Something to Be Called Tax Reform Cometh www.pwc.com Something to Be Called Tax Reform Cometh June 1, 2017 Pam Olson US Deputy Tax Leader & Washington National Tax Services Leader 202 414 1401 | pam.olson@pwc.com

Business tax reform is an economic imperative Note: The 2012 amount was based on tax return data gathered and reported by the Statistics of Income Division of the IRS. The JCT made assumptions regarding ordinary growth of the world economies and corporate earnings and profits to estimate the amount for 2015. There are two important caveats to the estimated $2.3 trillion. The undistributed earnings may include more than just cash holdings (e.g., reinvested earnings – buildings, equipment, etc.) The $2.3 trillion includes only CFCs and only the amount attributable to an 10 percent or greater US shareholder (however, JCT believes this captures >99% of undistributed, non-previously-taxed earnings) Sources: “Evolution of Territorial Tax Systems in the OECD,” April 2, 2013; OECD Tax Database, “Part II. Taxation of Corporate and Capital Income. Table II. 1. Corporate income tax rate: Combined Central and Subcentral”. PwC 2

Worsening federal budget outlook favors difficult revenue-neutral tax reform over simply cutting taxes Spending and revenues as a percentage of GDP 2016 2046 The extended baseline generally reflects current law, following CBO’s 10-year baseline budget projections through 2026 and then extending most of the concepts underlying those baseline projections for the rest of the long-term projection period. a. Consists of all federal spending other than that for Social Security, the major health care programs, and net interest. b. Consists of spending on Medicare (net of offsetting receipts), Medicaid, and the Children’s Health Insurance Program, as well as outlays to subsidize health insurance purchased through the marketplaces established under the Affordable Care Act and related spending. c. Consists of excise taxes, remittances to the Treasury from the Federal Reserve System, customs duties, estate and gift taxes, and miscellaneous fees and fines. Source: Congressional Budget Office, The 2016 Long-Term Budget Outlook (July 2016). PwC

Looking back to past reform efforts Tax Reform Act of 1986 (H.R. 3838) Treasury I - November 1984 Treasury II – May 1985 Ways and Means hearings – 30 days of hearings between February and July 1985 Ways and Means markup – 26 days of markup sessions between September and December 1985 House passage of H.R. 3838 on December 17, 1985 Finance Committee hearings – 36 days of hearings between May 1985 and April 1986 Finance Committee markup – 17 days of markup sessions between March and May 1986 Senate passage of H.R. 3838, as amended – on June 24, 1986, after 12 days of floor action House/Senate Conference Committee – 4 days of formal conference committee meetings between July and August 1986 House final passage of H.R. 3838 on September 25, 1986 Senate final passage of H.R. 3838 on September 25, 1986 President Reagan signs H.R. 3838 into law – October 22, 1986 PwC

House Ways and Means Chairman Dave Camp Tax Reform Act of 2014 In brief Reduce the top corporate tax rate from 35% to 25% over a 5-year period Shift from a worldwide to a territorial-based system Anti-base erosion provision applicable to foreign profits Mandatory one-time deemed repatriation of foreign profits Reduce the individual rate structure to two brackets – 10% and 25% A 10% surtax applies to income above certain thresholds Broaden the tax base by eliminating the majority of corporate and individual tax credits and slowing business cost recovery Repeal the corporate and individual AMT Intended to be revenue neutral during the 10-year budget window Intended to be distributionally neutral PwC

Key elements of the House Republican tax reform blueprint Full expensing with limits on interest Border adjustment Deemed repatriation Territorial taxation Lower business and individual tax rates PwC

A completely different approach to the tax base Current US tax system Worldwide system with tax applied to both domestic and foreign sales on current or deferred basis Deferred taxation for unremitted active foreign income, with repatriated dividends subject to 35% corporate rate House Republican Blueprint Destination-based system with tax limited to sales within the United States 100% dividend exemption for active foreign income, “deemed” repatriation tax (8.75% cash / 3.5% other) on remitted foreign profits PwC

Outline of House Republican Blueprint goals for comprehensive ‘pro-growth’ tax reform Cut business tax rates and limit disparity between corporate and pass-through rates 20% top corporate tax rate 25% top rate for pass-through business income Reduce top individual tax rate to 33% 50% exclusion for capital gains, dividends and interest (16.5% top individual rate) Eliminates most individual itemized deductions; except charitable contributions and mortgage interest; also retains education and retirement savings incentives (with modifications TBD) 100% expensing for equipment and real property (excluding land) No deduction for business net interest expense Border adjustable destination-based cash-flow system: no deduction for cost of imported goods and services; no tax on receipts from exported goods and services Territorial tax system, with 100-percent dividend exemption Mandatory ‘deemed’ repatriation 8.75% for cash / cash equivalents and 3.5% for other accumulated foreign earnings, payable over eight years Repeals corporate and individual AMT Special rules TBD for banks, insurance, and leasing PwC

Why doesn’t the United States just adopt a VAT? US more reliant on income/profits taxes; other OECD countries more reliant on goods and services taxes (e.g., VAT) Only OECD country without a national-level VAT or goods and services tax Andy Stern (fiscal commission member): Graetz-type tax reform with 10-15% VAT Use revenue to finance individual reform and lower corporate tax rate Domenici-Rivlin (BPC task force): 6.5% “debt reduction sales tax” (3% in 2012) Estimated to raise $3 trillion/9 years (2012-2020) HBC Chairman Ryan: 8.5% subtraction-method VAT (i.e., business activity tax) Replacement for corporate income tax Advantage: border adjustable (i.e., imposed on imports and refunded on exports) Disadvantage: encroaches on traditional source of state and local tax revenue PwC

Trump Administration tax reform principles (4/26/17 outline) Individuals Reduce individual rate brackets from 7 to 3 (10%, 25%, 35%) Maximum 20% tax rate on long-term capital gains and dividends, with repeal of 3.8% ACA net investment income tax Double the standard deduction Eliminate targeted tax breaks for wealthiest taxpayers Protect home ownership and charitable gift deductions Tax relief for child and dependent care expenses Eliminate estate tax and AMT Businesses 15% business tax rate – corporate and passthrough Eliminate tax breaks for special interests Territorial international tax system One-time repatriation tax on overseas corporate profits (unspecified rate) PwC

Recent GOP tax reform proposals Corporate provisions Current Law Camp 2014 tax reform act (H.R. 1) House GOP 2016 tax reform ‘Blueprint’ President Trump tax reform proposals Corporate tax rates 35% rate 25% rate (phased in over 5 years) 20% rate 15% rate Border adjustments (No provision) ‘Destination-based cash- flow’ Exempt exports & tax imports (TBD) International tax regime ‘Worldwide’ system Foreign tax credits to mitigate double taxation ‘Territorial’ system 95% foreign dividend exemption 100% dividend exemption system ‘Territorial’ Cost recovery (full expensing) Expense investment over the investment’s applicable life under MACRS or ADS Repeal MACRS Implement ADS type system, with inflation Full expensing for investments (tangible & intangible) excluding land Campaign: manufacturers may elect full expensing for investments (revocable within the first 3 years), but… Business interest expense Deductible as incurred Limit for thin capitalization Deductible only against net interest income Special rules for financial services …if electing full expensing for investments must forego interest expense deductions Repatriation ‘toll tax’ Currently no provision. Previously untaxed foreign earnings: 35% corporate rate when repatriated 8.75% cash & cash- equivalents 3.5% non-cash assets over 8 years 3.5% non-cash assets over 8 years Previously untaxed foreign earnings: Subject to US income tax at rate TBD PwC

Recent GOP tax reform proposals Corporate provisions Current Law Camp 2014 tax reform act (H.R. 1) House GOP 2016 tax reform ‘Blueprint’ President Trump tax reform proposals Pass-through entities Income is passed through to the owners to be taxed at the individual rates (see below) (No change) 25% maximum (combined entity and individual) 15% maximum (within individual income tax regime) Carried interest Taxed at capital gains rates Taxed at ordinary rates for partnerships engaged in certain stated trades or businesses (Not stated) Taxed at ordinary rates Anti-base erosion regime (Subpart F) Subpart F anti-deferral regime includes CFC’s insurance income, foreign base company income, among others Subpart F generally maintained; New tax on ‘intangible’ income: 15% for foreign market sales, 25% for US market sales Subpart F reduced to foreign personal holding company income provisions Domestic production Deduction up to 9% of qualified income for items manufactured, produced, grown, or extracted in US Phase out and repeal Section 199 deduction Repeal Section 199 deduction R&D Regular credit – 20% Make alternative simplified credit permanent Business credit to encourage research and development (TBD) AMT AMT imposed on indiv., estates, trusts (up to 28%) & corps (20%) on tentative min tax liability in excess of regular tax liability Repeal corporate and individual AMT PwC

Recent GOP tax reform proposals Individual Provisions Current Law Camp 2014 tax reform act (H.R. 1) House GOP 2016 tax reform ‘Blueprint’ President Trump tax reform proposals Individual rates Seven rate brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) Three rate brackets (10%, 25%, 35%) Three rate brackets (12%, 25%, 33%) Three rate brackets (12%, 25%, 35%) Capital gain/ QDI rates (Individuals) Maximum 20% rate for long-term capital gains and QDI Tax as ordinary income with 40% exclusion Tax as ordinary income with 50% exclusion; exclusion also applies to interest Maximum 20% rate Individual – standard deduction $6,300 for single filers/ $12,600 joint returns (2016) $22,000 joint returns/ $11,000 other tax payers $18,000 for single filers with a child/$24,000 for joint returns/$12,000 for other tax payers Double the standard deduction Individual – itemized deductions Itemized deductions phase out begins at $311,300 for joint filers and $259,400 for single filers (2016) Itemized deductions would look similar to current law with several stated exceptions All itemized deductions except mortgage interest and charitable contributions deductions to be eliminated All itemized deductions except mortgage interest and charitable contribution deductions to be eliminated Estate tax Maximum 40% rate for taxable estates exceeding $5.45 million (2016 indexed amount) (No provision) Repeal estate tax PwC

Chairman Hatch’s study of corporate integration Likely SFC specifications assuming current law DPD—C-corps. may deduct dividends paid Withholding tax—35% rate on dividends Shareholder taxation of dividends: Individuals—Taxed at ordinary rates with nonrefundable credit for w/h tax Corporations—DRD is repealed? Carryover excess withholding tax credits? Foreign shareholders—Override treaties? Tax exempts, pension funds—W/h tax is not creditable against tax on UBTI Redemptions and sale of shares–Same as present law Net investment income tax—Same as present law Interest withholding—To pay for DPD, a 35% nonrefundable withholding tax could be imposed on interest paid by C-corps PwC

Tax reform is always difficult PwC

Republican control increases odds of comprehensive tax reform President Trump has multiple priorities, including health care, trade, immigration, and regulatory reform, competing for attention But he has clearly communicated tax reform goals: Lower rates, simpler system Focus on tax reform to promote domestic manufacturing Republican tax reform focuses on increasing US economic growth Democratic tax reform focuses more on income inequality PwC

Tax reform points of agreement / disagreement Tax Reform Design Points White House House Republicans Senate Republicans House Democrats Senate Democrats Top individual rate reduction C D/s Corporate rate reduction Special pass-through rate s Territorial Deemed repatriation Border adjustment C/s D Anti-base erosion Expensing / interest Cap gains / dividend rate relief Estate tax repeal Dynamic scoring Current policy baseline Revenue neutral PwC

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