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Engineering and Construction Conference: Legislative Update and Outlook for Tax ReformWes Coulam & Rob Hanson

September 2017

US Political and Legislative Landscape

US Government in 2017: Balance of Power

2017 Environment► For first time in a decade, Trump win gives Republicans control both executive and

legislative bodies of government► Highly partisan environment► Non-legislative distractions

House, 115th Congress► 434 current members (1 vacancy) with a simple majority requiring 218 votes► 240 Republicans► 194 Democrats

Senate, 115th Congress► 100 current members with a simple majority of 51 to pass legislation through

reconciliation► 52 Republicans► 48 Democrats (includes 2 Independents)

Tax Policy Influencers

House

► Speaker Paul Ryan ► Chairman Ways &

Means, Kevin Brady (R-TX)

► Ranking Member on Ways & Means, Richard Neal (D-MA)

► Tax Policy Subcommittee Chair, Peter Roskam (R-IL)

Trump Administration

► Treasury Secretary, Steven Mnuchin

► National Economic Council Director, Gary Cohn

► Assistant Treasury Secretary for Tax Policy – David Kautter

► Commerce Secretary, Wilbur Ross

► Senior White House staff: Steve Bannon, Stephen Miller, Jared Kushner

Senate

► Majority Leader, Mitch McConnell

► Chuck Schumer (D-NY), Senate’s top Democrat

► Senate Finance Chair, Orrin Hatch (R-UT)

► Ranking Member on Senate Finance, Ron Wyden (D-OR)

FAA funding, reauthorization?

Congressional agenda

December 8deadline

Government funding

National Flood Insurance Program

MUST-DO ITEMS

OTHER PRIORITIES

Tax reform, plus FY18 budget resolution for reconciliation

DREAMers/Deferred Action on Childhood Arrivals

Affordable Care Act market stabilization

Children’s Health Insurance Program?

Debt limit (“extraordinary measures” to be available into 2018) Sometime in 2018

Budget reconciliation

► Republicans don’t have filibuster-proof 60 Senate votes► Reconciliation allows 51-vote approval for spending, tax, debt limit

bills (or combination), under 2-step process1) Budget with reconciliation instructions passed by House, Senate

► Instructions direct committees to change spending or revenue numbers2) Then, Congress must pass bills that adhere to instructions

► Plan for two sets of reconciliation instructions in 20171) FY 2017 resolution called on 4 committees to reduce deficit by not less

than $1b each FY2017-2026 = AHCA health care bill 2) FY 2018 budget could include instructions for tax reform

► BUT… JCT has projected that even 3-year corporate rate cut has revenue effects beyond budget window, meaning it would run afoul of reconciliation rules unless there are sufficient offsets

► Could budget window be extended beyond 10 years?

July 27 Big 6 Joint Statement

(BAT removed)

Washington timeline, agenda

OctoberPass FY 18 Budget

(Required to move tax reform via reconciliation)

August 1Democratic response

(3 senators do not joint the letter)

September• Must-do items addressed until

December• Others to be temporarily

addressed• Additional tax reform detail

expected• Additional guidance on addressing

burdensome regulations expected

July August September October November December

October - NovemberW&M draft

November – December – 2018Committee amendments

House / Senate votesMove to conference

Federal deficit projections: CBO vs. Trump budget

$587$693

$563

$689$775

$879

$1,027 $1,057 $1,083

$1,225

$1,352

$1,463

$440$526 $488 $456 $442

$319

$209 $176$111

$(16)

(200)

0

200

400

600

800

1,000

1,200

1,400

1,600

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Bill

ions

Sources: CBO, An Update to the Budget and Economic Outlook: 2017 to 2027, June 29, 2017; OMB FY 2018 Analytical Perspectives, May 23, 2017

CBO = Current law plus 2% GDP growth Trump Budget = Significant spending cuts plus 3% GDP growth projected to result from “policies for simplifying taxes, cutting regulation, building infrastructure, reforming health care, boosting domestic energy production.”

2018 Senate elections

► Seats up for re-election: 23 Democrats plus 2 Independents, 9 Republicans

Democrats RepublicansTammy Baldwin (D-WI) TSherrod Brown (D-OH) TMaria Cantwell (D-WA)Ben Cardin (D-MD)Tom Carper (D-DE)Bob Casey (D-PA) TJoe Donnelly (D-IN) TDianne Feinstein (D-CA)Kirsten Gillibrand (D-NY)Martin Heinrich (D-NM)Heidi Heitkamp (D-ND) TMazie Hirono (D-HI)Tim Kaine (D-VA)

Amy Klobuchar (D-MN)Joe Manchin (D-WV) TClaire McCaskill (D-MO) TRobert Menendez (D-NJ)Chris Murphy (D-CT)Bill Nelson (D-FL) TDebbie Stabenow (D-MI) TJon Tester (D-MT) TElizabeth Warren (D-MA)Sheldon Whitehouse (D-RI)+2 Independents that caucus with Democrats:Angus King (I-ME)Bernie Sanders (I-VT)

John Barasso (R-WY)Bob Corker (R-TN)Ted Cruz (R-TX)Deb Fischer (R-NE)Jeff Flake (R-AZ)Orrin Hatch (R-UT)Dean Heller (R-NV)Luther Strange (R-AL)*Roger Wicker (R-MS)

T = Running in state won by Donald Trump in 2016* = 2017 special election

2018 House elections: GOP seats in districts that voted for Clinton

► Martha McSally (R-AZ)► Jeff Denham (R-CA)► David Valadao (R-CA)► Steve Knight (R-CA)► Ed Royce (R-CA)► Mimi Walters (R-CA)► Dana Rohrabacher (R-CA)

► Darrell Issa (R-CA)► Mike Coffman (R-CO)► Carlos Curbelo (R-FL)*► Ileana Ros-Lehtinen (R-FL)

retiring► Peter Roskam (R-IL)*► Kevin Yoder (R-KS)► Erik Paulsen (R-MN)*► Leonard Lance (R-NJ)

► John Katko (R-NY)► Ryan Costello (R-PA)► Pat Meehan (R-PA)*► John Culberson (R-TX)► Will Hurd (R-TX)► Pete Sessions (R-TX)► Barbara Comstock (R-VA)► Dave Reichert (R-WA)*

retiring

* Ways and Means Committee member

► Democrats would need to pick up 24 seats to regain control of the House► 23 Republicans hail from districts won by Hillary Clinton in 2016

Members not running for re-election in 2018

► Dave Reichert (R-WA)► Sam Johnson (R-TX)► Lynn Jenkins (R-KS)► Ileana Ros-Lehtinen (R-FL)► Charlie Dent (R-PA)► Dave Trott (R-MI) ► John Duncan (R-TN) ► Niki Tsongas (D-MA)

► Kristi Noem (R-SD), running for governor ► Jim Renacci (R-OH), running for governor► Jacky Rosen (D-NV), running for Senate► Evan Jenkins (R-WV), running for Senate► Michelle Lujan Grisham (D-NM), running for

governor► Steve Pearce (R-NM), running for Senate► Beto O’Rourke (D-TX), running for Senate► Lou Barletta (R-PA), running for Senate► Diane Black (R-TN), running for governor► Luke Messer (R-IN), running for Senate► Todd Rokita (R-IN), running for Senate► Raul Labrador (R-ID), running for governor► Jared Polis (D-CO), running for governor► Colleen Hanabusa (D-HI), running for governor► Tim Walz (D-MN), running for governor

Retiring Running for other office

Understanding Tax Reform Options

How we got here: Major drivers of tax reform

► Understand history – current and past tax issues► Inversions, repatriation, OECD BEPS, State Aid, treaties

► Reduce corporate and individual tax rates

► Promote economic growth

► Drive US competitiveness

High US statutory

corporate tax rate

Worldwide system of

taxing foreign earnings

Less competitive

US tax system relative to

other nations

Tax reform: overall state of play

June 2016 Republican Blueprint for tax reform► 20% corporate income tax rate/25% rate for business income of pass-throughs ► Immediate expensing but no interest expense deduction - small business exception likely► Territorial system of taxing future foreign earnings► Border adjustability: exempt exports from tax, deny deductions for imports - 5-year phase-in likely

Senate perspectives► Does not have a tax reform plan, though options being evaluated► Republican Senators publicly opposed to border adjustability► McConnell wants revenue neutral tax reform, Hatch not wedded to revenue neutrality

April 2017 Trump administration plan► 15% business income rate; no position on depreciation or interest deductibility► Territorial system of taxing foreign earnings, no position on border adjustability► Unspecified base-broadening for corporations and individuals

Now: negotiations between House, White House, Senate on “unified plan”► Principals: NEC Director Cohn, Treasury Secretary Mnuchin, Senate Leader McConnell, Finance

Committee Chairman Hatch, Speaker Ryan, Ways and Means Committee Chairman Brady ► Goal -- agree on plan by September

Combined corporate tax rates, OECD

Australia 30.00

Austria 25.00

Belgium 33.99

Canada 26.70

Chile 25.00

Czech Rep. 19.00

Denmark 22.00

Estonia 20.00

Finland 20.00

Slovak Republic 21.00Slovenia 19.00Spain 25.00Sweden 22.00Switzerland 21.15Turkey 20.00United Kingdom 19.00United States 38.91

Korea 24.20Latvia 15.00Luxembourg 27.08Mexico 30.00Netherlands 25.00New Zealand 28.00Norway 24.00Poland 19.00Portugal 29.50

0

5

10

15

20

25

30

35

40

45

France 34.43

Germany 30.18

Greece 29.00

Hungary 9.00

Iceland 20.00

Ireland 12.50

Israel 24.00

Italy 27.81

Japan 29.97

%

Source: https://stats.oecd.org/index.aspx?DataSetCode=Table_II1. Combined corporate income tax rate - shows the basic combined central and sub-central (statutory) corporate income tax rate given by the central government rate (less deductions)

https://stats.oecd.org/index.aspx?DataSetCode=Table_II1

What CEOs are saying about Tax Reform

► BRT CEO Letter to President Trump and Congressional Leaders – 7 June

► “Business Roundtable recently surveyed its membership and found that a significant majority of CEOs believe that tax reform is the single most effective action that Congress can take to accelerate economic growth over the next year.“

► “We support a fiscally responsible, modernized tax code that includes competitive business tax rates and a modern international tax system that doesn’t leave trillions of investment dollars trapped overseas.”

► “We have witnessed the obstacles to past tax reform efforts for over a decade. For this reason, we provide you our commitment to put all our corporate credits and special deductions on the table. We stand ready to work with you to achieve this goal.”

Key issues in tax reform debate

Revenue & Political Impact

► Will reform be “revenue neutral”?

► Reconciliation could require provisions to sunset after 10 years

► Will Dems participate?► Republicans can lose only 2

Senate votes if using reconciliation

Interest Deductibility

► House Republican plan: expensing, eliminate deductibility of net interest expense

► Trump proposed optional expensing for manufacturers, who lose interest deductibility

► Is expensing worth losing interest deductions?

InternationalSystem

► Territorial (Exemption/tax free repatriation)

► Worldwide without deferral ► Border adjustments► Anti-base erosion and profit

shifting options (minimum tax or tax intangible income)

► Repatriation tax to transition to new system

Trump vs. House Blueprint: corporate

Tax provision Trump April 26 Plan House GOP

Top corporate tax rate 15% business rate 20% top corporate rateAMT eliminated

Cost recovery No provision. “We do think some level of expensing is important.” ► Secretary Mnuchin

100% immediate expensing for all tangible and intangible assets except land

Interest expense No provision. Secretary Mnuchin: retaining interest deductibility is“our preference”

No deduction will be allowed for netinterest expense

Net operating losses (NOLs) (Not addressed) ► Carrybacks of NOLs not permitted► Deduction allowed for NOL carryforward

limited to 90% of net taxable amount for year determined w/o regard to carryforward

► NOLs allowed to be carried forward indefinitely

Other business preferences “Eliminate tax breaks for special interests”

Calls for them to generally be eliminated, except for R&D credit and LIFO

Trump vs. House Blueprint: international


Mandatory tax on previously untaxed accumulated foreign earnings regardless of whether repatriated

Calls for one-time tax but rate unspecified, to be negotiated with Congress

► 8.75% rate for cash/cash equivalents,► 3.5% rate for other earnings

(e.g., Those reinvested in hard assets outside the US)

► Tax payable over eight year period

Taxation of future foreign earnings

Territorial Territorial; 100% exemption for dividends paid from foreign subs.

Border adjustability ► No provision or position► Won’t embrace House border

adjustability plan in current form► Trump likes “reciprocal” tax

► Border adjustability with exports exempt from tax with cost of goods sold remaining deductible. All imports non-deductible. Applies to services as well as to tangible and intangible property.

► Emphasis is on a “Made in America” policy with goal of eliminating tax incentive to move operations outside the US.

Trump vs. House Blueprint: individual


Individual rates (now 10%, 15%, 25%, 28%, 33%, 35%, 39.6%)

10% 12% $0 to $75,300

25% Income levels not set 25% $75,300 to $231,450

35% 33% $231,450+

Individual AMT Repealed Repealed

Capital gains and dividends Current law rates:► 0%► 15%, and► 20%

50% deduction for capital gains, dividends, interest; rates of: ► 6%► 12.5%, and ► 16.5%

3.8% Net Investment Income Tax (NIIT)

Repealed Proposed to be repealed under health reform bill

Top pass-through rate 15% business tax rate 25% rate on “business income”

Carried interest Not addressed, but WH Chief of Staff Priebus said, “The President wants to get rid of carried interest.”

(Not addressed)

Estate tax Repealed Repealed

Tax reform process

1Outline to be releasedOutline reflecting a consensus of “Big Six” negotiators will be released the week of September 25

2Ways and Means CommitteeA chairman’s mark release is targeted for mid-October, after House passes budget resolution

3House floor considerationA successful Ways & Means vote would send the bill to the floor

4Senate Finance Committee Chairman Hatch: Committee will “draft and report tax reform legislation” as main priority this fall

5Senate floorFinance approval would lead to floor consideration and amendments prior to a full Senate vote

6Conference, signatureThe House and Senate must agree to (and pass) a final version, then President signs

Tax reform menu

Revenue neutral Tax cut

GOP bill, reconciliation

Bipartisan, no reconciliation

Business and individual

Scope Money

Business only

50% bonusdepreciation

Politics

DepreciationchangesPermanent Temporary

Duration Cost recovery

Borderadjustability

Limit interestdeductibility

International only

Anti-base erosion

provisions

100% expensing

Revenue ideas

Joint Statement on Tax Reform – July 27

What it calls for► Reducing tax rates as much as possible

► “tax relief for American families” ► “lower tax rate for small businesses so they can compete with larger ones”► “lower rates for all American businesses so they can compete with foreign ones”

► “Unprecedented” capital expensing► Priority on permanence► Encouraging US companies to bring back jobs and profits from overseas

To be accomplished by► Ways & Means and Finance committees developing and drafting legislation► Moving legislation through tax committees this fall, under regular order► Followed by consideration on the House and Senate floors► Hopefully with participation from Democrats

Not addressed► Rate targets► Interest deductibility► Extent to which the tax reform plan should be paid for, and how

Hatch corporate integration proposal

► Finance Chairman Hatch crafting discussion draft designed to partially integrate the corporate and individual tax systems ► Could be incorporated into broader tax reform plan

► Reduce or eliminate double taxation through establishment of a corporate dividends-paid deduction (DPD)

► International tax regime likely unchanged► Corporation withholds 35% tax on gross amount of all dividends

► Withheld amount would be a “nonrefundable credit” for the shareholder

► 20% preferential rate for qualified dividends would be repealed► Corporation withholds 35% tax on the gross amount of interest paid to creditors► Policy rationale

► Narrow tax treatment gap between C corps and pass-throughs► Create some incentive to repatriate foreign earnings► Eliminate tax code bias in favor of debt► Withholding tax on interest viewed as curbing “earnings stripping”

Partnership taxation

Proposedrates

TrumpPass-through rate: 15% business tax rateTop individual rate: 35%

House RepublicansPass-through rate: 25% for the “active business income” of sole proprietorships and pass-through entities Top individual rate: 33%

Definition of business income

► What should be taxed as “business income” and what should be taxed as wages/ordinary income?► What is considered “reasonable compensation?”

► One suggested approach: taxing 70% of all pass-through income as wages, 30% as business profits

Potential for abuse

► Secretary Mnuchin, May 25: “We will absolutely make sure that rich people cannot use this as a loophole where they should be paying 35 percent taxes on wages and that they pay 15 percent instead. I assure you that that will be in the code and we will have very clear ways to enforce that.”

Regulatory review

► April 21: Trump executive order requires review of significant tax regulations issued after January 1, 2016

► July 7: Notice 2017-38 identifies 8 specific regulations as unduly burdensome or complex1) Proposed Regulations under Section 103 on Definition of Political Subdivision (REG-129067-15) 2) Temporary Regulations under Section 337(d) on Certain Transfers of Property to Regulated Investment Companies (RICs)

and Real Estate Investment Trusts (REITs) (T.D. 9770)3) Final Regulations under Section 7602 on the Participation of a Person Described in Section 6103(n) in a Summons

Interview (T.D. 9778)4) Proposed Regulations under Section 2704 on Restrictions on Liquidation of an Interest for Estate, Gift and Generation-

Skipping Transfer Taxes (REG-163113-02)5) Temporary Regulations under Section 752 on Liabilities Recognized as Recourse Partnership Liabilities (T.D. 9788)6) Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or

Indebtedness (T.D. 9790)7) Final Regulations under Section 987 on Income and Currency Gain or Loss With Respect to a Section 987 Qualified

Business Unit (T.D. 9794)8) Final Regulations under Section 367 on the Treatment of Certain Transfers of Property to Foreign Corporations (T.D. 9803)

► By August 7: comments were due on whether the regulations should be rescinded or modified, and how they should be modified

► By September 18: final report to the President recommending specific actions► July 28: Notice 2017-36 delayed the application of the Documentation Regulations

under final and temporary regulations (T.D. 9790) under Section 385 by one year

2017 OECD guidance

In 2017, the OECD released guidance on several focus areas including: ► July 11 2017, the OECD released the draft contents of the

next update to the OECD Model Tax Convention► July 10 2017, the OECD released the 2017 edition of the

OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

► April 6 2017, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting

► February 1 2017, the OECD released BEPS Action 13 on Country-by-Country Reporting Peer Review Documents providing the approach taken regarding the peer review process, the sources required to be submitted to the OECD, and the timing for each phase of the process

► January 6 2017, the OECD released a public discussion draft for comment that includes three draft examples with respect to treaty entitlement of non-collective investment vehicle (non-CIV) funds

Infrastructure

► Trump advisors have encouraged private sector “P3” investment, regulatory reform, and divesting FAA’s air traffic control system

► The Administration’s FY 2018 budget proposal calls for $200 billion in federal infrastructure spending spread over ten fiscal years, but provides no further details about the $1 trillion package► The budget also proposed to reduce funding for existing transit and highway project

grant programs, cutting the Department of Transportation’s budget by 13% in FY 2018 and slashing HTF spending by $95 billion over 10 years

► GOP congressional leaders and the White House have prioritized tax reform in 2017, with no link to infrastructure ► Previous proposals used revenue from repatriation for infrastructure funding; could

attract support of Democrats► Privatization of FAA air traffic control is priority for House, but Senate unlikely to go

along► Appropriators, on bipartisan basis, likely to reject Administration’s proposed

infrastructure cuts► Infrastructure could still emerge as a pre-election priority in 2018

Tax reform: take away points

► Focus on Key Elements of Change► Lower US corporate and individual tax rates► International system - Territorial, destination-based► Repatriation tax► What deductions and credits will be repealed?

► Details matter► Reset on process due to events around healthcare bill► Transition period on all major policy changes

► When and how likely is Tax Reform?► Unified Republican government/budget reconciliation rules create a path

forward but challenges remain► President Trump courting Democrats on tax reform► Expect action during calendar year 2017, could continue into 2018► Details remain fluid (size and scope may vary)

Questions?