International tax reform, where do we stand?
Fall is around the corner and Congress’ progress on tax reform leaves much to be desired. Earlier in the year we were hopeful for comprehensive tax reform in 2017, now we are cautiously optimistic for even a minor reform package to come by the end of 2018. While comprehensive reform in 2017 is still possible, it would be more likely that some “rifle shot” changes are made to lay the ground for a subsequent comprehensive rewrite of the Code.
Some evidence of the rifle shot approach has recently come in the form of a notice from Treasury (seeTreasury identifies eight regulations for review under executive order.) The notice, a response to an executive order issued by President Trump, identifies eight regulations that may impose an undue burden for possible action. Of those eight, three address areas of international tax. Watch the video to learn what may be in store.
What's on the table for international tax reform?
Summary of international regulations in the Treasury notice:
- Final and Temporary Regulations under Section 385 regarding the Treatment of Certain Interests in Corporations as Stock or Indebtedness (T.D. 9790; 81 F.R. 72858)
- Final Regulations under Section 987 regarding Income and Currency Gain or Loss With Respect to a Section 987 Qualified Business Unit (T.D. 9794; 81 F.R. 88806)
- Final Regulations under Section 367 regarding the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803; 81 F.R. 91012)
What action, if any, will be taken on these items is yet to be known. There are really only three options available. First, Treasury could revoke the regulations through the normal rule making process, requiring notice and comment periods. This path forward would likely be time consuming and does little to support comprehensive tax reform. Second, Congress could exercise its powers under the Congressional Review Act (CRA) and revoke the regulations with a simple majority and the President’s signature. (See: House resolution would revoke controversial debt/equity regulations.) Since the start of Trump’s presidency, Congress has successfully used the CRA fourteen times for non-tax regulations. While this approach is appealing because of its ease and speed it also does little to advance tax reform. The third option would be traditional legislation, perhaps even with bipartisan support, that would supersede the identified regulations. While ideally this would take the form of comprehensive tax reform, it could also just be a few rifle shot amendments that lay the groundwork for future reform. For example, a bill could address the repatriation of foreign earnings while laying the groundwork for a future move to a territorial tax system. Such a bill could also address these regulations.
Patience and preparation are both important
Despite the wide partisan divide in Congress, there are potential areas within tax reform that have bipartisan support. Recently, Senator Orrin Hatch (R-UT), Chairman of the Senate Committee on Finance, pointed to one such area in a statement where he said that a “[s]hift from worldwide to territorial tax system has bipartisan support.” Furthermore, David Kautter’s nomination to be assistant secretary of the Treasury for tax policy received unanimous support from the Senate Committee on Finance. These are positive steps that may signal that comprehensive tax reform is still possible for the 115th United States Congress, it’s just unlikely to happen in 2017.