post-election federal tax legislative update - ernst &...

Post-election federal tax legislative update

Denver – December 8, 2016

Tax legislative and policy update

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Today’s presenter

F. Michael Dell

Partner

Center for Tax Policy

Ernst & Young LLP

[email protected]


Agenda

Political and economic outlook1

Legislative and regulatory landscape2

US tax reform3

4 Global tax issues, risks and trends


2016 US elections overview*

House, 114th Congress House, 115th Congress

246/186 with 3 vacancies

► Speaker Paul Ryan (R-WI)

► Democratic leader: Nancy Pelosi (D-CA)

► Majority Leader: Kevin McCarthy (R-CA)

239/194with 2 undecided

► Speaker Paul Ryan (R-WI)

► Democratic leader: Nancy Pelosi (D-CA)

► Majority Leader: Kevin McCarthy (R-CA)

Senate, 114th Congress Senate, 115th Congress

54/46 with 2 Independents

► Majority Leader: Mitch McConnell (R-KY)

► Democratic Leader: Harry Reid (D-NV)

► Majority Whip: John Cornyn (R-TX)

51/48with 2 Independents,1 undecided

► Majority Leader: Mitch McConnell (R-KY)

► Democratic Leader: Charles Schumer (D-NY)

► Majority Whip: John Cornyn (R-TX)

Presidential

Electoral votes: 306 Trump/232 Clinton

Popular vote: 46.5% Trump/48.1% Clinton 62,352,375 / 64,429,062

*As of 9 am Eastern time, November 29, CNN


Trump’s ‘Contract with the American Voter’–priorities for first 100 days

► Middle Class Tax Relief And Simplification Act: tax reform

► End The Offshoring Act: tariffs to discourage corporate relocation

► American Energy & Infrastructure Act: public-private partnerships

and private investments = $1 trillion/10 years for infrastructure

► School Choice And Education Opportunity Act: elementary school

choice and college affordability

► Repeal and Replace Obamacare Act: Health Savings Accounts,

ability to purchase insurance across state lines

► Affordable Childcare and Eldercare Act: tax deductibility

► End Illegal Immigration Act: wall on Mexican border

► Restoring Community Safety Act: law enforcement resources

► Restoring National Security Act: eliminate defense sequester

► Clean up Corruption in Washington Act: ethics reforms


First major piece of legislation enacted by recent presidents after taking office

Barack Obama

Took office January 20, 2009

American Recovery and Reinvestment Act of 2009

Enacted February 17, 2009

► Stimulus legislation, included bonus depreciation

George W. Bush


Economic Growth and Tax Relief Reconciliation Act of 2001

Enacted June 7, 2001

► The “Bush tax cuts” reduced individual rates,

estate tax

Bill Clinton


Omnibus Budget Reconciliation Act of 1993

Enacted August 10, 1993

► Increased individual, corporate taxes

George H. W. Bush


Omnibus Budget Reconciliation Act of 1990

Enacted November 5, 1990

► Increased individual taxes despite “no new tax” pledge

Ronald Reagan


Economic Recovery Tax Act of 1981

Enacted August 13, 1981

► Sharply reduced individual, corporate taxes


House Ways and Means Committee

Republicans (24) Democrats (15)

► Kevin Brady (R-TX),

Chairman

► Sam Johnson (R-TX)

► Devin Nunes (R-CA)

► Pat Tiberi (R-OH)

► Dave Reichert (R-WA)

► Charles. Boustany, Jr. (R-

LA)*

► Peter Roskam (R-IL)

► Tom Price (R-GA)

► Vern Buchanan (R-FL)

► Adrian Smith (R-NE)

► Lynn Jenkins (R-KS)

► Erik Paulsen (R-MN)

*ran for US Senate

**defeated

► Kenny Marchant (R-TX)

► Diane Black (R-TN)

► Tom Reed (R-NY)

► Mike Kelly (R-PA)

► Todd Young (R-IN)*

► Jim Renacci (R-OH)

► Kristi Noem (R-SD)

► Pat Meehan (R-PA)

► George Holding (R-NC)

► Jason Smith (R-MO)

► Robert Dold (R-IL)**

► Tom Rice (R-SC)

► Richard Neal (D-MA)

► Sander Levin (D-MI)

► Charles Rangel (D-NY) retired

► Jim McDermott (D-WA) retired

► John Lewis (D-GA)

► Xavier Becerra (D-CA)

► Lloyd Doggett (D-TX)

► Mike Thompson (D-CA)

► John Larson (D-CT)

► Earl Blumenauer (D-OR)

► Ron Kind (D-WI)

► Bill Pascrell (D-NJ)

► Joseph Crowley (D-NY)

► Danny Davis (D-IL)

► Linda Sanchez (D-CA)


Senate Finance Committee

Republicans (14) Democrats (12)

► Chairman Orrin Hatch (R-UT) 2018

► Chuck Grassley (R-IA) 2016

► Mike Crapo (R-ID) 2016

► Pat Roberts (R-KS)

► Mike Enzi (R-WY)

► John Cornyn (R-TX)

► John Thune (R-SD) 2016

► Richard Burr (R-NC) 2016

► Johnny Isakson (R-GA) 2016

► Rob Portman (R-OH) 2016

► Pat Toomey (R-PA) 2016

► Dan Coats (R-IN)

► Dean Heller (R-NV) 2018

► Tim Scott (R-SC) 2016

► Ron Wyden (D-OR) 2016

► Chuck Schumer (D-NY) 2016

► Debbie Stabenow (D-MI) 2018

► Maria Cantwell (D-WA) 2018

► Bill Nelson (D-FL) 2018

► Robert Menendez (D-NJ) 2018

► Thomas Carper (D-DE) 2018

► Ben Cardin (D-MD) 2018

► Sherrod Brown (D-OH) 2018

► Michael Bennet (D-CO) 2016

► Bob Casey (D-PA) 2018

► Mark Warner (D-VA)

2016 = re-elected on November 8

2018 = up for re-election in 2018


2018 Senate elections

Seats up for re-election: 23 Democratic plus 2 Independents, 8 Republican

T = Running in state Donald Trump won in 2016

Democrats Republicans

Tammy Baldwin (D-WI) T

Sherrod Brown (D-OH) T

Maria Cantwell (D-WA)

Ben Cardin (D-MD)

Tom Carper (D-DE)

Bob Casey (D-PA) T

Joe Donnelly (D-IN) T

Dianne Feinstein (D-CA)

Kirsten Gillibrand (D-NY)

Martin Heinrich (D-NM)

Heidi Heitkamp (D-ND) T

Mazie Hirono (D-HI)

Tim Kaine (D-VA)

Amy Klobuchar (D-MN)

Joe Manchin (D-WV) T

Claire McCaskill (D-MO) T

Robert Menendez (D-NJ)

Chris Murphy (D-CT)

Bill Nelson (D-FL) T

Debbie Stabenow (D-MI) T

Jon Tester (D-MT) T

Elizabeth 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)

Roger Wicker (R-MS)


US economic update – GDP and job growth continue► Gross domestic product (GDP) increased at a 3.2% annualized rate in

Q3 2016, more than double the 1.4% annualized growth rate for Q2

2016

► Gross private domestic investment rose by a 3.1% annualized rate in Q3

► Federal government spending rose by a 2.5% annualized rate in Q3

► On an annual basis, GDP increased by 2.4% in 2014 and 2.6% in 2015

► The Federal Reserve Board left the federal funds rate target range of

0.25% to 0.5% unchanged during its November 1-2 meeting

► Latest Blue Chip forecast (November 2016):

► 1.5% GDP growth in 2016 followed by 2.2% growth in 2017 expected

► Unemployment rate expected to average 4.9% in 2016 and decline to

4.7% in 2017

► Employment increased by 178,000 jobs in November, up from

142,000 in October

► The unemployment rate dropped to 4.6% from 4.9%


Economic forecasts through 2017

Note: Figures are averages of selected economic forecasts. Figures shaded in yellow are forecasts.

Source: Blue Chip Economic Indicators. Vol. 41, No. 11, November 7, 2016.

Key macroeconomic measures 2013 2014 2015 2016 2017

Percent change, full-year over prior-year:

Real GDP 1.5 2.4 2.6 1.5 2.2

Average:

Unemployment rate 7.4 6.2 5.3 4.9 4.7

Consumer Price Index 1.5 1.6 0.1 1.3 2.3

Treasury bills 3-month rate 0.1 0.0 0.1 0.3 0.8

Treasury notes 10-year rate 2.4 2.5 2.2 1.7 2.1


While the rates of unemployment hold steady, the underemployment “gap” remains elevated

Note: The U-6 measure of underemployment includes: 1) total unemployed, 2) “marginally attached workers” (individuals not in the labor force

who wanted and were available for work), and 3) workers employed part-time for economic reasons. Figures shown are seasonally adjusted.

Source: US Bureau of Labor Statistics: Labor Force Statistics from the Current Population Survey, November 4, 2016.

The spread between the official unemployment rate and the U-6 rate was 4.6 percentage

points in October 2016, up from 3.7 percentage points in October 2007

Official unemployment rate, 4.9%

"U-6" unemployment rate, 9.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


Labor force participation rate remains historically low

Note: The labor force participation rate is the number of persons in the labor force as a percent of the civilian non-institutional population,

which includes retired persons. The labor force includes persons who are employed and persons who are unemployed but available for and

looking for work sometime during the four-week period preceding the survey. Data are available from as early as 1948.

Source: US Bureau of Labor Statistics: Labor Force Statistics from the Current Population Survey, November 4, 2016.

The labor force participation rate declined from 66.7% in October 2001 to 62.8% in October

2016, as growth in the overall population outpaced growth in the labor force

October 2016, 62.8%

Average since 1948, 62.9%

Average since 1980, 65.5%

60.0%

61.0%

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016


Sources and uses of federal revenues, FY2016

Total: $3.85t

Note: “Other” revenue includes Federal Reserve earnings, customs duties, estate and gift taxes, and other miscellaneous receipts. “Other entitlements” include commerce and

housing credit, education, training, employment, social services, and veterans benefits and services. “Nondefense discretionary” includes international affairs, general science, space

and technology, energy, natural resources and environment, agriculture, transportation, community and regional development, administration of justice, general government and

undistributed offsetting receipts. Income security includes items such as food stamps, public housing and non-veteran pensions.

Figures do not total to 100% due to rounding.

Source: US Department of Treasury, Monthly Treasury Statement, September 2016

Individual income taxes,

47.3%

Social Security, 34.1%

Corporate income taxes,

9.2%

Excise taxes, 2.9%

Other, 6.5%

Social Security, 23.8%

Medicare and health,

28.7%

Defense, 15.4%

Income security, 13.4%

Nondefense discretionary,

6.0%

Other entitlements,

6.5%

Net interest, 6.2%

Revenues Expenditures

Total: $3.27t


Federal revenue trendsPercentage of GDP

Note: “Other” includes excise taxes, estate and gift taxes, customs duties and miscellaneous receipts. The 2016 data are projections.

Source: Congressional Budget Office, Updated budget projections: 2016 to 2026, March 2016

8.8%

6.0%

1.8%

0

2

4

6

8

10

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Individual income taxes Payroll taxes Corporate income taxes Other


Agenda



US tax reform3


Congressional timeline, agenda for 2016-2017

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct

December 9 -

Government

funding expires

December 31 –

39 tax provisions

expire

March 15 -

Federal debt limit

reinstated

September 30, 2017 -

FAA funding, authorization

expire

2016 lame-duck session to include:

► New member orientation, leadership elections

► “Must-do” legislation, such as extending government funding

January 4 -

Expected swearing

in of 115th Congress

January 20 -

Presidential

inauguration

Late February –President

to address joint session of

Congress

November 14 -

Lame duck

session begins

Tax policy and legislative update

Priorities for lame-duck session

► Omnibus appropriations, “mini”-buses, or continuing resolution

► Extending government funding into early 2017

► Water Resources Development Act, Flint aid package

► 21st Century Cures legislation

► Funds medical research and speeds drug approvals

► Miners Protection, Retirement Enhancement/Savings Acts

► Assures payment of health benefits, pension solvency for miners

► Bipartisan proposals to expand retirement savings

► Tax items: extenders, technical corrections, miscellaneous bills


‘Must-do’ 2017 legislative agenda items

► Government funding: budget and appropriations for FY

2018► Federal debt limit: current suspension ends March 15,

2017

► Supreme Court nomination and other Administration appointments

► Federal Aviation Administration reauthorization

► Children’s Health Insurance Program reauthorization



Regulatory

reform

Infrastructure

ACA repeal

Tax reform

Trump/Republican priorities for 2017

Energy

► All-GOP control opens door for comprehensive tax reform

► Trump, House GOP have similar proposals on rates

► Different approaches to international taxation

► Senate likely to use reconciliation process to pass repeal

► Ryan plan keeps parts of Affordable Care Act (ACA)

► Trump could strike some parts of ACA without Congress

► Trump wants public-private partnerships, private investments

► Election outcome takes focus off repatriation as funding

► Democrats also interested in increased investment

► Trump could roll back some Obama regulations

► Fiduciary rule, Dodd-Frank elements among targets

► House GOP Better Way effort also targeted regulatory reform

► Trump to cancel Obama energy rules, e.g., on power plants

► Favorable treatment expected for coal, oil, natural gas

► Trump denies climate change, wants US out of Paris deal

Budget reconciliation may come into play

► Republicans don’t have filibuster-proof 60 Senate votes

► Reconciliation allows simple-majority vote for spending,

revenue or debt limit bills (or a combination)

► Possible use for ACA repeal, tax reform, etc.

► Two-step process

► 1. House and Senate would need to pass a concurrent Budget

Resolution with reconciliation instructions

► Provides directions to committees to change the spending or revenue

numbers

► 2. Need to pass “reconciliation” bills that adhere to the instructions

► Carries with it restrictions on provisions that would increase the

deficit beyond the budget timeframe (usually 10 years)

► This means reconciliation could only be used to repeal certain

provisions of the ACA


Revisiting health care reform

► President-elect Trump and Republicans remain opposed

to the ACA

► Trump has vowed to “repeal and replace” the law soon after taking

office

► Complexities and procedural hurdles make unwinding the law

difficult

► Republicans unlikely to get 60 votes to repeal; would have to use

“reconciliation” process

► Alternative might be to work on changes that might garner bipartisan

support

► Modification of some fees

► Changes to health insurance exchanges


Trade issues

► Trade was a significant election issue

► Unlikely Congress will ratify the Trans-Pacific Partnership

(TPP)

► Trump has suggested he might revisit North American

Free Trade Agreement (NAFTA)

► Trump position on China’s currency and his pledge to

build a wall on the US-Mexico border may have trade

repercussions



Regulatory activity: treatment of related-party corporate interests

► Final and temporary related-party debt-equity regulations

under Section 385 were released October 13, 2016

► Proposed regulations released April 4, 2016

► Documentation Rule generally applies to debt instruments

issued on or after January 1, 2018

► Recharacterization Rules generally apply to debt

instruments issued on or after April 5, 2016; a transition

rule generally exempts debt settled within 90 days of the

publication of the final regulations


What changed in the final and temporary Section 385 regulations

► New/expanded exemptions and exclusions (e.g., first $50 million of recast debt, compensatory stock, post-April 4, 2016 E&P)

► Exclusion for certain regulated industries

► Numerous exemptions and exclusions (e.g., qualified short-term debt instruments, certain acquisitions of subsidiary stock)

► Exclusion for certain regulated industries

► Documentation due on return filing date

► Disregarded entity (DRE) debt recast into equity of regarded owner

► Exclusion of debt issued by partnership

► Master agreements blessed

► Annual debt capacity study allowed

► Reservation on no affirmative use

► Eliminated

Apply to interests issued by domestic

corporations

Exclude (reserve on) interests issued by

foreign corporations

Exclude interests issued by

non-captive real estate investment

trusts and regulated investment companies

Do not apply to instruments issued

within US consolidated group

Documentation RuleProp. Reg. §1.385-2

Transaction Recharacterization Rule

Prop. Reg. §1.385-3(b)(2)

Bifurcation RuleProp. Reg. §1.385-1(d)

Funding Recharacterization Rule

Prop. Reg. §1.385-3(b)(3)


Key state income tax questions surrounding Section 385 regulations

► Will the states conform to the final and temporary

regulations?

► The documentation consolidated group exclusion in Reg.

Section 1.385-2(d)(2)(ii)(A)?

► The recharacterization consolidated group exception in Temp.

Reg. Section 1.385-4T(b)(1)?

► Will the states have powers independent of the IRS to

police these rules?

► Can states make debt-equity determinations that are

different from those made by the IRS?


Agenda



US tax reform3



Major drivers of US tax reform

► High corporate tax rate and complex system puts US companies at a

competitive disadvantage

► Patent box regimes in other countries lure intellectual property (IP) income

and R&D jobs from the United States

► European Union (EU) State aid investigations have been criticized for

appearing to target US multinationals

High statutory

corporate tax

rate (35%)

Worldwide

system of

taxing foreign

earnings

Less

competitive US

tax system

relative to other

developed

nations

Tax reform: 2016 developments to date

► Republican Blueprint for tax reform

► Reduced individual tax rates

► Corporate income tax replaced with 20% cash-flow tax

► 25% business income tax for pass-through entities

► Territorial system of taxing future foreign earnings

► Mandatory tax on accumulated foreign earnings

► Destination-basis tax system that exempts exports while taxing imports

House

Senate

► Senate Finance Committee Chairman Orrin Hatch (R-UT)

► Readying corporate integration proposal to eliminate double taxation of corporate

income

► Senate Majority Leader Mitch McConnell (R-KY)

► Favors comprehensive tax reform

► Incoming Senate Democratic Leader Chuck Schumer (D-NY)

► Supports international tax reform to fund infrastructure spending

Trump

► Trump

► 15% business income rate, 15% pass-through rate

► Elective expensing for manufacturers with loss of interest expense deduction

► Elimination of most business provisions, except for R&D Credit

► Individual: 12%, 25% and 33% rates; deductions capped at $100,000/$200,000



Improved political environment for comprehensive tax reform

► Both Trump and Republican congressional leaders have

said tax reform is an early priority

► Trump says he will act on tax reform in first 100 days

► Revenue-losing comprehensive tax reform possible via

reconciliation rules

► Would allow Senate to advance a bill without 60 votes

► Trump and congressional Republican plans are not

identical but have enough overlap for compromise

► Similar interest in lower rates for individuals and corporations, including

pass-through entities

► House GOP plan moves toward cash-flow consumption tax, border

adjustability

► Trump plan might repeal deferral without switch to territorial system


Tax reform key focus: economic growth

► For GOP lawmakers, growth is a key goal of reform

► Must include provisions that will increase demand for goods and

services and increase the return to capital investment

► Growth will be “scored”

► Joint Committee on Taxation (JCT) now uses dynamic revenue

models; producing positive revenue scores depends on tax reform

design

► House rules now require dynamic revenue estimating

► Pro-growth proposals:

► Reducing individual and corporate tax rates

► Allowing 100% expensing of investments in tangible, intangible

assets


Comparison of Trump, House GOP Blueprint tax reform plansProposal Trump House GOP

Top corporate tax rate (now 35%) 15%, corporate alternative minimum tax (AMT) eliminated 20%, corporate AMT eliminated

Top pass-through rate (now 39.6%)15% rate for pass-through entities that retain profits within

the business25%

Taxation of future foreign earnings In 2015, proposed worldwide system, repeal of deferral;

currently unclear

Territorial; 100% exemption for dividends paid from

foreign subs.; border adjustment

Mandatory tax, untaxed accumulated foreign earnings 10%8.75% for cash/cash equivalents, 3.5% otherwise,

payable over 8 years

Cost recovery Expensing for manufacturers 100% expensing: tangible, intangible assets

Interest Manufacturers electing to expense capital investment lose

the deductibility of corporate interest expense

No current deduction will be allowed for net interest

expense

Other business provisionsCalls for them to generally be eliminated, except for R&D

credit

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

credit and LIFO

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

39.6%)12%, 25%, 33% 12%, 25%, 33%

Capital gains and dividendsCurrent law (max. rate of 20%), 3.8% Net Investment

Income Tax (NIIT) repealed

50% deduction for capital gains, dividends and interest,

leading to basic rates of 6%, 12.5% and 16.5%

Carried interest Ordinary income (Not addressed)

Estate tax (now 40% rate, $5.45 million exemption)Repealed, capital gains held until death taxable, first $10

million tax-freeRepealed

State tax deduction Cap itemized deductions at $100,000 for single filers and

$200,000 for couples Eliminated

Charitable contribution deduction See above Retained, but could be modified

Mortgage interest deduction See above Retained, but could be modified

Personal Exemption Phase-out (PEP), Pease deduction

limitationUnspecified “steepening the curve” of PEP and Pease (Not addressed)

Life insurance build-up Included in income for high earners (Not addressed)


House GOP Tax Reform Blueprint: border adjustments

► Would move to a destination-basis tax system, under which

border adjustments (BAs) exempt exports from tax while taxing

imports

► Key questions include:

► Are the BAs under the House Blueprint compliant with the World Trade

Organization (WTO)?

► Would the BAs have any long-term impact on trade or be offset by

changes in countries’ real price levels/exchange rates, a view held by

economists but met with skepticism by the business community?

► Would the BAs involve a wealth transfer from the United States to other

countries?

► What impact would allowing BAs under a direct tax have, since it differs

from the indirect tax form of most other countries’ value-added taxes

(VATs)?


Estimated change in tax liability from House GOP Blueprint’s border adjustments, select industries

$60 | 1%

$29 | 3%

$28 | 18%

$27 | 4%

$12 | 1%

$9 | 1%

-$3 | *

-$3 | *

-$6 | 5%

-$7 | 12%

-$17 | 4%

-$26 | 9%

Miscellaneous services

Information & utilities

Motor vehicles

Other nondurable goods mfg

Retail & wholesale trade

Ag, construction & mining

Professional services

Other durable goods mfg

Other transportation equipment

Electrical equipment & components

Chemical products

Computers & electronics

Tax change ($B) | Taxes as a share of industry GDP

*Change in tax liability as a share of GDP is less than 0.5%.

Source: US Census Bureau’s USA Trade; US Bureau of Economic Analysis; Ernst & Young LLP analysis.


Interest deductibility

► Some recent tax proposals would eliminate interest

expense deductibility for most non-financial businesses

► House GOP Blueprint would deny deduction for net interest

expense

► Proposal modeled on H.R. 4377, introduced in January 2016 by

House Ways and Means Committee member Devin Nunes (R-CA)

► Financial services companies generally exempted

► Immediate expensing of business investment seen as “a more

beneficial and more neutral substitute” for deductibility of interest

expense, according to House GOP Blueprint

► May resurface in next Congress as part of tax reform

proposals


Tax treatment of carried interest

► President-elect Trump, Secretary Clinton and President

Obama have supported changing the treatment of carried

interest

► Under current law, income or gains from carried interests can be

taxed at capital gains rates (currently 15%)

► Limited partners do not pay self-employment tax on income from

carried interests

► Under several recent proposals, income or gains from carried

interests would generally be taxed at ordinary income rates

► Individual partners would pay self-employment tax on recharacterized

carried interest income

► A carried interest proposal in President Obama’s FY2017

budget would have raised revenue by $19.6 billion over

10 years (Joint Committee on Taxation)


Corporate tax integration in Congress

► Finance Chairman Hatch crafting corporate integration bill

► Attempt to reduce or eliminate double taxation through establishment of a corporate

DPD without statutory reduction in corporate rate

► International tax regime likely would be unchanged

► Corporation would withhold tax on gross amount of dividends paid to

all shareholders

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

► 20% preferential rate for qualified dividends would be repealed

► Corporation would be required to withhold tax, at same rate, on the gross amount

of interest paid to creditors

► Policy rationale

► Address debt/equity imbalance

► Unlock “trapped” offshore earnings

► Attack earnings stripping

► Close gap with pass-throughs


Corporate tax integration – possible methods

Method How it works

Shareholder credit for

corporate tax paid

(imputation credit)

Shareholders include dividend payments in income and

receive a tax credit equal to the corporate-level tax allocable

to the dividend

Shareholder exclusion of

dividends (dividend

exclusion)

Shareholders exclude dividends taxed at the corporate level

from their taxable income. The tax treatment of interest is

unchanged

Comprehensive business

income tax (CBIT)

Shareholders exclude dividends taxed at the corporate level

from their taxable income. The deduction for interest expense

is disallowed, and interest income is excluded from the

taxable income of debt holders (i.e., interest is removed from

the income tax base)

Dividends-paid deduction

(DPD)

Corporations can deduct dividends paid to shareholders, and

shareholders include dividends in gross income subject to

ordinary income tax rates


What federal tax reform may mean for state tax purposes

► Will state conform to any federal tax law changes?

► It depends ...

► States use the Internal Revenue Code as the starting point for

determining state taxable income

► If the Code changes (e.g., base expansion, elimination of deductions,

modifications of credits), the state tax base may change as well

► Conformity dates

► Static (e.g., California, Texas, New Hampshire) = not automatic

► Rolling (e.g., Florida, Illinois, New York) = automatic

► States generally don’t conform to rate reductions

► All states except Vermont must have a balanced budget and must

address the cost of conforming to the federal changes


Agenda



US tax reform3



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ite

d K

ing

dom

Sw

itzerl

and

Sw

ede

n

Kore

a

Isla

mic

Repu

blic

of Ir

an

Austr

ia

Ne

therl

and

s

Indon

esia

Ch

ina

Ca

nad

a

No

rwa

y

Ita

ly

Spain

Me

xic

o

Austr

alia

Nig

eri

a

Germ

any

Japa

n

Belg

ium

Bra

zil

Fra

nce

India

Arg

entina

Un

ite

d S

tate

s

Tax r

ate

Corporate tax rates in the top 30 economies by GDP, 2015

Note: Includes both national and subnational statutory corporate tax rates.

Source: Organisation for Economic Cooperation and Development (OECD), EY Worldwide Corporate Tax Guide. GDP weighting reflects

2015 GDP estimates from the International Monetary Fund (IMF).

GDP-weighted average (excluding US) – 27.1%

Simple average (excluding

US) – 25.6%


Global focus intensifying on companies’ taxes

► Economic and revenue needs driving tax policy

► Increasing focus on compliance and enforcement,

information sharing, transparency, analysis of company

data

► Taxpayers facing greater tax and reputational risk:

► Globally: Political and economic volatility resulting from “Brexit,”

“State aid” investigations, new or strengthened anti-avoidance

rules, data leaks

► OECD BEPS project: continuing implementation at country level

► United States: scrutiny of tax dealings, including mergers and

overseas reincorporations (inversions), regulatory activity, calls for

tax reform


OECD multilateral instrument to modify bilateral tax treaties

► Released Nov. 24 and adopted by approximately 100

countries

► Part of the OECD’s effort to incorporate BEPS measures related to

tax treaties into existing bilateral or regional tax treaties quickly

and consistently

► Will implement minimum standards to counter treaty abuse and

improve dispute resolution mechanisms

► Will allow governments to strengthen their tax treaties with other

measures developed through the BEPS project

► Will be open for signature as of Dec. 31, and will enter into force

after five countries have ratified it

► Signing ceremony to be held in June 2017


EU Anti-Tax Avoidance Directive (ATAD)

► Lays down rules to strengthen the average level of protection against

aggressive tax planning in the internal market

► Objective is to ensure a coordinated implementation of certain BEPS outputs at the

EU level

► The European Commission published the first draft of the ATAD

January 8 as part of its wider EU Anti-Tax Avoidance Package

► Agreement on a final Directive was reached June 20

► Member States must adopt and publish the laws, regulations and administrative

provisions necessary to comply with this directive by December 31, 2018

► An additional year is provided for the implementation of the exit tax provisions

(December 31, 2019)

► Member States that have (equally effective) national targeted rules for preventing

base erosion and profit shifting risks may defer implementation of the ATAD interest

limitation rules, but not until later than January 1, 2024


EU tax reform proposal

► On October 25, the EC released its proposals for a major

corporate tax reform across the EU

► Includes three separate legislative initiatives:

► (i) A two-stage proposal towards a Common Consolidated

Corporate Tax Base (CCCTB)

► (ii) A directive on double taxation dispute resolution mechanisms in

the EU

► (iii) Amendments to the ATAD agreed in June 2016, as regards

hybrid mismatches with non-EU countries


EC proposes public country-by-country (CbC) reporting

► Proposal released April 12 would require companies with annual revenue greater than

€750m to report yearly (on the company’s website and via an official EU register):

► Nature of activities

► Number of employees

► Net turnover

► Profit before tax

► Income tax due in the country and amount of tax paid

► Accumulated earnings

► Reporting is required on country-by-country basis within the EU and for certain (as yet

unidentified) tax haven jurisdictions

► Companies would also provide aggregate figures reporting total taxes paid outside EU

► Rules would apply to EU and non-EU multinational enterprises (MNEs) doing business

in Europe

► The proposal is a change to an accounting directive; thus, it can become law with

support of a qualified majority (in practice, 16 of the 28 Member States)


Appendix


Annual federal budget deficit 2015-2026

Total deficit 2016-2026 = $9.6 trillion

Source: Congressional Budget Office (CBO) Updated Budget Projections 2016 to 2026, August 26, 2016.

$438 B

$590 B $594 B

$520 B

$625 B

$714 B

$806 B

$954 B$988 B $1,000 B

$1,128 B

$1,243 B

$0B

$200B

$400B

$600B

$800B

$1,000B

$1,200B

$1,400B

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Billio

ns o

f n

om

inal

US

do

llars


Spending, interest continue to grow as percent of GDP, while revenue remains flat

Note: Projections for the years 2016 to 2026 are from the CBO’s Updated Budget Projections 2016 to 2026, August 26, 2016. Projections from 2026 to 2040 use

Ernst & Young LLP calculations applied to CBO data from The 2016 Long-Term Budget Outlook, July 12, 2016.

Source: CBO, The 2016 Long-Term Budget Outlook, July 12, 2016, and Updated Budget Projections 2016 to 2026, August 26, 2016

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1975 1985 1995 2005 2015 2025 2040

Net interest

Discretionary and other mandatoryspending

Major health care programs

Social Security

Revenue


0%

5%

10%

15%

20%

25%

30%

35%

1960 1975 1990 2005 2020 2035

Pe

rce

nt

of

GD

P

Deficit

Surplus

Deficit

Surplus

Long-term US fiscal outlook is a major driver for policy

Note: Projections for the years 2016 to 2026 are from the CBO’s Updated Budget Projections 2016 to 2026, August 26, 2016. Projections from 2026 to 2040 use Ernst &

Young LLP calculations applied to CBO data from The 2016 Long-Term Budget Outlook, July12, 2016.

Source: CBO, The 2016 Long-Term Budget Outlook, July 12, 2016, and Updated Budget Projections 2016 to 2026, August 26, 2016

Spending

Revenue

ProjectedHistorical


Corporate taxes as a share of national tax revenue, OECD countries 2012

22.3

0

5

10

15

20

25

30

No

rwa

y

Spain

Japa

n

Kore

a

Un

ite

d S

tate

s

Czech R

epu

blic

Fra

nce

Slo

vak R

epub

lic

Lu

xe

mbo

urg

Ne

w Z

eala

nd

Ca

nad

a

Sw

itzerl

and

Sw

ede

n

Belg

ium

Isra

el

Port

ug

al

Ita

ly

Irela

nd

Un

ite

d K

ing

dom

Turk

ey

De

nm

ark

Austr

ia

Icela

nd

Fin

land

Slo

ven

ia

Esto

nia

Hu

nga

ry

Germ

any

Source: OECD


Tax extenders: extensions through 2016

1. Extend and modify discharge of indebtedness on principal

residence excluded from gross income of individuals

2. Mortgage insurance premiums treated as qualified

residence interest

3. Deduction for qualified tuition, related expenses

4. Indian employment tax credit

5. Railroad track maintenance credit

6. Mine rescue team training credit

7. Qualified zone academy bonds

8. Classification of certain racehorses as three-year property

9. Seven-year recovery period for motorsports entertainment

complexes

10. Extend and modify accelerated depreciation for business

property on an Indian reservation

11. Election to expense mine safety equipment

12. Special expensing rules for certain film and television

productions and live theatrical productions

13. Deduction allowable with respect to income attributable to

domestic production activities in Puerto Rico

14. Empowerment zone tax incentives

15. Increased cover-over of rum excise tax revenues

16. American Samoa economic development credit

17. Two-year moratorium of the ACA medical device excise tax

(sales in calendar year 2016 and 2017)

18. Credit for Section 25C nonbusiness energy property

19. Credit for alternative fuel vehicle refueling property

20. Credit for two-wheeled plug-in electric vehicles

21. Second generation biofuel producer credit

22. Incentives for biodiesel and renewable diesel

23. Credit for Indian coal production facilities

24. Beginning-of-construction date for non-wind-renewable

power facilities eligible to claim the electricity production

credit or investment credit in lieu of the production credit

25. Credit for construction of energy-efficient new homes

26. Special allowance, second generation biofuel plant

property

27. Energy-efficient commercial buildings deduction

28. Special rule for sales or dispositions to implement Federal

Energy Regulatory Commission or state electric

restructuring policy for qualified electric utilities

29. Excise tax credits and outlay payments for alternative fuel,

and excise tax credits for alternative fuel mixtures

30. Alternative motor vehicle credit, qualified fuel cell

motor vehicles


Tax extenders: extensions through 2019

1. New markets tax credit

2. Work opportunity tax credit

3. Bonus depreciation:

a. First-year depreciation for 50% of basis of qualified property placed in

service during 2015, 2016 and 2017; phased down to 40% for 2018

and 30% for 2019

b. Election to accelerate alternative minimum tax (AMT) credit in lieu of

bonus depreciation

c. Special rules for plants bearing fruits, nuts

4. Look-through treatment of payments between related controlled foreign

corporations (CFCs) under foreign personal holding company income

rules

5. Beginning-of-construction date for wind-renewable power facilities eligible

to claim the electricity production credit or investment credit in lieu of the

production credit

6. Extension and phaseout of higher credit rate of solar energy credit

7. Extension and phaseout of credits with respect to residential qualified

solar electric property and qualified solar water-heating property

8. Allow independent refiners to exclude 75% of oil transportation costs from

the calculation of their Section 199 manufacturing deduction


0 600,000 1,200,000 1,800,000 2,400,000 3,000,000

Deductibility of charitable contributions (noneducation, nonhealth)

Defined benefit employer plans

Deductibility of nonbusiness, nonhome State and local taxes

Step-up basis of capital gains at death

Deferral of income from controlled foreign corporations

Defined contribution employer plans

Deductibility of mortgage interest on owner-occupied homes

Capital gains (except agriculture, timber, etc.)

Exclusion of net imputed rental income

Exclusion of employer contributions for medical insurance/care

$693b

$623b

$601b

Top tax expenditures, FY 2016–25 projected revenue effect

$2.74t

$1.18t

$1.06t

$948b

$921b

$853b

$777b

Source: President’s FY 2017 Budget, Analytical Perspectives.

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