United States: Tax Policy Update - June 16, 2015

NUMBER OF THE WEEK: 15. The number of member nations now under increased scrutiny from European Union regulators who are aggressively hunting for violations of the EU's "state aid" rules. The possible violations arise from favorable tax agreements between the scrutinized nations and multinational corporations. Luxembourg, Ireland, and the Netherlands occupied the headlines in 2014 for their tax agreements with major companies — including some heavy-hitter U.S. firms. But the EU's tax dragnet is expanding, with demands for more in-depth details on tax arrangements now directed at Germany, France, and Italy, among others. If the European Commission finds a company's tax arrangement violates state aid rules, the company could be forced to pay back past tax benefits it received. These tax probes are swelling against the backdrop of the ongoing OECD Base Erosion and Profit Shifting (BEPS) project, which aims to develop a broad set of multi-lateral tax avoidance policies and unprecedented information sharing among member nations. Read more in our Legislative Landscape section.

LEGISLATIVE LANDSCAPE

OECD Does D.C. The Organization for Economic Cooperation and Development (OECD) and its BEPS project dominated the tax policy conversations in Washington last week. Senior tax officials from the U.S. and other major countries, as well as key representatives from the OECD's Center for Tax Policy and Administration, convened for the 2015 OECD International Tax Conference.

Panelists spoke on the various action items established under the BEPS project, including interest deductibility, transfer pricing issues, preventing treaty abuse, controlled foreign corporation rules, and dispute resolution.

The conference kicked off with Bob Stack, the deputy assistant Treasury secretary for international tax policy, expressing some serious concerns for the BEPS program and its progress. While other tax officials talked about the various areas of consensus and general approval on the emerging BEPS recommendations, Stack posed question after question about a lack of clarity in the rules, the force behind the rules and whether the final set of recommendations, due at the end of this year, will really serve as a model for the G20.

Despite the lack of consensus on many action items, Stack did express support for the Country-by-Country (CbC) reporting requirement, which would require multinationals to file detailed tax information in every country where they do business. But House Ways and Means Chairman Paul Ryan (R-WI) and Senate Finance Chairman Orrin Hatch (R-UT) are skeptical, and they urged Treasury Secretary Jack Lew in a June 9 letter to work closely with Congress on the BEPS project, so that "we reach good outcomes for the United States and U.S. companies and provide an atmosphere within which we can continue to work towards U.S. tax reform."

Sen. Whitehouse Proposes Carbon Tax. Senator Sheldon Whitehouse (D-RI), along with Senator Brian Schatz (D-HI), introduced legislation aimed to reduce carbon emissions by 40 percent by 2025 (based on 2005 levels). According to the draft text of the American Opportunity Carbon Fee Act of 2015, the bill would impose a tax on greenhouse gas emissions from both fossil fuel and non-fossil fuel sources. The carbon tax would be set at $45 per metric ton beginning in 2016 and would increase by 2 percent in each subsequent year. In addition to carbon emissions, the bill would also assess a fee on methane emissions associated with the extraction of coal, petroleum products, and natural gas, requiring the secretary of the Treasury to work with the EPA and EIA administrators to collect the necessary data on such emissions.

The bill, which, according to the Joint Committee on Taxation, would raise a little over $2 trillion, has little-to-no chance of progressing in a Republican-dominated Congress, despite the fact that it aims to use the revenue raised to lower the corporate tax rate to 29 percent, among other things.

Online Sales Tax Bill. Congressman Jason Chaffetz (R-UT) yesterday proposed a revamped version of his earlier Remote Transactions Parity Act. The bill, which is fairly similar in form to the Senate's Marketplace Fairness Act (S.698), would enable states to direct online retailers to collect sales tax based on where the consumer lives. In the world of online taxation, this is known as a "destination-based" approach, and it has the support of major retailers such as Best Buy, Amazon, and Target. Critics of the destination-based approach often point to the enormous compliance cost, which would disadvantage small online sellers. They also question the authority of states to compel retailers that operate beyond their jurisdictions. Under current law, a retailer is subject to a state's sales tax obligation only if the retailer has a physical presence in that state. Opponents of Chaffetz's legislation would prefer the adoption of an "origin-based" approach, where sellers would calculate the sales tax based on where they primarily do business. House Judiciary Chairman Bob Goodlatte (R-VA) has circulated a draft plan based on a modified origin-based approach that would redirect a portion of the sales tax back to the buyer's home state.

In Vino Veritas...et Tax Cuts. Senate Finance Committee ranking member Ron Wyden (D-OR) poured a perfect pint for craft brewers, vintners, distillers and cider makers with his introduction of the Craft Beverage Modernization and Tax Reform Act of 2015 — a bill aimed at reducing federal excise taxes and reducing compliance burdens on those who maker smaller batches of alcoholic libations. The legislation combines several proposals that have been previously introduced to deliver tax relief across industry groups. Specifically, the bill would cut in half the $7 per barrel excise tax on brewers that produce less than 2 million per year; modify the definition of hard cider; provide tax credits for small wine producers; and increase the alcohol content threshold for certain wines. In addition, Wyden's bill would reduce compliance burdens for craft beverage producers by exempting nearly 90 percent of all industry members from complex bonding and bi-weekly tax filing requirements. Industry groups such as the Brewer's Association, the Beer Institute, U.S. Association of Cider Makers, among others, have already expressed their support of the legislation. For a section-by-section summary of the bill, click here.

REGULATORY WORLD

Continuous Audits Are Being Discontinued. Due to budget constraints, the IRS will be ending its continuous audit program, said Douglas O'Donnell, the deputy commissioner of the IRS' Large Business and International (LB&I) division. The shift is away from examining domestic multinational companies based on size and towards examining companies based on "risk." Areas of interest to the LB&I include transfer pricing arrangements, research & development tax credits, and depreciation. The end of the continuous audit program brings less scrutiny to companies, but more uncertainty as to how "risk" will be assessed.

LOOKING AHEAD

Congressional Activity

Wednesday, 6/17

Thursday, 6/18

Other Activity

Wednesday, 6/17

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