Tax Reform: Provisions You May Have Missed and the State of Play

Transcription

1 December 4, 2017 SIDLEY UPDATE Tax Refrm: Prvisins Yu May Have Missed and the State f Play On December 2, 2017, the United States Senate passed its versin f the Tax Cuts and Jbs Act (the Senate Bill), taking a significant leap frward as lawmakers seek t enact cmprehensive refrm f the U.S. tax cde fr the first time since The Senate vte cmes just tw weeks after the Huse f Representatives passed its versin f the Tax Cuts and Jbs Act (the Huse Bill). Fr ur summary f the riginal Huse prpsal, which was mdified t a certain extent by the Huse Bill, please click here. Fr these dcuments, and ther resurces summarizing the majr prpsed changes t the U.S. tax cde, please click here t access ur Tax Refrm Develpments and Insights webpage. As indicated belw, there are significant differences between the Huse Bill and the Senate Bill. The Huse is currently scheduled t vte tnight n sending the bill t cnference with the Senate. It remains unclear whether lawmakers will be able t successfully recncile their differences and prduce a cnference bill acceptable t bth chambers f Cngress. As a result, there is still uncertainty as t whether tax refrm will be enacted and, if s, the exact frm it will take. Less Publicized Prvisins In additin t the majr prvisins summarized belw, mst f which have been widely reprted by tax prfessinals and the general media, there are certain prvisins in each f the bills that may have gne unnticed by sme. These include: Timing f Incme Inclusin. Under the Senate Bill, an accrual methd taxpayer must include items f grss incme in its grss incme n later than the taxable year in which that item is taken int accunt in any applicable financial statement (including any GAAP financial statement, Frm 10-K annual statement, audited financial statement r a financial statement filed with any Federal agency fr nn-tax purpses). Observatin. Amng the businesses that culd be affected by this prvisin is mrtgage servicing. Under current law, the servicers generally pay tax n mrtgage servicing incme as cash is received. Hwever, fr financial statement purpses, they generally include the prjected incme stream int incme when they acquire the mrtgage servicing rights. Securities Sld n a First-in-First-ut Basis. Under the Senate Bill, taxpayers selling nly part f their hldings f a particular stck r security will n lnger be able t identify which shares r securities are being sld. Instead, they will be deemed t sell n a first-in-first-ut basis. Mutual funds and ther regulated investment cmpanies are excluded frm the prpsed change. Hwever, persns hlding shares f thse regulated investment cmpanies will be subject t the rule.

2 Page 2 Tax n Gain n the Sale f a Partnership Interest. The Senate Bill cdifies Revenue Ruling by treating gain recgnized by a freign persn n the sale f an interest in a partnership as effectively cnnected with a U.S. trade r business if the partnership is engaged in a U.S. trade r business. The change reverses a recent Tax Curt decisin, which held that gain recgnized by a freign persn n the sale f an interest in a partnership culd nt be subject t U.S. federal incme tax slely because the partnership is engaged in a U.S. trade r business. Fr additinal details n the Grecian Magnesite Mining case, please click here. Observatin. The Senate Bill als impses a new 10 percent withhlding tax n the sale unless a nnfreign affidavit is prvided by the seller. In the event the buyer f such partnership interest fails t withhld, the partnership is respnsible fr the withhlding tax under the Senate Bill. As a result, it is likely that mst partnership agreements wuld treat the partnership s payment f the withhlding tax as a distributin t the buyer. Definitin f U.S. Sharehlder fr Subpart F Purpses. Under current law, a U.S. persn that wns at least 10 percent f the vting stck f a cntrlled freign crpratin (CFC) is a U.S. sharehlder that is required t include its share f the CFC s subpart F incme in incme currently (whether distributed r nt). The Senate Bill expands the definitin f a U.S. sharehlder t include U.S. persns that wn at least 10 percent f the value f a CFC. This expansin wuld cause sme freign crpratins t becme CFCs and wuld require additinal persns t becme subject t subpart F incme inclusins frm CFCs. Observatin. Under current law, a U.S. persn that has wned at least 10 percent f the vting stck f a cntrlled freign crpratin (CFC) at any pint during the five-year perid prir t selling stck in such crpratin is required t treat any gain recgnized n such sale as rdinary incme t the extent f such sharehlder s pr rata share f the crpratin s previusly untaxed earnings and prfits. The Senate Bill des nt fllw the change in the definitin f U.S. sharehlder fr CFC purpses and cnfrm the scpe f this prvisin t include U.S. persns that wn at least 10 percent f the value a CFC during the relevant perid. This may be an versight that will be addressed in future technical crrectins legislatin. Sharehlder Cntributin f Crprate Debt. Under current law, if a sharehlder cntributes the debt f a crpratin t that crpratin, the crpratin is treated as having satisfied the debt with an amunt f mney equal t the sharehlder s basis in the debt. The Huse Bill repeals this prvisin. Observatin. This appears t be an unintended result. The cmmittee reprt accmpanying the Huse Bill describes the repeal as merely a cnfrming change linked t the prpsal regarding capital cntributins described mre fully belw. Tax Credits. Fr multinatinal cmpanies subject t the anti-base ersin measures cntained in the Senate Bill, many widely-used tax credits (including, amng thers, the investment tax credit and the prductin tax credit, but excluding the research and develpment credit) are eliminated in calculating a taxpayer s regular tax liability fr purpses f determining the taxpayer s base ersin minimum tax (described mre fully belw). Observatin. This culd have an adverse effect n the availability f tax equity financing fr renewable energy and ther prjects entitled t credit-based subsidies.

3 Page 3 Miscellaneus Itemized Deductins. The Senate Bill temprarily repeals, fr taxable years beginning after December 31, 2017 and befre January 1, 2026, the deductin fr certain miscellaneus itemized deductins. This prhibits the deductibility f certain expenses such as certain investment and emplyee business expenses. The fllwing summarizes the majr prvisins f the prpsed tax legislatin, and prvides a cmparisn where there are differences between the Huse Bill and the Senate Bill. If enacted, the legislatin will be effective fr taxable years beginning after December 31, 2017, unless therwise nted belw. Crprate Taxatin Rates. Under current law, crpratins are subject t a maximum tax rate f 35 percent. Huse Bill. Reduces the crprate tax rate t a flat 20 percent rate. Senate Bill. Same, but is nt effective until taxable years beginning after December 31, Capital Investment. Under current law, a 50 percent write-ff (subject t phase-ut) is generally available fr new prperty placed in service befre January 1, Huse Bill. Allws taxpayers t fully and immediately expense 100 percent f the cst f qualified prperty acquired and placed in service after September 27, 2017 and befre January 1, In additin, the 100 percent write-ff is expanded t certain used prperty acquired by the taxpayer. Special prir law phase-ut rules apply t prperty acquired befre September 28, 2017 and placed in service after September 27, Senate Bill. Same, but this benefit is nt extended t used prperty. Dividend Received Deductin. Under current law, crpratins are entitled t a 70 percent dividend received deductin (DRD) n dividends received frm crprate subsidiaries. If the crpratin receiving the dividend wns mre than 20 percent, but less than 80 percent f the crpratin paying the dividend, the DRD is 80 percent f the dividend received. Huse Bill. Reduces the 80 percent DRD t 65 percent, and the 70 percent DRD t 50 percent. Senate Bill. Same. Observatin. These dwnward adjustments are necessary t preserve the current law effective tax rates n dividends entitled t the DRD. Interest Deductins. Huse Bill. Limits, with certain exceptins, the deductin in any taxable year fr business interest t the sum f (i) business interest incme fr that year; plus (ii) 30 percent f the adjusted taxable incme fr the year. Fr this purpse, business interest is interest paid r accrued n indebtedness prperly allcable t a trade r business. Business interest incme is interest incme prperly allcable t a trade r business. Adjusted taxable incme is a taxpayer s taxable incme, cmputed withut regard t, amng ther items, business interest r business interest incme, net perating lss deductins, and deductins fr depreciatin, amrtizatin r depletin. Any disallwed interest

4 Page 4 may be carried frward indefinitely and, in the case f certain crprate taxpayers, preserved as a tax attribute in certain crprate acquisitins. The disallwance rule applies t taxable years beginning after December 31, The limitatins n interest deductins cntained in the earnings stripping rules f present Internal Revenue Cde 163(j) are repealed. Senate Bill. Same, except adjusted taxable incme is defined t mean taxable incme, cmputed withut regard t, amng ther items, any items f incme, gain, deductin r lss, that are nt prperly allcable t a trade r business, any business interest r business interest incme, the amunt f any net perating lss deductin, and the 23 percent deductin fr certain pass-thrugh incme (described mre fully belw). In additin, it preserves the current earnings stripping rules f Internal Revenue Cde 163(j). See Taxatin f U.S. Multinatinal Entities Interest Deductins belw fr additinal rules restricting interest deductins. Alternative Minimum Tax. Huse Bill. Repeals the crprate alternative minimum tax (AMT). Als, allws a crpratin with AMT credit carryfrwards t claim a refund f 50 percent f the remaining credits (t the extent the credits exceed regular tax fr the year) in taxable years beginning in 2019, 2020 and 2021, and allws a refund f all remaining credits in the taxable year beginning in Senate Bill. Preserves current law. Net Operating Lsses. Huse Bill. Fr net perating lsses (NOLs) arising in taxable years beginning after December 31, 2017, n carryback is permitted but lsses can be carried frward indefinitely. Lss carryfrwards are increased each year by an interest factr but are permitted t ffset nly 90 percent f taxable incme fr the year (cmputed withut regard t the carryver). With respect t NOLs arising in years beginning befre January 1, 2018, current law carryback and carryfrward rules apply, but thse lsses, t the extent carried frward t taxable years beginning after December 31, 2017, are subject t the 90 percent limitatin and are nt entitled t the interest factr increase. Senate Bill. Same, but generally eliminates the tw-year carryback, des nt increase NOLs by an interest factr, and limits lss carryfrward ffsets t 80 percent f taxable incme fr taxable years beginning after December 31, Like-Kind Exchanges. Huse Bill. Limits tax-deferred like-kind exchange treatment t real prperty used in a trade r business r fr investment, eliminating like-kind exchange treatment fr ther prperty such as autmbiles and art. The new limitatin generally applies t exchanges cmpleted after December 31, 2017, unless prperty part f a like-kind exchange was either dispsed f r received n r befre that date. Senate Bill. Same.

5 Page 5 Capital Cntributins. Under current law, cntributins t the capital f a crpratin (including transfers f mney r prperty t the crpratin by a nn-sharehlder, such as a gvernment entity) are tax-free t the crpratin. Huse Bill. Grss incme f a crpratin includes any cntributin t its capital in excess f the value f stck received. The bill als applies t a cntributin t an entity ther than a crpratin. Senate Bill. Preserves current law. Observatin. These changes cntained in the Huse Bill are intended t impse a tax n certain state and lcal incentives and cncessins. Hwever, as currently prpsed, the prvisin is nt limited t nn-sharehlder cntributins. The accmpanying cmmittee reprt states that whether shares are actually issued in a pr rata cntributin by sharehlders des nt determine whether the cntributin is taxable t the crpratin. Hwever, it remains unclear the extent t which Treasury regulatins and case law that deem share issuances t ccur in certain circumstances wuld apply fr purpses f the prpsed legislatin. Tax Credits and Private Activity Bnds. Huse Bill. Repeals rehabilitatin tax credits, the new markets tax credits, and the ability f taxpayers t deduct certain unused business credits. Certain ther business tax credits (including in the energy sectr) are als changed. In additin, the exemptin fr private activity bnds is repealed. Senate Bill. Retains the rehabilitatin tax credit, but limits the amunt f the tax credit t certified histric buildings and spreads this credit ver five years. The bill preserves current law regarding the new markets tax credits, the deductibility f certain unused business credits, tax credits in the energy sectr, and the exemptin fr private activity bnds. Cmpensatin Deductins. Huse Bill. Expands the limitatin n deductins fr cmpensatin in excess f $1 millin in any year t cmpensatin (in any frm) paid t any prxy fficer. In additin, nce an emplyee is a prxy fficer, the emplyee cntinues t be treated as such even if that status changes. Senate Bill. Same. Entertainment Expenses. Huse Bill. Bradens the limitatin n the deductibility f expenses relating t entertainment, amusement, recreatin activities, and certain ther similar expenses. Senate Bill. Same. Partnership Taxatin Rates. Under current law, incme f pass-thrugh entities (e.g., sle prprietrships, partnerships, limited liability cmpanies, and S crpratins) is allcated amng the wners r sharehlders, wh pay the crrespnding tax n their individual tax returns. As a result, the incme (including business incme) f pass-thrugh entities is subject t rdinary individual incme tax rates with a current maximum marginal rate f 39.6 percent.

6 Page 6 Huse Bill. Reduces the rate fr certain business incme f pass-thrugh entities t a maximum tax rate f 25 percent. Generally, passive investrs in pass-thrugh entities are subject t a lwer effective tax rate than active investrs: 100 percent f incme frm passive business activities (defined by reference t existing passive activity rules) qualifies fr the reduced rate while generally nly 30 percent f incme frm active business activities qualifies. The bill als includes anti-abuse rules designed t prevent taxpayers frm turning what wuld therwise be wage incme (taxed at up t 39.6 percent) int business incme taxed at the lwer rate. Incme frm persnal service businesses (e.g., accuntants, lawyers, cnsultants, financial service prviders, thse in the perfrming arts, and thse investing, trading r dealing in securities) is nt entitled t the reduced rate. Senate Bill. Fr taxable years beginning befre January 1, 2026, nn-crprate wners and sharehlders f pass-thrugh entities may take a deductin f up t 23 percent f their dmestic qualified business incme. Fr this purpse, qualified business incme is defined as all dmestic business incme ther than investment incme (e.g., dividends (ther than REIT dividends and qualified publicly traded partnership incme), incme equivalent t a dividend, interest incme nt allcable t a trade r business, shrt- and lng-term capital gains, etc.). The deductin is limited t 50 percent f the W-2 wages paid by the business. This prvisin has the effect f reducing the tp tax rate n pass-thrugh dmestic business incme frm 39.6 percent t apprximately 29.6 percent. Incme frm specified service businesses (as defined in the Huse Bill) is nt entitled t the deductin unless the wner s incme is less than $75,000 (if single; $150,000 fr jint filers). Observatins. Fund managers and investment funds rganized as pass-thrugh entities will nt benefit frm either f these prpsals. Carried Interest Prvisin. Under current law, any capital gain recgnized by a taxpayer n the sale f an interest in a partnership is treated as lng-term capital gain prvided the taxpayer held such interest fr mre than ne year. Huse Bill. If a nn-crprate taxpayer has a partnership interest received in cnnectin with the perfrmance f services (and nt fr the cntributin f capital) in an applicable trade r business, any capital gain allcable t such taxpayer in respect f assets held by the partnership fr mre than ne year that wuld have therwise been treated as lng-term capital gain will be cnverted int shrt-term capital gain unless the assets are held by the partnership fr mre than three years. An applicable trade r business means the business f raising r returning capital r investing in r develping specified assets. Specified assets cnsist f securities, cmmdities, real estate held fr rental r investment, derivatives relating t the freging, and partnership interests t the extent f such partnership s interest in the freging assets. Senate Bill. Same. Observatin. Althugh the legislative language is nt entirely clear, the cmmittee reprt accmpanying the Huse Bill indicates that the hlding perid is determined at the partnership level. Accrdingly, a taxpayer hlding a partnership interest may get the benefit f lng-term capital gain treatment even if the taxpayer has held the partnership interest fr three years r less.

7 Page 7 Self-Emplyment Tax. Huse Bill. Repeals exclusins frm self-emplyment tax fr rental incme and a limited partner s distributive share f a limited partnership s incme. Senate Bill. Preserves current law. Interest Deductins. Huse Bill. With certain exceptins, limits the deductin in any taxable year fr business interest t the sum f (i) business interest incme fr that year; plus (ii) 30 percent f the adjusted taxable incme fr the year. See Crprate Taxatin Interest Deductins abve fr relevant definitins. In the case f partnerships, this limitatin applies at the entity level. Any interest disallwed is carried frward t the succeeding five taxable years. Senate Bill. Same, except adjusted taxable incme is calculated differently. See Crprate Taxatin Interest Deductins abve. See Taxatin f U.S. Multinatinal Entities Interest Deductins belw fr additinal rules restricting interest deductins. Technical Terminatins. Under current law, a partnership is treated as having been technically terminated if mre than 50 percent f the ttal capital and prfits interests f the partnership are sld r exchanged during any 12-mnth perid. Huse Bill. Repeals the technical terminatin rule. Senate Bill. Preserves current law. Taxatin f U.S. Multinatinal Entities Mdified Territrial System. Bth the Huse and Senate Bills implement dramatic changes t the taxatin f freign incme earned by U.S. businesses by adpting a mdified territrial system f taxatin, the mst imprtant features f which are summarized belw. Shuld these prvisins becme law, U.S. multinatinals will need t examine their freign hldings t determine the extent t which rerganizatin f them will maximize their benefits frm these new rules. Participatin Exemptin System. Under current law, U.S. crpratins are generally taxed n distributins f earnings frm their freign subsidiaries with a dividend-exemptin system. Huse Bill. Prpses a participatin exemptin system in which 100 percent f the freignsurce prtin f dividends paid by a freign crpratin t a U.S. crprate sharehlder that wns 10 percent r mre f the freign crpratin are exempt frm U.S. taxatin. N freign tax credit r deductin is allwed fr any freign taxes (including withhlding taxes) paid r accrued with respect t any exempt dividend, and n deductins fr expenses prperly allcable t an exempt dividend (r stck that gives rise t exempt dividends) are taken int accunt fr purpses f determining the U.S. crprate sharehlder s freign-surce incme. A minimum hlding perid f 181 days is required in rder fr the exemptin t apply.

8 Page 8 Senate Bill. Generally, the same. The mst imprtant differences are the expansin f the participatin exemptin t cver the deemed-dividend prtin f a crpratin s gain frm the sale f stck f a 10 percent-wned freign crpratin, the denial f the exemptin with respect t amunts fr which the paying freign crpratin receives a benefit against freign cuntry taxes, and the increase f the minimum hlding perid t 365 days. Repatriatin f Prir Deferred Incme. Huse Bill. Ensures that the adptin f the participatin exemptin system des nt allw freign crpratins previusly untaxed deferred earnings (estimated t be apprximately $2 trillin) t escape U.S. tax entirely by requiring a U.S. sharehlder (as defined in the subpart F rules) t include as subpart F incme, in its last taxable year beginning befre January 1, 2018, its share f the freign crpratin s earnings that have nt been previusly subject t U.S. tax. The earnings are classified either as cash r cash equivalents (including net accunts receivable) taxed at a rate f 14 percent r as earnings reinvested in the crpratin s business (e.g., in prperty, plant, and equipment) taxed at a rate f seven percent. The mandatry inclusin f untaxed deferred earnings applies t all U.S. sharehlders even thugh nly 10 percent crprate sharehlders benefit frm the participatin exemptin. A U.S. sharehlder may elect t pay the tax liability in equal installments ver a perid f up t eight years withut an interest charge. Each sharehlder f an S crpratin that is a U.S. sharehlder may elect t defer payment f its tax liability withut an interest charge until a triggering event ccurs, such as a dispsitin f shares f the S crpratin. Senate Bill. Same, except that earnings deemed repatriated will be taxed at 14.5 percent and 7.5 percent, respectively, and the eight-year installment perid fr payment f the tax is back-laded by requiring nly eight percent f the tax t be paid in each f the first five years, 15 percent in the sixth year, 20 percent in the seventh year, and 25 percent in the eighth year. Expansin f Subpart F Rules. Huse Bill. Retains with mdificatins the subpart F regime fr taxatin f a CFC. T deal with the utbund shifting f incme frm intangible prperty t a CFC, a U.S. sharehlder is subject t current U.S. tax n 50 percent f its share f freign high returns (prducing a 10 percent effective rate f tax n such incme fr a crprate sharehlder). A freign high return amunt (FHRA) is measured as the excess f the U.S. sharehlder s share f its CFC s net incme ver a rutine return (seven percent plus the federal shrt-term rate) n the CFC s aggregate adjusted basis in depreciable tangible prperty, adjusted dwnward fr interest expense. FHRA des nt include incme effectively cnnected with a U.S. trade r business, subpart F incme, insurance and financing incme that meets the requirements fr the active finance exemptin frm subpart F incme, incme frm the dispsitin f cmmdities prduced r extracted by the taxpayer r certain related-party payments. As with ther subpart F incme, the U.S. sharehlder is taxed n FHRA earnings each year, regardless f whether it left thse earnings ffshre r repatriated the earnings t the United States. Senate Bill. Als retains the current subpart F incme regime with mdificatins but, instead f the Huse s FHRA system, des s by creating a new categry f subpart F incme deemed t

9 Page 9 arise frm high-value intangibles, knwn as glbal intangible lw-taxed incme (GILTI). Althugh similar, the GILTI regime differs frm the FHRA system in a number f respects. Amng ther differences, the Senate Bill increases the effective tax rate n GILTI fr a crprate U.S. sharehlder frm 10 percent t 12.5 percent fr taxable perids after 2025 and impses the rdinary individual incme tax rates n a nn-crprate U.S. sharehlder s share f a CFC s GILTI fr all years. Additinal Subpart F Changes. Huse Bill. Amng ther changes, exempts a U.S. crprate sharehlder f a CFC frm tax n a CFC s investments in U.S. prperty and mdifies the deemed paid credit s that it applies n a current year basis nly. Senate Bill. Same, and als mdifies the definitin f U.S. sharehlder t include a persn wh wns 10 percent r mre f the value f the crpratin. Interest Deductins. Huse Bill. Limits the deductible net interest expense f a U.S. crpratin that is a member f an internatinal financial reprting grup (IFRG) t the extent the U.S. crpratin s share f the grup s glbal net interest expense exceeds 110 percent f the U.S. crpratin s share f the grup s glbal EBITDA. Any disallwed interest expense is carried frward fr up t five taxable years. Fr this purpse, an IFRG includes a grup f entities that has at least ne dmestic crpratin and a freign crpratin, prepares cnslidated financial statements and has annual glbal grss receipts f mre than $100 millin. Senate Bill. Reduces the deductible net interest expense f a U.S. crpratin that is a member f a wrldwide affiliated grup by the prduct f such U.S. crpratin s net interest expense and the debt-t-equity differential percentage f the grup. The debt-t-equity differential percentage f the wrldwide affiliated grup means the amunt by which the ttal indebtedness f the U.S. crpratins in the grup exceeds 110 percent f the ttal indebtedness thse crpratins wuld have if their ttal indebtedness t ttal equity rati were prprtinate t the wrldwide grup s rati f ttal indebtedness t ttal equity. (The 110 percent benchmark is phased in, with the benchmark being 130 percent in 2018, 125 percent in 2019, 120 percent in 2020 and 115 percent in 2021.) Any disallwed interest expense is carried frward indefinitely. Anti-Base Ersin Measures. Huse Bill. Impses an excise tax (at the highest crprate rate) n certain payments made by dmestic crpratins t certain freign crpratins where the dmestic crpratin payr and the freign crpratin payee are part f the same IFRG. The tax is generally impsed n payments frm a dmestic crpratin (i) that are deductible r includible by the U.S. payr in csts f gds sld, inventry r the basis f a depreciable r amrtizable asset and; (ii) that the freign crpratin payee des nt treat (r elect t treat) as effectively cnnected with a U.S. trade r business. Fr this purpse, an IFRG is generally any grup f entities that prepares cnslidated financial statements and has annual payments subject t the excise tax that meet certain threshlds. Payments t r frm

10 Page 10 a partnership which is a member f an IFRG are treated as paid r received by the partners f that partnership. Senate Bill. In lieu f an excise tax, requires an applicable crpratin t pay a tax generally equal t its base ersin minimum tax amunt. Fr this purpse, a crpratin s base ersin minimum tax amunt is the excess f 10 percent f the crpratin s taxable incme (determined withut deductins fr base ersin payments ) ver its regular tax liability (cmputed withut regard t credits ther than research and develpment credits). Fr certain banks and securities dealers, the incme threshld is 11 percent. Fr taxable years beginning after December 31, 2025, the incme threshld fr the base ersin minimum tax amunt is increased t 12.5 percent (13.5 percent fr certain banks and securities dealers) and research and develpment credits are als subtracted frm regular tax liability. A base ersin payment is generally any amunt paid r accrued by a taxpayer t a freign persn that is a related party (generally, with a 25 percent affiliatin threshld) and that either is deductible r is paid in cnnectin with the acquisitin f depreciable r amrtizable prperty. The prvisin applies t crpratins (ther than RICs, REITs, and S crpratins) with average annual grss receipts f at least $500 millin fr the preceding three years and a base ersin percentage f at least fur percent. The base ersin percentage is generally the taxpayer s base ersin tax benefits divided by its deductins (ther than the 100 percent participatin exemptin dividends received deductin, net perating lss deductins, and the deductin that implements the reduced tax n GILTI (described mre fully abve)). Outbund Transfers. Under Internal Revenue Cde 367(a), a U.S. persn generally is required t recgnize gain with respect t certain transfers t a freign crpratin that wuld therwise be tax-free. Internal Revenue Cde 367(a)(3) prvides an exceptin frm gain recgnitin fr the transfer f certain prperty t be used by the transferee freign crpratin in the active cnduct f a trade r business utside f the United States. In additin, Internal Revenue Cde 367(d)(2) and 482 cntain special rules, with respect t transfers by a U.S. persn f intangible prperty, in therwise tax-free exchanges r t a related persn, that require the U.S. transferr s incme t be increased in the future t reflect amunts that are cmmensurate with the incme derived frm the intangible (the s-called super ryalty rules). Huse Bill. Preserves current law. Senate Bill. Repeals the exceptin prvided by Internal Revenue Cde 367(a)(3) in respect f prperty used in the active cnduct f a trade r business. With respect t Internal Revenue Cde 367(d)(2) and 482, revises the definitin f intangible prperty t include gdwill, ging cncern value, wrkfrce in place, and any ther item f value r ptential value that is nt attributable t tangible prperty r the services f any individual. Such revisins direct the Internal Revenue Service t require the valuatin f transfers f intangible prperty n an aggregate basis with ther prperty r services transferred r n the basis f the realistic alternatives t such a transfer if the Internal Revenue Service determines that such basis is the mst reliable means f valuatin f such transfers. Observatin. It appears the Senate Bill prvisins are intended t limit shifting incme t freign affiliates thrugh intangible prperty transfers. The extent t which these prvisins wuld d s is unclear.

11 Page 11 Inventry Incme Surcing. Huse Bill. Allcates and apprtins incme frm the sale f inventry prperty prduced within and sld utside f the U.S. (r vice versa) between surces within and utside f the U.S. slely n the basis f the prductin activities with respect t the inventry. Senate Bill. Same. Observatin. This change will likely reduce the amunt f freign surce incme realized by taxpayers exprting gds prduced in the U.S. and, therefre, reduce their ability t utilize freign tax credits. Individual Taxatin Rates. Under current law, rdinary incme is subject t a seven-bracket prgressive system: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. Huse Bill. Cnslidates the seven existing tax brackets dwn t fur: 12 percent, 25 percent, 35 percent, and 39.6 percent. Fr jint returns, the threshlds generally are as fllws: $90,000 fr the 25 percent bracket; $260,000 fr the 35 percent bracket; and $1 millin fr the 39.6 percent bracket. Senate Bill. Retains a seven-bracket system, but lwers the rates t 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 38.5 percent. Fr jint returns, the threshlds generally are as fllws: $19,050 fr the 12 percent rate; $77,400 fr the 22 percent rate; $140,000 fr the 24 percent rate; $320,000 fr the 32 percent rate, $400,000 fr the 35 percent rate; and $1 millin fr the 38.5 percent rate. The rates are effective fr taxable years 2018 thrugh Individual Mandate. Under current law, taxpayers must maintain minimum essential cverage fr health insurance r pay a penalty (therwise knwn as the individual mandate ). Huse Bill. Preserves current law. Senate Bill. Effectively repeals the mandate by reducing the amunt f the penalty t zer. The change is effective fr taxable mnths after December 31, Standard Deductin. Under current law, the standard deductin fr jint filers is $12,700. Huse Bill. Increases the standard deductin fr jint filers t $24,400. Senate Bill. Increases the standard deductin fr jint filers t $24,000, but is nly effective fr taxable years 2018 thrugh Itemized Deductins. Under current law, taxpayers are allwed t take itemized deductins fr medical expenses, mrtgage interest expense (n up t $1.1 millin f acquisitin and hme equity debt fr jint filers), persnal casualty lsses, real estate taxes, state and lcal incme taxes, charitable cntributins, unreimbursed emplyee expenses, and tax preparatin fees. The fllwing chart cmpares the treatment f certain itemized deductins under the Huse and Senate Bills:

12 Page 12 Overall Limitatin n Itemized Deductins Huse Bill Repeals the verall limitatin n itemized deductins. Senate Bill Same, fr taxable years State and Lcal Incme Taxes Repealed. Same, fr taxable years Prperty Taxes Mrtgage Interest Limits the deductin fr real prperty taxes t $10,000. The deductins fr nn-business freign real prperty taxes and nn-business persnal prperty taxes are repealed. Fr primary residences purchased after Nvember 2, 2017, interest n lans up t $500,000 is deductible. The deductin fr interest n lans fr secnd hmes is eliminated. Same, fr taxable years Retains current law. Hme Equity Interest Repealed. Same, fr taxable years Charitable Deductin Increases the limitatin n deductin fr charitable cntributins t 60 percent f the taxpayer s cntributin base. Same, fr taxable years Medical Expenses Repealed. Reduces the deductibility threshld fr the amunt by which csts must exceed adjusted grss incme frm the current 10 percent dwn t 7.5 percent until Alimny Payments Repealed. Retains current law. Mving Expenses Repealed. Generally the same, fr taxable years Miscellaneus Itemized Deductins Retains current law. Suspended fr taxable years

13 Page 13 Hme Sale Gain Exclusin. Under current law, in rder t exclude frm taxable incme up t $500,000 (fr jint filers; $250,000 fr ther filers) f gain frm the sale f a primary residence, taxpayers must have wned and lived in the residence fr at least tw f the last five years. Huse Bill. Expands the residency requirement t five f the last eight years. Als, limits the use f the exclusin t nly nce every five years. The exclusin is phased ut n a dllar-fr-dllar basis fr every dllar by which a taxpayer s adjusted grss incme exceeds $500,000 (fr jint filers; $250,000 if single). The prvisin is effective fr sales and exchanges cmpleted after Senate Bill. Same, but des nt phase ut the exclusin. The prvisin is effective fr sales and exchanges during taxable years 2018 thrugh 2025, but prvides an exceptin fr transactins cmpleted pursuant t a binding, written cntract in effect befre January 1, Alternative Minimum Tax. Huse Bill. Eliminates the individual AMT. Certain AMT credit carryfrwards may be refunded beginning in 2019 t varying extents. Senate Bill. Preserves the individual AMT, but increases (i) the exemptin amunt frm $78,750 t $109,400 and (ii) the phase-ut threshld frm $150,000 t $208,400, in each case, fr jint filers. These prvisins are effective fr taxable years 2018 thrugh Child Tax Credits. Huse Bill. Expands the child tax credit t cver dependents, increases the amunt frm $1,000 t $1,600, and increases the phase-ut threshld frm $115,000 t $230,000 (fr jint filers). Certain ther nnrefundable tax credits are repealed. Senate Bill. Fr taxable years 2018 thrugh 2025, increases the amunt f the child tax credit frm $1,000 t $2,000 and increases the phase-ut threshld amunt t $500,000 fr all types f filers. Fr taxable years 2018 thrugh 2024, increases the maximum age f a qualifying dependent frm 17 t 18. The bill des nt repeal certain nnrefundable tax credits that the Huse Bill repeals. Estate Tax. Huse Bill. Increases the estate tax exemptin t $10 millin, up frm the current $5 millin limit, and repeals the tax entirely fr tax years beginning after December 31, Senate Bill. Same increase t the exemptin amunt, but des nt repeal the tax. If enacted, the changes t the U.S. tax cde prpsed by Cngress wuld have substantial effects n taxpayers acrss all industries. We expect t publish summaries f prvisins in the Senate Bill affecting the insurance industry and cmpensatin. These summaries will be psted n ur Tax Refrm Develpments and Insights webpage, which can be accessed by clicking here. Sidley will cntinue t mnitr develpments as they unfld.

14 Page 14 If yu have any questins regarding this Sidley Update, please cntact the Sidley lawyer with whm yu usually wrk, r Laura M. Barzilai Partner lbarzilai@sidley.cm Rbert M. Kreitman Partner rkreitman@sidley.cm Edwin L. Nrris Partner enrris@sidley.cm Sharp Srensen Partner ssrensen@sidley.cm Tara M. Lancaster Assciate tara.lancaster@sidley.cm Sidley Tax Practice Our Tax Practice prvides legal services in transactins, planning and cntrversy related t United States federal, state and lcal and United Kingdm tax laws. Our lawyers wrk clsely with ur clients and with lawyers in the firm s ther practice grups t develp timely, cst-effective tax strategies and t identify and slve ptential tax-related prblems. This Tax update has been prepared by Sidley Austin LLP fr infrmatinal purpses nly and des nt cnstitute legal advice. This infrmatin is nt intended t create, and receipt f it des nt cnstitute, a lawyer-client relatinship. Readers shuld nt act upn this Tax update withut seeking advice frm prfessinal advisers. Furthermre, this Tax update was nt intended r written t be used, and cannt be used, by any persn fr the purpse f aviding any U.S. federal, state r lcal tax penalties that may be impsed n such persn. T receive Sidley Updates, please subscribe at BEIJING BOSTON BRUSSELS CENTURY CITY CHICAGO DALLAS GENEVA HONG KONG HOUSTON LONDON LOS ANGELES MUNICH NEW YORK PALO ALTO SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. Sidley and Sidley Austin refer t Sidley Austin LLP and affiliated partnerships as explained at