This blog is on hiatus until Congress gets back to work on tax policy.
Archive for the ‘International’ Category
Building on the work of the President’s deficit commission, a bipartisan group of six U.S. Senators is reported to be working on legislation that could force mandatory changes to the tax code, limiting tax expenditures such as the mortgage-interest deduction. The group would divide the task of deficit control into four categories: tax, discretionary spending, Medicare/aid and other entitlements, and Social Security, each with its own spending caps.
As part of its overall scheme, the group’s proposal would order the House and Senate tax writing committees to overhaul the tax code – - eliminating deductions and lowering rates – - and to report legislation to the House and Senate to raise a target amount of revenue within two years.
If Congress failed to meet the target for new revenue, the budget group’s legislation would require a mandatory across-the-board limitations on all tax deductions. Under the existing outline of a plan, this would affect everything from the deduction for losses due to theft, to the state and local tax deduction, to the exclusion for employer-provided healthcare that was a battle ground in last year’s healthcare debate.
The current members of the group include Senators Tom Coburn, Mike Crapo, and Saxby Chambliss on the Republican side. On the Democratic side: Senators Richard Durbin, Kent Conrad, and Mark Warner. They represent a diverse group of states and only two sit on the Budget Committee. Three serve on Finance.
The White House is said to be supportive of the gang’s efforts and other Senators are taking it seriously. Reportedly, Senator Schumer asked the White House not to support of any deficit reduction plan that would affect Social Security in a meeting at the White House on Wednesday.
In an article today, the New York Times published the results of a study it commissioned on the total tax paid by S&P 500 companies over the past 5 years. According to the article, the average total tax rate for these companies was 32.8%, including federal, state, local, and foreign corporate taxes. Nearly a quarter of the S&P 500 (115 firms) paid less than 20% of corporate income to all levels of the U.S. and foreign governments, and the article singles out a few firms with lower rates.
The article implicitly criticizes the place of incorporation rule, suggesting that Carnival (incorporated in Panama) should be treated as a U.S. corporation, because “its executives sit in Miami” and “many passengers board in Baltimore, Los Angeles, Miami, New York, and Seattle.”
Forestalling income tax evasion through the use of foreign financial assets and accounts is a high priority for the Obama administration as well as for the House and the Senate. The administration’s recently released ”Green Book” revenue proposals for fiscal year 2011 and the 2009 Foreign Account Tax Compliance Act (FATCA) share the same approach to curtailing offshore abuse. Each enhances existing foreign asset disclosure laws with a combination of additional information reporting requirements and a strengthened penalty scheme for non-compliance.
Central to both the Green Book proposal and FATCA are the following provisions:
Disclosure with the tax return: An individual who has interests in foreign financial accounts, foreign entities, financial instruments, or contracts held for investment must submit an information return as part of his or her income tax return when the aggregate value of those interests is $50,000 or more at any point during the taxable year. If the taxpayer fails to supply information to determine the combined value of the accounts, FATCA creates a presumption that the $50,000 threshold is met. While each authorizes a $10,000 penalty for failure to disclose, FATCA allows for an additional $10,000 fine for each 30-day period (or portion thereof) that the information remains outstanding following notification to the taxpayer by the Secretary and an initial grace period of 90 days. Whereas FATCA specifically states that the reasonable cause exception to the penalty does not include civil or criminal sanctions that might be imposed by a foreign jurisdiction for providing the very information demanded, the Green Book says only that the Secretary is authorized to coordinate the section with other information return requirements.
Penalty for Underpayment Attributable to Undisclosed Foreign Financial Assets: The Green Book and FATCA each change existing law by tying the failure to satisfy information reporting requirements to the precise amount of the penalty imposed for the underpayment of tax. Both double the 20-percent accuracy-related penalty to 40-percent. Again, while FATCA is clear that the reasonable cause exception excludes foreign civil or criminal sanctions, the Green Book refers to “current law.’
Extend Statute of Limitations for Significant Omission of Income Attributable to Foreign Financial Assets: The statute of limitations, which is extended to six years under both FATCA and the Green Book when the understatement is greater than $5,000, begins to run only when all of the foreign financial asset reports required have been filed.
Qualified Intermediary Program and Withholding - – Both FATCA and the Green Book make substantial changes to the existing Qualified Intermediary program and withholding rules that will be discussed in a subsequent post.
The comprehensive health care bill (H.R. 3962) that narrowly cleared the House on Saturday, Nov. 7th contains a number of significant tax provisions. In order of size, the provisions scored solely by the Joint Committee on Taxation are as follows:
- AGI Surtax – - For the first time, the House has passed a tax on Adjusted Gross Income. The tax is 5.4% and kicks in at $500k for single taxpayers and $1m for joint filers. It would apply to capital gains, effectively creating a new 25.4% bracket for gains when the taxpayer’s AGI exceeds the relevant threshold. No credits are allowed against the tax, and it is not taken into account in calculating AMT. Because the 500k/1m thresholds are not adjusted for inflation, the surtax raises more money every year. The surtax would go into effect on 1/1/2011. According to JCT, total federal revenue from the surtax will amount to $460.5 billion during the first 9 years (from 2011 to 2019).
- Narrow Biofuels Credit to Exclude “Black Liquor” – - $23.9 billion over 10.
- Tax on Sale of Medical Devices – - Effective 1/1/2013, the House bill would impose a federal excise tax of 2.5% on the first sale of medical devices to a taxable or tax-exempt organization. A medical device is defined by reference to the Federal Food, Drug, and Cosmetic Act. The new excise tax is estimated to raise $20 billion over 10 years.
- Information Reporting on Payments to Corporations – - $17.1 billion over 10.
- Limit FSAs to $2,500, indexed for inflation – - $13.3 billion over 10.
- Limitation on Treaty Benefits for Deductible Payments – - $7.5 billion over 10.
- Repeal Implementation of Worldwide Interest Allocation – - $6 billion over 10.
- Codification of Economic Substance Doctrine – - $5.7 billion over 10.
- Conform Definition of Medical Expense for Various Code Provisions – - $5 billion over 10.
- No Deduction for Certain Presription Drug Expenses – - $2.2 billion over 10.
- 20% Penalty for Nonqualified Distributions from HSAs – - $1.3 billion over 10.
In addition the tax provisions estimated by JCT alone, there are a few significant health-specific revenue raising provisions estimated by CBO and JCT together. These include, the “Tax on Individuals Without Acceptable Health Care Coverage” (a/k/a the Individual Mandate) and the employer mandate: a payroll surtax on employers electing not to provide health care coverage to employees.
Ever since Chairman Rangel introduced his Mother Bill companies that would be affected by the proposal to expand the current taxation of earnings and profits overseas have been concerned. As today’s article by Jesse Drucker in the Wall Street Journal illustrates, U.S. companies with substantial overseas earnings – - particularly those in IP-intensive industries – - are working vigorously to stop the proposal and keep it out of the Obama Administration’s official budget. The Budget is now rumored to be on track for release in May, and the roughly $210 billion raised by the proposal and other unspecified changes to international tax law and enforcement practice will be difficult to replace. The extremely poor budget environment doesn’t help either.