1. Tax Legislation 2017: Thinking Outside the Box
John Gimigliano
June2017

2. Notices
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

3. Handicapping the Legislative Process
Tax Bills Introduced In 114th Congress
(1062)
Became Law
0.8%

4. Historical Perspective – First Year Tax Legislation
Economic Recovery Tax Act of 1981
Omnibus Budget Reconciliation Act of 1989
Omnibus Budget Reconciliation Act of 1993
Economic Growth & Tax Relief Reconciliation Act of 2001
Reagan – ’81 Bill - Economic Recovery Tax Act of 1981
Individual income tax reductions. ACRS. reduce Estate tax 70% to 50%. Expand IRAs.
Bush 41 – ’89 Bill - Omnibus Budget Reconciliation Act of 1989
Increased fees and excise taxes on air travel, ozone-depleting chemicals, & OSLTF
Repealed completed contract method of accounting.
Clinton – ’93 Bill Omnibus Budget Reconciliation Act of 1993
Individual income tax rate increases. Corporate tax rate increases. Repealed the cap so that the HI tax applies to all income. Motor fuels tax increase. Reduced business meals and entertainment deduction. EITC expansion
Bush 43 – ’01 Bill - EGTRRA
Individual income tax rate reductions. Marriage penalty abatement. Estate and gift tax reduction and elimination. PEP and PEASE repeal
Obama – ’08 Bill - Economic Stimulus Act of 2008
Tax rebates. Section 179 Expensing and 50% Bonus.
American Recovery & Reinvestment Tax Act of 2009

5. Making tax law
Policy
Politics
Personalities

6. The Political Setting:

7. Senate 2017
Democrats 48
Republicans 52

8. House 2017
Democrats 194
Republicans 241

9. Elections: United States Senate election map, 2018* * * * * * * * *
Democratic incumbent*
Republican incumbent *
Independent incumbent
*Includes 10 of 12 Democratic Finance Committee members

10. Process and politics: The Pledge
Significance
All but 26 Republican Members of House have signed
All but 6 Republican Senators have signed

11. The Personalities: Principal Tax Writers

12. Speaker of the House
“[Tax Reform] is going to have to be one of the Crown Jewels of our agenda…. I have a deep interest in this…”
-Speaker Paul Ryan
Politico Playbook Breakfast 12/15/15
New Speaker of the House in Late October
What does this mean for tax reform?
Probably most famous Boehner comment on Tax Reform
Contrast with Ryan
Top Priority
In the weeds – cares a lot .

13. Chair: Orrin Hatch (R-UT) Chair: Kevin Brady (R-TX)
The “Big Four”
Senate Finance Committee:
Chair: Orrin Hatch (R-UT)
Ranking Member:
Ron Wyden (D-OR)
Ways & Means Committee:
Chair: Kevin Brady (R-TX)
Ranking Member:
Richard Neal (D-MA)

14. Key Treasury Personnel
Secretary: Steven Mnuchin
Finance Chairman of Trump campaign
CEO Dune Capital Management
17 years at Goldman Sachs
Key Tax Positions
Assistant Secretary
Deputy Assistant Secretary (Tax Policy)
Deputy Assistant Secretary (Tax Analysis)
Deputy Assistant Secretary (international)
Tax Legislative Counsel
International Tax Counsel
Benefits Tax Counsel
VACANT

15. Policy: Tax Reform

16. Tax Reform: U.S. and other OECD statutory corporate tax rates
(Percent)
Source: Forbes -

17. Tax Reform: Statutory tax rates, United States and OECD
Source: Tax Foundation (

18. Competing Goals of Tax Reform
Distributional Neutrality
Legal Entity Neutrality
Revenue Neutrality

19. Tax Reform Hurdle 1: Federal expenditures
Source: Congressional Budget Office, The Budget and Economic Outlook:” Fiscal Years (January 2016)

20. Tax Reform Hurdle 2: Distribution of Benefits and Burdens

21. Tax Reform Hurdle 3: “Business Only” Tax Reform?
Avoids issue of what to do with individual rates – or does it?
FROM: Choice of Business Entity: Present Law and Data Relating to C Corporations, Partnerships, and S Corporations, Prepared by the Staff of the Joint Committee on Taxation, JCX (April 10, 2015)

22. Thinking Outside the Box
House: Consumption-type tax
Senate: Corporate integration proposal
Administration: Tax cuts?

23. Ways & Means strategy: towards consumption
Differentials
Income Tax
VAT
Inversions
Renacci
SATS
July 2016
Camp
Tax Reform Act
2014
Nunes
ABC Act
2015
Brady
House Blueprint
June 2016
Infrastructure Spending
Ryan/Brady
International Reform
2015

24. VATs raise average of 20% of revenue in countries that have one
Source: Ways and Means Committee

25. Tax Reform: Why Consumption Tax?
Pro-Growth
Emphasis on Savings
ROI on Capital Investments
Border Adjustable
Territoriality
Ability to attract Investment
Manage Base Erosion
Base Broadening
More Taxpayers
Better Compliance
Consumption Tax

26. Key Proposals - Individual
President Trump
(April 26, 2017)
House blueprint
Camp bill
Ordinary income rate
10%-25%-35%
12%-25%-33%
10%-25%-35%. (Special calculation for qualified domestic manufacturing income)
Standard deduction/personal exemption
Double standard deduction
Consolidate personal exemption/standard deduction into larger standard deduction
Increase standard deduction with phase out; eliminate personal exemptions
Itemized deductions
Eliminate itemized deductions other than home mortgage interest and charitable deductions
Eliminate itemized deductions other than home mortgage interest and charitable deductions (with possible changes to home mortgage interest deduction)
Eliminate many itemized deductions, including deduction for interest on home equity debt. 2% floor on charitable deductions
Individual AMT
Repeal
Net investment income tax
Not part of tax reform blueprint (but contemplated as part of healthcare)
Does not address
Investment income rate
Same as current law (20%)
50% deduction for capital gains, interest, and dividends (6%, 12.5%, 16.5% rates)
Deduction of 40% of adjusted net capital gain
Estate tax
Repeal estate tax
Repeal. Silent as to basis consequences
Keep

27. Key Proposals – Business
President Trump
(April 26, 2017)
House blueprint
Camp bill
Corporate rate
15%
20%
Reduce to 25% (over several years)
Individual owners of passthroughs and proprietorships
15% rate, possibly limited to “small” and “medium” passthrough businesses (with unspecified anti-abuse rules)
“Active business income” of owners of passthrough entities capped at 25% ordinary income rate.  Backstopped by “reasonable compensation” requirement for owner-operators
Qualified domestic manufacturing generally taxed at no higher than 25%. Owners who materially participate treat 70% of combined compensation and distributive share as subject to employment taxes. Other changes to Sub K.
Carried interest
Not mentioned
Not clear
Special rules
Cost recovery
Full and immediate expensing for investments in tangible property and intangible assets, but not land
Replace MACRS with system that lengthens recovery lives and indexes depreciable basis for inflation. Extend amortization period for acquired Code section 197 intangibles. Caps on expensing. Other.
Interest expense
Net interest expense not deductible but carried forward indefinitely—with unspecified special rules for financial services companies
No broad rule, but limits amount of deductible interest expense that could apply to a U.S. corporation shareholder with one or more foreign corporations in some cases

28. Key Proposals – Business (cont’d)
President Trump
(April 26, 2017)
House blueprint
Camp bill
NOLs
Not mentioned
Carry forward indefinitely and indexed for inflation, but no carry back. Carryforwards limited to 90% of the net taxable amount for the year
Limit deduction to 90% of taxable income. Repeal some special NOL carryback provisions as well as limitation on the carryback of excess interest losses attributable to CERTs
Corporate AMT
Not clear
Repeal
Repeal (with unused AMT credits refundable over several years)
Research credit
Keep, with unspecified modifications
Keep, with modifications
Last in, first out (LIFO)
Superseded by expensing of non-imported inventory
Selected revenue raisers
Eliminate unspecified tax breaks for “special interests”
Eliminate various unspecified “special interest” deductions and credits, including section 199 (but not R&D credit)
Numerous raisers specified

29. Key Proposals - International
President Trump
(April 26, 2017)
House blueprint
Camp bill
Destination based cash flow system, with border adjustments
Not mentioned in one-page summary document
Move towards a destination-based tax system, with border adjustments
Not included
Territorial system
Move to territorial system. No details.
Territorial tax system, with 100% exemption for dividends received from foreign subsidiaries. Repeal most of current subpart F regime, but retain foreign personal holding company rules for passive foreign income.
U.S. corporate shareholder gets 95% deduction for foreign sourced portion of dividends received from certain foreign subsidiaries. Complex provisions to prevent offshore shifting of profits. Minimum tax of 15% on CFC’s foreign earnings. Modify active financing exception
Repatriation of existing earnings and profits (E&P)
Foreign earnings accumulated under old system taxed; rate determined in consultation with Congress
Foreign earnings accumulated under old system repatriated by paying tax of 8.75% to the extent held in cash or cash equivalents or 3.5% otherwise (payable in installments over 8 years)  

30. GOP House Blueprint – Doing the Math*
Corporate Highlights
Reduce rate to 20%
Full expensing
True territorial system
25% passthrough rate
Repatriation at 8.75% / 3.5%
Border adjustment
Only “net interest” deductible
Nearly all other credits/deductions eliminated
$1,325
$883
$160
$388
$185
$936
$1,172
$677
* Tax Foundation dynamic scoring estimates from “Details and Analysis of the 2016 House Republican Tax Reform Plan” (July 5, 2016). Dollar amounts are in billions.

31. Dates To Keep in Mind Mid-Term Elections November 6, 2018
Summer Recess
July 28, 2017
FAA & Transportation Authorizations Expire
September 30, 2017
Target Recess
December 15, 2017
Gov’t Funding Expires
April 28, 2017
Administration’s Full Budget
May 2017
Debt Ceiling
Fall 2017?
New Fiscal Year
October 1, 2017

32. Where to from here?

33. Tax reform plus/minus Tax reform – Prospects for success
Factors favoring reform
Countervailing factors
Increased urgency around tax reform
Repeal and replacement of the Affordable Care Act possibly a higher GOP priority
U.S. statutory corporate tax rate highest in the OECD
U.S. multinationals’ effective rates largely in line with OECD averages—could erode political support
Unified GOP control of House, Senate, and White House
Senate rules generally require 60 votes (8 Democrats) to pass most legislation
GOP may have “budget reconciliation” option to avoid Senate 60-vote filibuster threshold
Budget reconciliation rules can impose budgetary “straitjacket,” making policy options less desirable
Mandatory repatriation of foreign earnings to pay in part for infrastructure investment could draw bipartisan support
Use of repatriation revenue to pay for spending could be viewed as a violation of the pledge not to raise taxes signed by more than 250 members of Congress
Use of new rules requiring dynamic scoring could reduce costs of rate reduction
Little precedent for use of dynamic scoring in official revenue estimates—benefits could prove to be de minimis
Goal of revenue neutrality reduces budgetary pressures of rate cuts
Revenue neutrality increases likelihood of losers and winners

34. Tax reform – factors affecting outcomes
Tax reform – Distribution of benefits
Tax reform – factors affecting outcomes
Factors suggesting lower tax burden
Factors suggesting higher tax burden
High number of domestic suppliers, foreign customers
High number of foreign suppliers, domestic customers
Asset-intensive business
Multinational with significant cross-border financing
Low-leverage business model
High-leverage business model
Domestically domiciled IP
Value chain relies on imports from foreign affiliates
Tax burden currently determined largely by the statutory tax rate
Currently manage tax burden via heavy use of deductions, credits, preference items, and other incentives and special rules

35. The Universe (?) of Options – What can be done?
Go Big (Rates at least in the low 20s and Territorial Taxation)
The Blueprint
Credit Invoice (i.e., traditional) VAT
Revenue Losing Tax Reform (i.e., tax cuts)
Corporate Integration (e.g., DPD)
Worldwide Taxation (incl Minimum Tax proposals)
Political Orphans – Camp 2014, Carbon Tax
Go Small
Modest rate cuts
Repatriation only (mandatory or voluntary)
Small business & individual?
Other non-rate related corporate relief

36. The Universe (?) of Options – How to do it?
Getting to 60
Can it be done part one
Can it be done part two
Budget Reconciliation -
About that budget . . .
Achieving permanence through revenue neutrality
“Flexibility” in defining neutrality
Revisit the budget window
One last option . . .

37. Thank you

38. Contact us John P. Gimigliano 202-533-4022 jgimigliano@kpmg.com
@johngimigliano