January 2008

2008’S TAX LEGISLATIVE AGENDA,

NEAR TERM AND LONG TERM

The tax legislative agenda Congress is now considering has two elements. The first is a near-term agenda of issues that must be enacted during the year, and which is not much different than the near-term agenda of a year ago.

The second is a long-term agenda of major fiscal reforms. Assuming that Democrats remain in control of Congress and capture the White House this November, these major reforms will very likely be among the new Administration’s goals. Indeed, many of these reforms may also be on the table even if a Republican wins the presidential race.

Both agendas have the potential to affect multinationals.

The Near-Term Agenda

Despite efforts by Senate Finance Committee Chairman Max Baucus
(D-Montana) to convince his colleagues to adopt a two-year patch that would remove millions of middle-class taxpayers from the alternative minimum tax, internal disputes over whether to offset the cost of the patch resulted in the enactment of AMT protection for just one year, 2007, teeing the issue up again for 2008. In addition, because Congress failed in 2007 to extend the three dozen or so now expired tax provisions (such as the research credit and accelerated depreciation for leasehold improvements), those issues are once again on the near-term agenda. All in all, these items will cost upwards of $100 billion.

The issue that prevented the enactment of a longer AMT patch and the extenders, however, has not been resolved. Early in 2007, Democrats in the House and Senate led in the passage of the “pay-go” rules. Under pay-go, absent an agreement to do otherwise, all tax cuts, including the extensions of expiring tax benefits, must be offset either by tax increases or spending cuts. During 2007, most Senate Republicans joined the President to block any tax increases (even tax increases in the form of loophole closers), while House Democrats generally demanded strict adherence to pay-go. Only in the final days of the session, when it became clear that middle-class taxpayers would blame Democrats for any failure to enact the patch, did the stalemate end.

While House Democrats are not likely to change their position on pay-go this year, there may be some new avenues to facilitate the enactment of the extenders and the AMT patch. Democratic leaders and the President are discussing one or more economic stimulus bills to try and prevent a recession. One of those bills might include the extenders, which were similarly included in the 2002 economic stimulus bill that followed the 9/11 terrorist attacks. It is also possible that Democrats might agree to relax pay-go in the context of an economic stimulus package, especially if the economy continues to show weakness.

There may also be a slight change in the political dynamic on the Republican side. If polls continue to suggest a strong year for Democrats, the unity among Republicans in the Senate to oppose all tax offsets could erode, at least among moderate Republican senators running for reelection who might want to show their voters that they can compromise and work with the Democratic majorities.

This latter possibility should be of concern. During 2007, both of the tax-writing committees considered and in some cases adopted revenue-raising offset proposals affecting international business. Among these were a proposal to drastically curb the ability of individuals to receive nonqualified deferred compensation earned overseas; a retroactive date change for the anti-corporate inversion provisions; a proposal to essentially override certain tax treaty rights in the case of multinationals with multiple foreign subsidiaries in jurisdictions with lower tax rates than their foreign parent company; provisions requiring the allocation of expenses and taxes on the basis of the repatriation of foreign income; repeal of worldwide allocation of interest; and the delay in the implementation of some of the international provisions in the 2004 Jobs Act.

As a result of the larger dispute over pay-go, none of these proposals were enacted into law.

Although Republicans held together in 2007 in resisting any tax cuts generally, there were indications that some of the international provisions had bipartisan support and, in a different political environment, might have been adopted.

The Long-Term Agenda

The longer-term agenda is equally important. On the assumption that Democrats will do well in November, in the coming months the tax-writing committee chairs will hold a series of hearings on issues relating to tax reform in order to lay the foundation for changes the next president is likely to ask Congress to consider early in 2009. The rationale for hearings this year is that the new Administration will want to move quickly while it has early public support and that 2008 should be used as the time to formulate tax reform alternatives.

On the corporate side, Ways and Means Committee Chairman Charles Rangel (D-New York) introduced a major tax proposal this year that would reduce the corporate tax rate (to approximately 30 percent from 35 percent), but on a fully offset basis. Rangel has indicated that the rate reduction would likely be offset by reducing or eliminating some corporate tax preferences and has suggested that groups who benefit from particular tax benefits should come forward and justify the continuation of their tax advantages in 2008. In Rangel’s view, every tax preference will be under review this year, and that will include all aspects of international taxation.

On the individual side, Congress will need to address the expiration of the Bush tax cuts (both the individual rate reductions and lower capital gains rates, and the estate tax reduction), which will take place at the end of 2010. Assuming Democrats remain in control of the Congress after 2008, reforms are likely to pivot on the issue of tax fairness, with Democratic leaders already arguing that the rates should be allowed to rise at the upper income levels and should be reduced for middle-class taxpayers.

Arguably a debate over whether the tax code should be updated, simplified, and rendered more efficient could benefit international companies to the extent that the discussions focus on aspects of US international taxation that are outmoded. The Republican chairman of the Ways and Means Committee in the previous Congress, Bill Thomas, suggested at various times that Congress should reexamine the worldwide basis for US taxation and consider transitioning into a territorial system in order to more clearly conform to the system of its major trading partners.

However, the driving force for the likely proposed reforms in 2009 will come from America’s next President. With the campaigns on the Democratic side, and, in some cases, on the Republican side taking an increasingly populist tone, it is quite likely that the next Administration will view the international tax system as a revenue source to fund domestic tax reductions for middle-class families and to support domestic spending programs in the context of a growing federal deficit.

The near-term agenda will likely be relatively modest, and Republicans may well continue to succeed in blocking tax increases. Multinationals should remain vigilant in the near-term, but they must keep the greater focus on what is likely to happen in 2009. And, given that the next Administration will want to move quickly on fiscal reforms in early 2009, the tax debate this year will be of vital concern to multinationals. Quite frankly, it may be too late to first become engaged in this debate in 2009.

WE WELCOME TWO NEW ARRIVALS TO
OUR PRACTICE:

PHILIPPE DE GUYENRO

Philippe de Guyenro has joined DLA Piper as a partner. Based in Paris, M. de Guyenro focuses his practice on international tax planning, M&A, and corporate restructuring. He regularly advises international organizations and investment funds in their tax planning. Please read more about his practice here.

His contact information:

philippe.deguyenro@dlapiper.com
T: 00 33 1 40.15.24.96
F: 00 33 1 40.15.25.00




JEAN-LUC CUADRADO

With more than 20 years of experience as a tax lawyer, Paris-based partner Jean-Luc Cuadrado has spent most of his career practicing international tax. His experience includes transfer pricing, mergers, acquisitions, reorganizations, and investment funds. He has significant experience in the pharmaceutical industry and is a member of the
Paris Bar and the International Bar Association. For more information about him, please click here.

His contact information:

jeanluc.cuadrado@dlapiper.com
T: 00 33 1 40.15.24.57
F: 00 33 1 40.15.25.00