US tax reform, tax policy and IRS updates. Michael Mundaca, Ray Beeman, Heather Maloy

Transcription

1 US tax reform, tax policy and IRS updates Michael Mundaca, Ray Beeman, Heather Maloy

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S. This presentation is 2017 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Washington timeline, agenda March 15: Federal debt limit reinstated April 7-24: Congressional spring recess April 28: Expiration of government funding Mid-May: Release of Trump detailed FY18 budget July 31 - Sept 5: Congressional summer recess September 30: FAA funding/authority and children s health program expire Mar Apr May Jun Jul Aug Sept Must-do items for 2017 By April 28/May 5 : government funding for remainder of FY 2017 Bipartisan support sought, will omit defunding Planned Parenthood, border wall funding One week extension agreed to on April 28 By September 30: government funding for FY 2018 Timeline for congressional processing of FY18 budget unclear May include reconciliation instructions for tax reform, other issues Full Trump budget expected mid-may; skinny budget was out March 16 Increased border, defense funding debates are likely in this context By sometime in the fall: address Federal debt limit Suspension ended March 15; Mnuchin wants increased ASAP Treasury extraordinary measures can last into the fall 3

4 Trump/Republican priorities, 2017 ACA repeal House bill pulled from consideration due to insufficient GOP support Would have repealed most ACA taxes beginning in 2017 President says negotiations continue, wants to do before tax reform Tax reform Administration at beginning phases of developing a new proposal NEC s Cohn: We re going to launch with one cohesive plan together Trump: doesn t like term border adjustment, prefers reciprocal tax Infrastructure Trump: very big infrastructure bill coming very soon See it as part perhaps of the healthcare plan to get Democratic votes Senate Democrats proposed $1T plan, includes closing tax loopholes Regulatory reform Immigration Trade March 28 executive order calls for rolling back Obama climate policies, including Clean Power Plan regulations for electric power plants January executive order calls for 2 regulations out for every new 1 in; April executive order requires review of all 2016 significant tax regs Trump calling for wall on Mexico border: $15-25b cost Budget bill unlikely to include wall funding that Democrats oppose Trump withdrew US from TPP; new USTR not yet confirmed Wants NAFTA renegotiated quickly; farmers, others concerned Did not act to deem China a currency manipulator 4

5 Effects of health bill outcome on tax reform Politics Highlights awareness of the difficulty of advancing a major bill Trump, House GOP under greater pressure for legislative achievement Could increase wariness for including controversial tax elements GOP could seek Democratic tax reform votes with infrastructure tie-in Leadership $/Process Health bill was crafted in House, Speaker Ryan was main advocate Administration has now asserted it take lead on tax reform OMB Dir. Mulvaney: It will be the President s plan, we will drive debate Press Sec. Spicer: Obviously, we re driving the train on this. GOP likely to try to line up support for tax proposal earlier in the process Health bill would ve repealed most ACA taxes in 2017 = $1 trillion cut If ACA taxes cut in tax reform, $1 trillion needed for revenue neutrality GOP could abandon revenue neutrality in favor of tax cut 5

6 Tax reform: overall state of play Trump Admin. House Senate Trump Administration: Reduced individual tax rates: 10%, 25%, and 35%; double standard deduction; deductions, etc. other than for charitable giving and home ownership, could be eliminated; tax relief for families with child and dependent care expenses; current law rates for capital gains and dividends maintained; 3.8% NIT repealed; AMT repealed; estate tax repealed 15% corp. tax rate, 15% pass-through business rate (for small- and medium-sized businesses?) Eliminate tax breaks for special interests Territorial system, with mandatory one-time tax on accumulated foreign earnings House Republican Blueprint for tax reform: Reduced individual tax rates: 12%, 25%, and 33%; standard deduction increased, other deductions repealed, limited; capital gains, etc. effectively taxed at one-half of otherwise applicable rate (NIT assumed repealed as part of healthcare reform) 20% corporate income tax rate/25% rate for business income of pass-throughs Immediate expensing of capital expenditures with no interest expense deduction Business provisions eliminated, except for R&D Credit and LIFO Territorial system of taxing future foreign earnings Mandatory tax (8.75%/3.5%) on accumulated foreign earnings Destination-basis tax system exempts exports while fully taxing imports Hearings in May? Senate: Does not have a companion to the House Blueprint Senate Finance Chairman Hatch: Senate will conduct its own tax reform process after the House acts. Will not just accept House bill Hatch and other Senators have reservations about border adjustability and starting to question need for revenue neutral bill Staff currently reviewing all options, including corporate integration 6

7 Budget reconciliation Republicans don t have filibuster-proof 60 Senate votes Reconciliation allows 51-vote approval for spending, tax, debt limit bills (or combination), under 2-step process 1) Budget Resolution with reconciliation instructions must be passed by both House and Senate - Instructions direct committees to change spending or revenue numbers 2) Then, Congress must pass reconciliation bills that adhere to instructions Plan for two sets of reconciliation instructions in 2017 now unsettled since health care vote was cancelled 1) FY 2017 budget resolution called on 4 committees to reduce deficit by not less than $1 billion each FY : 2 House committees produced American Health Care Act 2) FY 2018 budget could include instructions for tax reform 7

8 Budget reconciliation limitations Byrd Rule protects views of minority party, prohibits extraneous matter Six tests for matters to be considered extraneous and thus require 60 Senate votes to waive point of order, applicable to provisions that: Do not produce a change in outlays or revenues Produce changes in outlays or revenue which are merely incidental to the nonbudgetary components of the provision Are outside the jurisdiction of the committee that submitted the title or provision for inclusion in the reconciliation measure Increase outlays or decrease revenue if the provision's title, as a whole, fails to achieve the Senate reporting committee's reconciliation instructions Increase net outlays or decrease revenue during a fiscal year after the years covered by the reconciliation bill unless the provision's title, as a whole, remains budget neutral Contain recommendations regarding the OASDI (Social Security) trust funds These limitations on reconciliation have practical effects, including: The 2001 Bush tax cuts were subject to a sunset after 10 years, and required subsequent legislation to make many provisions permanent The Affordable Care Act cannot be completely repealed under reconciliation 8

9 Key issues in tax reform debate Border adjustability Individual taxes Interest deductibility House Rs: Imports exempt from tax with cost of goods sold deductible; costs, including costs of goods sold, for imports nondeductible House proposal faces opposition from retailers, others, including Senate, maybe Trump Trump and House Republicans propose top individual rate of 33% Lower tax rates on investment income Cuts to key individual tax benefits may create political fallout Payroll tax cut? Trump proposed expensing for manufacturers, who then lose interest deductibility House Rs: expensing, eliminate deductibility of net interest expense Expensing may or may not be worth losing interest deductions Pass-throughs Trump: 15% passthrough rate, 15% corporate rate House Republicans: 25% pass-through rate, 20% corporate rate Elimination of deductions, etc. to pay for rate cuts affects pass-through entities Revenue/politics Reform may be revenue neutral Democrats may or may not participate Reconciliation could require provisions to sunset after 10 years GOP can lose only two Senate votes if using reconciliation New international tax system Move from a global tax system to a territorial system? Eliminate income deferral? Mandatory tax on accumulated earnings 9

10 For and against border adjustability Arguments for: Provides level playing field for US companies; would bring jobs, investment to US Eliminates incentive for profitshifting No need for anti-base erosion provisions $1 trillion-plus in revenue toward tax reform bill Exchange rate adjustment would offset increased taxes/prices for imported goods Advocates think WTO challenge can be won Arguments against: Too complicated Too much uncertainty Increased taxes for imported goods hits retailers, passed to consumers May create negative net tax liability for large exporters Wage deduction may violate WTO rule that income taxes cannot favor exports Countries could retaliate outside of WTO, arguing BAT is export subsidy Exchange rate adjustment uncertain, could take a while And would reduce value of foreign investments held by US investors, such as pension funds, retirees 10

11 Senate Republicans on border adjustability Finance Chairman Hatch (R-UT): at least a handful of Senators have serious reservations. Questions: Who will bear the tax? Consistent with WTO obligations? Burden on industries? Senate GOP Whip (#2 in charge) Cornyn (R-TX): Concerned about constituent refiners, manufacturers in supply chains with Mexico Don t want the House to get momentum behind something that won t pass Senate Scholars disagree on impact: doesn t seem to be any consensus Senator Perdue (R-GA), former Reebok CEO: BAT regressive, hammers consumers Increase in consumer prices [C]urrency revaluation = multi-trillion dollar reduction in the value of foreign investments held by US investors, including pension funds, retirees Senator Cotton (R-AR): affects prices of food, apparel, toys, gas Taxes working class to lower marginal rates for corporations Senator Rounds (R-SD): need to know impact on economy Senator Moran (R-KS): worries over constituents paying tax, trade war I assume you get into a battle with other countries and it affects the exporters. 11

12 Tax reform details to be determined include 1 Will bipartisan support allow reconciliation to be avoided? Brady: reconciliation may be the only option for advancing reform, but House GOP to begin by asking Democrats for input Reconciliation-enacted provisions may sunset after 10 years Senator Cornyn: If you do things purely on the party line, then it s unsustainable Will tax reform be revenue neutral? Chairman Brady: intended to be break-even, considering economic growth Trump campaign tax plan estimated to lose $4-6 trillion depending on considerations Will reform be combined with infrastructure investment? Senator Schumer: That infrastructure bill has to have certain things for us to support it. It can't just be tax credits. Brady: Blueprint applies the revenue from deemed repatriation toward rate reduction and tax code redesign What will be the fate of border adjustability? Brady said benefits include: 1) Leveling the playing field for American made products; 2) Simplifying international tax; and 3) Eliminating incentive to move jobs, HQs overseas President Trump: Anytime I hear border adjustment, I don t love it. 12

13 Federal budget outlook Federal debt held by public is 77%/GDP, highest since WWII Without changes in law, major debt increase: 99%/GDP by 2032 WHY? Social Security and Medicare costs from aging population CBO assumes annual 2% increase in GDP on average Lower than historical average = slower growth of labor force due to aging Keep debt at 77%/GDP? spending or taxes by 2% of GDP per year $380 billion in 2018 Cut debt to 40%/GDP? spending or taxes by 3% of GDP per year $620 billion in 2018 FY 2017 FY Deficit $559 billion; 2.9%/GDP $9.42 trillion; 4%/GDP Debt held by public 77%/GDP 89%/GDP by %/GDP Source: CBO, The Budget and Economic Outlook: 2017 to 2027, January 24; The 2017 Long-Term Budget Outlook, March 30,

14 Trump budget perspectives Trump promised not to cut Social Security or Medicare Trump has focused comments more on tax cuts than reform Unclear if Administration s plan is revenue neutral Skinny budget cut discretionary to boost defense $54B Would not achieve any deficit reduction Tax cut could add to deficit, but arguably increase growth We believe we can be competitive and get back to sustainable growth at 3% or more. There s going to be a lot of things that will impact it. I think the first issue is going to be tax reform. Treasury Secretary Mnuchin, February 27 14

15 Spending, interest long term will grow as percent of GDP Net interest Discretionary and other mandatory spending Major health care programs Social Security 10.0 Revenue Note: Projections are from the CBO s extended baseline in The 2016 Long-Term Budget Outlook. Sources: CBO, The 2016 Long-Term Budget Outlook, July 12, 2016; CBO, Updated Budget Projections 2016 to 2026, March 24, 2016; Office of Management and Budget, Table 1.2 Summary of Receipts, Outlays, and Surpluses or Deficits (-) as Percentages of GDP:

16 Federal debt, long term % % = average of past 50 years : : : : 77% of GDP 89% of GDP 113% of GDP 150% of GDP Projected annual average Projected annual average Projected annual average Source: CBO, The 2017 Long-Term Budget Outlook, March 30,

17 Internal Revenue Service update 17

18 IRS budget challenges Even though there was a small $290 million increase in 2016, it was barely enough to keep up with inflation. As a result, IRS funding was still 17 percent below the 2010 level, adjusted for inflation. $0 $2 $4 $6 $8 $10 $12 $14 18

19 Number of IRS employees down Number of full-time equivalents (FTEs) at fiscal year-end ,219 76,540 78,121 83,613 89,551 91,380 94, ,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90, ,000 Source; IRS Data Book(s) , Table

20 IRS workforce composition In the next several years, close to 35% of IRS workforce will be eligible to retire 40% of managers 50% of executives Number of Revenue Agents has fallen 25% since 2010 Only 122 full-time employees 25 years old or younger out of a workforce of about 77,000, less than one-half of one percent. 20

21 Changing controversy landscape Impact on taxpayers Large Business & International Division (LB&I) Campaigns Update on LB&I s Examination Process Update on Appeals 21

22 Questions? 22

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