the first few months of the Trump

Administration and what the details of that legislation will be.

Republicans control both the House and the Senate in the next Congress,

which will help advance the cause of tax reform, since Republican

leadership has made tax reform a priority for several years and a GOP

tax reform “blueprint” was released in 2016. It should be noted, however,

that proposals from the President-elect and Congressional leadership have

not aligned in all areas.

Secretary of the Treasury Nominee, Steve MnuchinSteve Mnuchin, a former Wall Street executive who served as the

Trump campaign finance manager, has been selected as the nominee

for Secretary of the Treasury, and he has submitted tax returns and the

required questionnaire to the Senate Finance Committee in preparation

for his confirmation hearing. W&M Committee Chair Brady praised

the nomination citing his private sector experience and stated that he is

looking forward to working with him on policy development to help

business create jobs and grow the US economy.

In an interview after his nomination was announced, Mnuchin com-

mented that tax reform will be his number one priority stating that it is

“something that happens absolutely within the first 90 days of this

presidency.” He has focused on the importance of cutting the corporate

tax rate, which he believes will encourage multinationals to repatriate

accumulated offshore earnings and bring jobs back to the US. He believes

that the revenue needed for the corporate tax rate cut as proposed by

President-elect Trump to 15% will be raised by economic growth and

increased personal income.

He has stated that the Trump Administration will rely on dynamic scoring

to measure the revenue impact of its tax reform proposals. Dynamic

scoring takes into account certain macroeconomic feedback effects of

the plan on the economy and federal revenue levels. The House adopted

rules in 2015 that require the Joint Committee on Taxation staff and

the Congressional Budget Office to use dynamic scoring for major

fiscal legislation. The Tax Foundation has estimated the revenue loss

under the Trump plan to range from $2.64 trillion to $3.93 trillion

using dynamic scoring, while the Tax Policy Center estimates the

loss to be in the range of $6 trillion.

Border AdjustabilityOne of the most hotly debated issues in tax reform is the proposal in the

GOP blueprint that calls for replacing the corporate income tax with a

border adjustable, destination cash-flow tax that would eliminate US

tax on products, services, and intangibles exported abroad, regardless of

their production location, but impose a US tax on products, services, and

intangibles imported into the US, regardless of their production location.

Several commentators have questioned whether such a tax might not

comply with WTO rules.

W&M Committee Chair Brady continues his support for the proposal

commenting that he is happy to listen to retailers, oil refiners and other

critics of the plan but “it’s important though for them to understand that

we cannot leave in place any tax policies that encourage our companies

to move their operations overseas just to sell back in the United States –

those won’t stay.” He stated that “industries will have to adjust.”

There is opposition developing to this proposal including from some

factions of the Republican party, some of whom argue that border

adjustments would distort the market in the long term, although some

economists have suggested that adjusting exchange rates would modify

the adverse effects. A letter signed by more than 75 business groups

including retailers, auto dealers, toy makers and apparel makers was sent

to Chair Brady and stated that the proposal would lead to “huge business

challenges caused by increased taxes and increased cost of goods, which

would in turn likely result in reductions in employment, reduced capital

investments and higher prices for consumers.”

Analyses by investment banks Goldman Sachs and RBC Capital have

raised concerns about the impact on corporate profits and increased

prices for consumers. The National Foreign Trade Council has reserved

comment stating that they want to give Republicans the opportunity to

elaborate on their tax reform plans.

Democratic staff of the SFC have called the House GOP blueprint

regressive and fiscally irresponsible with specific criticism of the

“destination-based cash flow tax” calling it “risky, untested and

especially vulnerable to unforeseen consequences.” The comments

also stated that the proposal could cause consumer prices to spike,

give a boost to Wall Street and have an unpredictable impact on trade.

One of the most hotly debated issues in tax reform is

the proposal in the GOP blueprint that calls for replacing

the corporate income tax with a border adjustable,

destination cash-flow tax that would eliminate US tax

on products, services, and intangibles exported abroad,

regardless of their production location, but impose a

US tax on products, services, and intangibles imported

into the US, regardless of their production location.

Several commentators have questioned whether

such a tax might not comply with WTO rules.

“

”

©2017 True Partners Consulting LLC. All rights reserved. Printed in the USA. True Partners Consulting is a registered trademark in the U.S. and several international jurisdictions.

Any tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding U.S. federal, state, or local tax

penalties or promoting, marketing, or recommending to another party any transaction or matter addressed in this communication (or any attachment). The information contained herein is for informational

purposes only and is based on our understanding of the current tax laws and published tax authorities in effect as of the date of publishing, all of which are subject to change. You should consult with your

professional tax advisor to discuss the potential application of this subject matter to your particular facts and circumstances.

Robert M. GordonManaging Director(312) 235-3321

Robert.Gordon@TPCtax.com

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