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Brady Says International Tax Changes May Need Transition

Posted on December 8, 2017 by Stephen K. Cooper, Dylan F. Moroses

International tax changes in the Tax Cuts and Jobs Act could be phased in to allow corporations time to adjust to the new law, House Ways and Means Committee Chair Kevin Brady, R-Texas, told reporters December 7.

Brady said lawmakers on the tax reform bill’s conference committee, which he will chair, will work to address the complex international tax provisions in the tax bill, noting that some industries have asked for a transition period to provide more certainty. “Most of the requests have been very fair,” Brady added, but declined to be more specific, saying only that he planned to meet with Senate lawmakers to compare notes.

The House and Senate tax bills differ in their handling of base erosion and other international tax provisions. The House bill would impose a tax on 50 percent of the excess over routine returns earned by the U.S. parent of foreign subsidiaries. Interest expense would be limited to 110 percent of a U.S. corporation’s share of its global group’s earnings before interest, taxes, depreciation, and amortization. A 20 percent excise tax would be applied to some non-interest payments made by a U.S. corporation to a related foreign corporation.

Meanwhile, the Senate bill requires shareholders of controlled foreign corporations to determine their global intangible low-taxed income and include it in gross income. The Senate bill would make a portion of foreign-derived intangible income eligible for deduction. The Senate bill also would impose a 10 percent minimum tax on base-eroding payments to foreign parent companies. (Side-by-side comparison of the GOP tax plans.)

Brady restated his preference for keeping the corporate tax rate at 20 percent in the tax bill, saying the rate would allow American businesses to be more internationally competitive and bring more jobs to the United States from overseas. He said the lower rate would be better than the 22 percent rate some lawmakers and the White House have suggested or the 35 percent rate in current law. However, Brady predicted that other countries would their lower rates or make design changes to their tax laws to compete with the United States.

Brady said the Senate’s corporate and individual alternative minimum tax provisions would undermine the economic growth aspect of tax reform and that the House will seek to remove it in conference. The House bill repeals both the individual and corporate AMTs, while the Senate plan retains both and raises the individual AMT exemptions.

He also promised that taxwriters would be looking at the code in 2018 for another round of changes in areas that lawmakers were unable to address in the House tax bill. He was not specific on which provisions need more work and might be included in future legislation.

Tax Bill Timing

Brady said GOP lawmakers were working on a “deliberate timetable” to complete the upcoming tax bill conference within the coming weeks to ensure it reaches President Trump’s desk by the end of the month.

One House GOP staffer told Tax Analysts that a conference report on the Tax Cuts and Jobs Act could surface early the week of December 11 and be considered first by the Senate to ensure it passes reconciliation rules. The House could then vote on the bill as passed by the Senate as early as the end of that week, the staffer said.

House Majority Leader Kevin McCarthy, R-Calif., said on the House floor that the bill is unlikely to come to the floor the week of December 11. However, McCarthy told House Democratic Whip Steny H. Hoyer of Maryland that he could bring the bill up for a floor vote immediately after the conference committee completes its work.

Congressional lawmakers will likely be working on an omnibus spending bill the week of December 18, in time to keep the federal government from closing on December 22 when the latest short-term funding bill expires.

Meanwhile, Senate Minority Leader Charles E. Schumer, D-N.Y., named eight lawmakers to the conference committee December 7, including Senate Budget Committee ranking minority member Bernie Sanders, I-Vt., and Senate Finance Committee ranking minority member Ron Wyden, D-Ore. Also named were Budget Committee member Patty Murray, D-Wash., and four Democratic taxwriters, including Sens. Maria Cantwell of Washington, Debbie Stabenow of Michigan, Robert Menendez of New Jersey, and Thomas R. Carper of Delaware.

Democratic conferees sent a December 7 letter asking Treasury Secretary Steven Mnuchin to provide an economic analysis of the tax bill. In the letter, Ways and Means member Lloyd Doggett, D-Texas, said the Treasury analysis does not exist, and he quoted an anonymous economist from the Office of Tax Analysis who said no analysis is underway as Mnuchin has claimed.

The Blue Dog Coalition of House Democrats sent Mnuchin a similar request a day earlier when Wyden also asked Treasury’s inspector general to widen his review into potential internal interference with tax research.

Passthrough, Estate Tax Changes

A group of Republican lawmakers are pushing for the tax reform bill to include trusts in its passthrough treatment.

“The Senate-passed tax reform bill contains a provision that excludes trust shareholders from using the 23 percent pass-through deduction, creating a system that arbitrarily favors one business over another,” a group of 13 House and Senate lawmakers including Sens. James M. Inhofe of Oklahoma, Ron Johnson of Wisconsin, and James Lankford of Oklahoma wrote in a December 7 letter, adding, “Without access to the pass-through rate, small and family-owned business with shares held in trusts would face a tax treatment that puts them at a significant disadvantage compared to their counterparts.”

The Senate plan initially called for a 17.4 percent deduction on domestic qualified business income for passthrough entities, but that deduction was increased to 23 percent before passage on the Senate floor early December 2. Observers told Tax Analysts before the change that the Senate’s plan could be easier to administer. 

A second letter with over 50 House Republican signers, including Republican Study Committee Chair Mark Walker and House Freedom Caucus Chair Mark Meadows, both of North Carolina, urged leadership and the conferees to adopt the House's approach to the estate tax, which would double the exemption from the tax and eliminate it beginning in 2025.

"We urge you to seek an agreement in conference that achieves repeal of the hated and economically destructive death tax," the letter reads. Ways and Means member Jason Smith, R-Mo., signed on to the letter.

Brady defended the elimination of the estate tax in the House bill, promising to fight for the House position in conference with the Senate.

Healthcare Alarm

Several Senate Finance Committee Democrats are already raising concerns about the effect the Tax Cuts and Jobs Act will have on the nation’s healthcare system and entitlements.

The Senate tax bill would repeal the Affordable Care Act’s individual mandate, and it seems increasingly likely the repeal will remain in the final bill. An analysis updated in Novemberby the Congressional Budget Office estimates that 13 million people would be at risk of losing their health insurance by 2028 as a result of repealing the mandate.

Wyden also told reporters the $1.5 trillion increase to the deficit as a result of the Republican tax bill would force massive mandatory spending cuts to programs like Medicaid, Medicare, and Social Security.

Asha Glover contributed to this article.

Follow Stephen K. Cooper (@ScoopOnTaxes) and Dylan F. Moroses (@DMoroses3244) on Twitter for real-time updates.