The House speaker's senior tax counsel on January 7 dampened hopes for significant tax law changes in 2016, pointing to limited legislative opportunities to achieve them.
"In my mind, the next must-pass legislation that has a tax portion of any significance, and it's a relatively minor portion," is reauthorization of the Federal Aviation Administration, which expires at the end of March, said George Callas, senior tax counsel for House Speaker Paul D. Ryan, R-Wis. "Usually in things like that, you stick to the theme -- so you're not talking about international tax reform attached to FAA reauthorization."
Speaking on a webcast sponsored by PwC, Callas acknowledged that there is interest in passing some international tax reforms given the corporate inversions problem. "More household names are inverting, and it's creating a lot of political pressure to actually do something there, so you could see something like that possibly happening," he said. "There's a lot of angst" about inversions, the base erosion and profit-shifting project, and foreign acquisitions of U.S. companies -- "especially in industries like biopharma where companies get gobbled up even when they're not inversions," he said.
Ryan himself has avoided specific discussion of the tax reform agenda so far this year. At his weekly press conference January 7, Ryan said 2016 would be the year that Republicans would go on the offense on ideas, but when asked whether that includes any votes on tax reform plans, he said only that "everything is an option."
Some congressional leaders, including House Ways and Means Committee Chair Kevin Brady, R-Texas, have expressed an intention to focus on international tax reform this year after the major year-end tax extenders bill, enacted December 18, helped stabilize the tax code, laying the groundwork for a broader tax overhaul. (Prior coverage 2015 TNT 244-4: News Stories.)
In a December interview with Tax Analysts, Brady said he wants the Ways and Means Committee to start looking at ways to pass an international tax reform package or provide incentives to companies that would bring back innovation to the United States. In doing so, he said he wants to use the innovation box draft 2015 TNT 146-22: Proposed Legislationreleased by committee members Charles W. Boustany Jr., R-La., and Richard Neal, D-Mass., as well as the work done by the international working group in the Senate as the framework for an international tax reform plan. (Prior coverage 2015 TNT 245-1: News Stories.)
On the webcast, Callas warned that one-off proposals giving U.S. multinationals a lower tax rate for voluntarily bringing offshore earnings home stand little chance of success. A one-year repatriation holiday is "problematic because it scores as a substantial revenue loss," he said. "The most recent score I saw was over $100 billion over 10 years . . . and while I can't argue with whether the number that [the Joint Committee on Taxation] comes back with is right, I think directionally it's right."
Callas said a repatriation holiday without base erosion protections would create opportunities for arbitrage -- borrowing, deducting interest, and generating exempt income. "It is really hard to do a holiday without, number one, creating a big revenue problem and, number two, creating a perverse incentive with regard to the migration of intangibles," he added.
When it comes to deemed or mandatory repatriation, Callas said, the Ways and Means Committee has historically supported proposals only when they are part of a broader international tax reform that replaces the United States' system of worldwide taxation plus deferral with an exemption system. "Other folks have tried to use it as a money grab and the committee has always opposed that," Callas said, noting prior opposition from Ryan and from, he's "pretty sure," Brady.
As for extenders, Callas said that time would tell whether there is pressure to renew them. "I don't necessarily know that there will be because you can kind of wait until 2017 to deal with the extenders that expire at the end of 2016, so it is hard to see any action forcing tax items out there that other things could be attached to," he said. "It would really have to be organic."
Industry stakeholders have also shown pessimism about international tax reform in 2016. Catherine Schultz, vice president of tax policy at the National Foreign Trade Council, said January 7 at her organization's annual economic outlook luncheon that reform will be difficult to achieve during the 2016 elections in large part because of concerns over the taxation of passthrough entities.
"If you just do corporate tax reform, it's very hard for members to go back to their constituents to say, 'We gave tax credits to large multinational corporations but nothing for you -- the voters,'" she said.
Even if lawmakers pursue an international tax reform package without lowering the current corporate rate of 35 percent, such a plan would receive little fanfare from companies, Schultz said. "If you don't have the corporate rate lowered below the 35 percent rate and to pay for some of the other changes -- you do deemed repatriation or do minimum tax -- you're actually going to raise the tax rates of companies initially," she said.
To achieve corporate tax reform properly, lawmakers must pursue comprehensive tax reform, she continued, otherwise "you're not going to be able to lower the rate and [you will lose] some of the benefits."