Jan 24, 2017

Tax Policy Update


The estimated impact of Trump’s tax plan on the federal deficit according to an analysis by the Tax Policy Center (TPC). At his confirmation hearing last week, Steven Mnuchin, Trump’s pick for the Treasury secretary post, faced questions regarding the budgetary impact of the administration’s tax proposals. Sen. Mike Bennet (D-CO) cited the TPC’s $7-trillion figure and asked the nominee whether such a sum was acceptable. Mnuchin explained that the use of dynamic scoring will ultimately provide a more accurate picture on the economic impacts of Trump’s tax plan.

In addition to tax policy, Mnuchin fielded a broad range of questions at the five-hour hearing, sharing his views on potential reforms at the Internal Revenue Service, the renegotiation of existing trade deals, and changes to the Dodd-Frank Act. Check out the section below for a list of key takeaways from the hearing.


Mnuchin Takes the Hot Seat. Last Thursday, the Senate Finance Committee held a confirmation hearing on the nomination of Steven Mnuchin to be the secretary of the Treasury. Democrats on the panel had some tough questions and harsh words for the nominee, particularly in light of his failure to provide complete information on all of his business holdings in his financial disclosure reports to the committee.

Republicans on the panel roundly praised the Trump Administration’s focus on pro-growth economic policies. Throughout the Q&A portion of the hearing, Mnuchin restated his commitment to simplify the tax code and rewrite it so that American businesses can compete globally. For Mnuchin, making America competitive means lowering tax rates and eliminating most of the deductions in the code. Below are Mnuchin’s thoughts on other tax-related topics:

  • On Repatriation. Mnuchin stated that the administration is very interested in repatriating the profits currently parked overseas. According to Mnuchin, Trump, himself, believes the administration can bring back about $3 trillion. The Trump plan would impose a one-time repatriation tax of 10 percent—revenue from repatriation would then be reinvested in the United States to create jobs.
  • On Passthroughs . Mnuchin said that he is committed to making sure passthrough entities are treated fairly. But at the same time, Mnuchin wants to make sure that large passthroughs and hedge funds will not game the system to avoid paying taxes.
  • On the Production Tax Credit. Sen. Grassley raised the issue of the production tax credit, and Mnuchin agreed that as part of tax reform, there should be a plan for phasing out the credit.
  • On the Border Adjustment Tax. The only reference to the House GOP’s border adjustment tax proposal came when Ranking Member Ron Wyden asked which specific products would be subject to this “35 percent tax.” Mnuchin explained that Trump recently expressed some concerns with the border adjustment tax and noted that Trump has never suggested a 35 percent “border tax.” According to Mnuchin, Trump believes that companies that move jobs abroad should face some sort of repercussion.

On the other side of the aisle, Democrats are worried that Trump’s business tax reform plan will end up neglecting the middle class and add to the national debt. Ranking Member Ron Wyden repeatedly accused Mnuchin of going back on his promise to not give the wealthy an absolute tax cut. Wyden also questioned Mnuchin’s qualifications when the nominee failed to provide details on how he would deal with Medicare and the Earned Income Tax Credit.

When Democrats pressed the nominee to give some examples on what tax relief for the middle class would entail, Mnuchin struggled to cite examples of possible cuts. Democrats also took turns to criticize Mnuchin’s offshore holdings, some of which he did not disclose to the committee. Mnuchin stated that he did not use these entities to avoid paying personal taxes, adding that such offshore activities are reasons why the tax code needs to be simplified.

The Senate Finance Committee has not yet announced when it will hold a vote on Mnuchin’s nomination. In the interim, former Acting Undersecretary for Terrorism and Financial Intelligence Adam Szubin has assumed the role of acting secretary at the Department of the Treasury.

Mnuchin Signals Support for Staff Increase at IRS. At his confirmation hearing, Mnuchin spent a fair amount of time citing ways he would like to reform the tax collection agency, expressing concerns with the IRS’s inadequate staffing and poor technology infrastructure. Mnuchin believes that the agency needs to improve its customer service, cybersecurity, and technologies. For Mnuchin, good customer service means that the IRS should have the technology to allow taxpayers to interact or communicate with the agency electronically. Most importantly, the agency should have the right tools to protect taxpayers’ data from cyberattacks.

The Trump Variable to the GOP Constant. Since winning the presidential election, Donald Trump has been a wildcard for the GOP establishment. Within the span of a week, Trump went from criticizing the House GOP’s border adjustment tax to confirming that some sort of border tax will definitely be imposed on those who ship jobs overseas.

"If you go to another country and you decide that you're going to close and get rid of 2,000 people or 5,000 people ... we are going to be imposing a very major border tax on the product when it comes in," Trump said.

Trump is yet to release concrete details on his ideas for a border adjustment tax. In December last year, he tweeted out plans to impose a 35 percent import tariff on the sale of goods back into the U.S. as a punitive measure against companies that ship jobs overseas.

Though Trump’s plan differs significantly from that of the House GOP, Ways and Means Committee Chairman Kevin Brady seems confident that Trump will come around. Brady noted that the Trump team is currently diving into the tax reform plan and the “big, revolutionary” proposed changes that will “get us back in the game.”

Despite differences in their approach to the issue, both Trump and the House GOP seem to be on the same page on one thing: making products in the U.S. Recently, in a speech before business leaders visiting the White House, Trump noted that there “will be advantages to companies that do indeed make their products here.”

Both Trump and the GOP are eager for some version of a border adjustment tax and moving to a territorial system because it reduces incentives for corporations to move their operations abroad. It also eliminates the need for Congress to curb base erosion and profit shifting via legislation.

As the GOP ramps up to sell tax reform and the border adjustment tax outside the Beltway, the backlash against these proposals has already started. Amongst large retailers that may be negatively affected are Best Buy, Gap, Levi Strauss, and Target. Additionally, the conservative Koch Brothers have publicly opposed the tax, throwing another wrench into GOP plans for reform.

As the debate continues, the GOP is also mindful that its border adjustment tax may run afoul of World Trade Organization rules. In order to avoid this, experts suggest a tax that closely mirrors a value-added tax (VAT).

For a border adjustment tax to comply with WTO guidelines, it must be structured correctly – preferably as a VAT with a wage credit. Under these circumstances, it is likely that a border adjustment tax would withstand WTO scrutiny. However, the current GOP tax plan skirts a gray line, since it contains elements that differentiate it from a VAT. Until now the GOP has been reluctant to use the term “VAT,” fearful that people will see it as a new tax, rather than a completely new system. It remains to be seen whether they might change their tune in order to gain approval from the international community.

Trump Presses ACA’s Self-Destruct Button. The Trump Administration recently issued an executive order giving the Department of Health and Human Services (HHS), the IRS and other agencies the authority to dismantle the Affordable Care Act to the fullest extent permitted by the law – effectively gutting the law from within.

When the Obama Administration enacted the healthcare law, it relied heavily on guidance from agencies like the HHS to implement it. While this gave the administration wide latitude and control over key decisions, it is now the law’s Achilles Heel. The Trump Administration now has the same power to reverse every decision made at the executive level to start weakening the law, without any Congressional action.

Unfortunately, for proponents of the ACA, some of the cornerstones of the law were enacted through federal regulation. For example, the Trump Administration could stop subsidizing health care costs such as co-pays and deductibles for ACA participants under a certain income threshold. A decision to discontinue these payments would essentially cause health insurers to flee the exchanges or significantly increase premiums, making them unaffordable for many Americans. Essentially, the decisions made by federal agencies may cause the health care law to implode, leaving millions uninsured before Republicans have a replacement plan.

Speaking of which – Sens. Susan Collins (R-ME) and Bill Cassidy (R-LA) announced that they have worked out a compromise plan that will provide more Americans with coverage than the ACA, at no additional cost.

The Cassidy-Collins plan gives states three options: (1) maintain the status quo under the ACA; (2) reject federal assistance; (3) or transition to a new system that will automatically enroll certain individuals in a high-deductible health plan (HDHP) linked to a health savings account (HSA). While the two senators are yet to release more specifics, their proposal would keep the ACA’s taxes in place to pay for a replacement and waiting until 2020 to transition into the new system.

Democrats are wary of the proposal on the grounds that it may not allow those currently covered by the ACA to maintain their health insurance plans at current rates. Senator Chuck Schumer stated that the plan was far from the full replacement plan Republicans have been promising for years.

The plan is likely to be a difficult sell to Republicans as well, who want to repeal and replace the ACA as soon as possible. Additionally, according to the latest reports, the GOP has not decided on whether to maintain all ACA taxes. But based on chatter picked up by McGuireWoods’ tax policy team, the Cadillac tax will likely remain intact.

Cabinet Nominees to Get Their Hands Stamped. Senate committees are voting on several cabinet nominees this week, paving the way for confirmation votes on the Senate floor. Committees are expected to vote on the following nominees:

  • Sen. Jeff Sessions  nominee to be the U.S. attorney general
  • Dr. Ben Carson, nominee to be the HUD secretary [approved Jan. 24]
  • Elaine Chao, nominee to be the Transportation secretary [approved Jan. 24]
  • Wilbur Ross, nominee to be the Commerce secretary [approved Jan. 24]
  • Rex Tillerson, nominee to be the secretary of State [approved Jan. 23]


Trump as Mr. Freeze. After the festivities on Inauguration Day, the Trump Administration moved quickly to put a halt to the current regulatory agenda. In a memo to all federal departments and agencies, the administration called for an “immediate regulatory freeze” in order to give the new administration some time to review existing regulations. Regulations that have not yet taken effect will have their implementation dates delayed for 60 days. This means that the Master Limited Partnership guidance, earnings stripping guidance, and other recently-released tax rules will be caught in the cross-hairs of the Trump Administration’s new regulatory freeze. A copy of the memoranda has not yet been posted on the new White House website. See the memo here.

Q&A With Cordray. Consumer Financial Protection Bureau Director Richard Cordray sat down with the Wall Street Journal today for a Q&A session. Cordray faced tough questions about the future of the agency and his interpretation of President Trump’s executive order to freeze new or pending regulations. While the director mostly reiterated that he could not answer hypothetical questions, he did emphasize that the bureau is an independent agency that has been directed by Congress to enforce certain regulations and protect the interests of consumers. Cordray cited to statistics that the CFPB has made $12 billion available to 27 million consumers and that regardless of who holds power, the bureau will continue its mission. With regards to the regulatory freeze, Cordray stated that the bureau is still digesting these orders and trying to address them. He added that the agency will continue to regulate the markets in an even-handed manner as mandated by Congress.

Cordray was also asked about his response to the House GOP’s plans to change the structure of the agency and subject it to the congressional appropriations process. Cordray replied that neither he nor the CFPB have the power to dictate structure of the agency; only Congress has that power. Cordray promised to comply with any legislation changing the structure of the agency. Corday also added that in his opinion, there is considerable congressional oversight over the agency. He highlighted the fact that he has testified before Congress over 10 times, complied with numerous document requests, and always implemented the recommendations set forth in various GAO and Inspector General reports.

When asked about the bureau’s most important initiatives for 2017, Cordray said that the CFPB will continue to monitor the Wells Fargo scandal, noting that the incident illustrated the importance of monitoring performance incentive programs. Cordray added that the CFPB’s enforcement and supervisory role is key to all its 2017 initiatives.

U.S. Releases Voluntary Country-By-Country Reporting Rules. On Jan. 19, the IRS released Revenue Procedure 2017-23, allowing the parent companies of multinational enterprise groups the power to decide whether they will voluntarily file country-by-country reports. The guidance provides instructions for parent companies on how to file CBC reports if they are required to comply with the rules of the U.S. and a foreign country with an earlier effective date. The U.S. expects other countries to accept this voluntary regime, despite threats from the European Union to blacklist the U.S. for its failure to comply with CBC reporting set forth by the Organization for Economic Cooperation and Development in its action plan on Base Erosion and Profit Shifting (BEPS). CBC reporting requires multinational entities to disclose certain tax information in each jurisdiction where they conduct operations.


President Trump’s two simple rules for his pro-growth economic agenda:


  1. In a letter to the House and Senate tax-writing committees, Sens. Marco Rubio (R-FL) and Mike Lee (R-UT) said they oppose any child-care tax proposal that might “privilege wealthier families” or discriminate against parents who choose to stay at home. The statement is in response to the child-care deduction proposed under Trump tax plan.
  2. As the Treasury Department finalizes its estate tax valuation discount rules, it may consider exempting closely held businesses, according to Catherine V. Hughes, an estate and gift tax attorney-adviser in the Office of Tax Policy. Hughes notes that the exemption that the department is considering “would make most of the objections to these proposed regulations go away.” The department’s revision of the proposed rules comes after members of Congress criticized the regulations as being overly broad during a hearing in December. The release of the final regulations will of course be stalled by Donald Trump’s regulatory freeze. Hughes expressed hope that the department will be allowed to continue its comment process so that they can work out some of the remaining issues before the release of final regulations.
  3. On Jan. 19, the IRS published T.D. 9815, final and temporary regulations on dividend equivalents that clarify the obligations of nonresident aliens and foreign corporations that hold certain financial products. The agency notes that the final rules reflect comments from the industry, including provisions about the substantial equivalence test.
  4. On Sunday, Kellyanne Conway, White House counselor, admitted that President Trump is unlikely to release his tax returns, even after audits are complete. "We litigated this all through the election. People didn't care," Conway said. A White House petition seeking to make Trump's returns public already has over a 100,000 signatures — the threshold required for a comment from the White House.
  5. Fun fact — if you want a hefty discount on the new Bentley you’ve been eyeing, look no further than Montana. The state has a law that allows people to set up a limited liability company in the state in order to make a purchase, without paying sales tax in their home state. The Montana Secretary of State’s Office even provides a list of contacts for people seeking to use this tax planning strategy. Of course, other states have caught on -- California and a handful of other states have passed laws that retaliate against Montana LLCs that were set up purely for tax avoidance purposes.
  6. Former Saturday Night Live Star, Joe Piscopo, plans to give Gov. Chris Christie a run for his money by running to replace him as governor. Piscopo has come out with a revolutionary new tax plan to help make his bid competitive – it includes a plan to eliminate the income tax for firefighters, police officers, and teachers.
  7. The IRS extended its deadline to claim the health coverage tax credit for people who lost their jobs due to free trade agreements. In Notice 2017-16, the agency said that taxpayers who are eligible for the credit from June 30, 2015, to Dec. 31, 2016, have three years to claim it.
  8. Tax-filing season opened on Jan. 22. The IRS expects to receive approximately 153 million tax returns. This year, those claiming the Earned Income Tax Credit and the refundable portion of the Child Tax Credit will have to wait until Feb. 15, at the earliest, to receive a refund.


Congressional Activity

Thursday, 1/26

Congressional GOP Annual Retreat
GOP lawmakers are heading to Philadelphia for their annual retreat. Devising and agreeing on a strategy to repeal and replace the Affordable Care Act will be at the top of the meeting agenda.

Other Activity

Wednesday, 1/25

Atlantic Council
The council holds a discussion on “Too Big to Fail? The Power of Transparency in Preventing Future Financial Crises.”

Thursday, 1/26

Cato Institute
Cato holds a briefing on “The Economics of Health Insurance Reform.”

Washington International Trade Association
WITA holds a discussion on “Border Adjustment Taxes, Tax Reform, and Trade.”

For listings of all the week’s tax and financial services happenings, read below to find out how you can become a subscriber.

The McGuireWoods’ Tax & Financial Services Policy Group assists clients in understanding how the latest legislative and regulatory proposals and decisions may impact their business and industry. To learn more about how our team can help you monitor, analyze, and navigate all relevant legislative and regulatory developments, please contact any of our attorneys and consultants below at (202) 857-1700. For more information on how to subscribe to our weekly Tax Policy Update and tax news alerts, please contact Radha Mohan, , (202) 857-2944.

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