Is tax reform legislative and regulatory "fine tuning" on the way?

Tax Reform

US Tax Alert

By:

Republican Congressional tax writers have continued to reiterate in recent months that many of tax reform's most pressing modifications could be accomplished through Treasury's issuance of regulatory guidance. However, just last week House Ways and Means Committee Chairman Kevin Brady (R-TX) stated that Congress may indeed need to advance some form of "fine tuning" legislation, particularly on the international provisions, for which the chairman noted "[w]e didn't have as much time to model and analyze it." In recent weeks some of the Ways and Means and Senate Finance Committee tax staff have also hinted that legislative changes may be needed.

This new approach appears to be the two-fold result of global companies continuing to discover new concerns about additional aspects of the December 2017-passed tax reform legislation, and of Treasury consistently relaying to Congress that while it is willing to address some of the law's shortcomings via issued guidance, some simply cannot be fixed without legislative-based changes.

Last month, Jane Gravelle, the highly respected economics and tax policy expert at the Congressional Research Service, issued a report on international taxation, suggesting a number of potential areas in which fixes may be needed. Among the areas highlighted in her report are:

  1. the impact of allocating expenses to the new GILTI tax with the result of causing a residual US tax above what appeared under GILTI to be a maximum tax level of 13.125 percent
  2. the need for a carryforward/carryback mechanism under GILTI
  3. revisions to address the possibility that the new FDII tax could be found violative of the WTO rules as an impermissible export subsidy
  4. the lack of a credit for foreign taxes under the new BEAT tax, as well as the exclusion of most section 38 credits from BEAT (only the research credit and a small number of renewable energy credits are counted in the BEAT calculation) and
  5. issues relating to the definition of "cash" for the one-time tax on the deemed repatriation of foreign profits.

Numerous other issues have been raised with Treasury and Capitol Hill policymakers over the past six months or so and are actively being aggregated and noted by relevant tax staff.

It remains unclear, however, what the legislative vehicle or vehicles might be for making these changes. House Republicans have been increasingly discussing advancement of a second tax reform bill this upcoming fall that would focus on extending the individual tax cuts in tax reform beyond their 2025 expiration dates, the absence of which has been a point of political vulnerability Congress has been desperately looking address in advance of the November elections; as a result, Chairman Brady has suggested the international reforms might be added to this type of moving legislative vehicle.

However, Senate Majority Leader Mitch McConnell (R-KY) is rumored to be highly reluctant to bring this type of measure before the Senate floor for a vote, stating that it would afford those Democratic senators facing very thin margins in their upcoming re-election races a potentially very impactful voting opportunity. Specifically, Democratic senators refused to vote for making individual tax cuts permanent last fall and have been increasingly called to answer for that choice; this would give them a chance to "reverse" their prior decision, albeit now in a vehicle that did not contain the corporate tax cuts that Democrats largely cited as their reason for refusing to support tax reform. Given the current margins in the Senate, McConnell would also need the votes of nine Democrats to pass a tax bill this fall and, even if a few Democrats in tight races supported the measure, nine would be extremely difficult to find.

Nonetheless, even if a legislative title of various tax provisions that aims to address the original bill's shortcomings is first taken up in legislation of a political nature that then fails to get enacted into law, those same provisions could well come back shortly thereafter in another, less political legislative vehicle with much greater chances of successfully being enacted into law – a possible tax bill during the post-election lame duck session of Congress, to name one example.

Democratic tax writers are likely to propose major changes to tax reform if they ultimately achieve control of both chambers of Congress following this November's mid-term elections (or even control of just one chamber). However, many Democrats have also conceded that their consideration of near-term fixes to the tax reform provisions enacted in 2017 is warranted, while they are also unlikely to revert back to the old structure of deferral of international-based deferral of tax liability and creditability. Moreover, from recent experience in conversation with both entities, tax writers and regulators are very much interested in resolving stakeholder concerns in tax reform and are eager to discuss how to resolve those concerns.

Chairman Brady's comments appear to represent a growing interest in possible legislative changes to tax reform and a potential opening for companies that may be seeking changes that might be difficult for Treasury to fully address in guidance.

To discuss your concerns about provisions in tax reform, especially in the international area, please contact either of the authors.