Tax Reform Focus Shifts From House to Senate

When Dave Camp (R-MI), chairman of the House Committee on Ways and Means and one of the most respected tax law authors in Congress, released his tax reform plan earlier this year, it was automatically considered as the go-to plan that would form the basis of any legislation that simplifies and overhauls the entire tax code.

But now the onus for any proposed tax reform is shifting from the House to the Senate. Last week, Senators Mike Lee (R-UT) and Marco Rubio (R-FL) came up with their own tax reform plan which sharply diverges from Camp’s plan.

The Lee-Rubio plan would allow companies to take a full and immediate deduction for all investments. It would consolidate existing income tax brackets into two brackets - 15 and 35 percent.

Their plan eliminates the marriage penalty, where married couples end up paying higher taxes than if they filed individually.

The Lee-Rubio plan also hikes the child tax credit of $1,000 to a $3,500 refundable tax credit, applicable against income taxes and payroll taxes.

They also say they plan to cut the corporate tax rate, but do not specify the new rate. There is also no date as yet for when the plan will be introduced as legislation. Dave Camp’s plan has already been introduced as the Tax Reform Act of 2014.

This brings us to an important issue - Rep. Dave Camp is retiring at the end of this Congressional session and won’t be returning to perch on Ways and Means next year. It’s fair to say that the Lee-Rubio tax reform plan would firmly put the onus for tax reform on the Senate.

This in turn raises the question of what happens to this plan if the Democrats retain control of the Senate. Nothing much, because then the Senate’s tax reform plan would have to be introduced by a Democrat or at least as bipartisan legislation, in order to stand a chance of making it through the Senate.

But in that case, the Senate’s plan would no doubt be firmly opposed by the House, which will simply pass the Dave Camp plan and wait for the Senate to follow suit. This standoff could be avoided if the Senate and House are both controlled by the Republicans.

In other words, the proposed Lee-Rubio plan is laying the foundation in case the Republicans gain control of the Senate. Regardless of whether this plan or the Dave Camp plan is ultimately made use of, that would be good news in terms of the fact that long-overdue tax reform now looks good to be passed by both the House and Senate early next year.

Photo credit – tax.house.gov

Will Treasury’s Inversion Fix Play a Spoiler in Congress?

The U.S. Department of Treasury and the IRS finally unveiled a set of changes to the tax code that will make inversions harder or attempt to stop them altogether.

The corporate and tax law changes in the notice issued on Sept 22, which are not retroactive,  are meant to be a stop-gap arrangement to prevent further inversions until such time as Congress can get its act together.

Let’s look at how this is going to impact whatever legislation Congress may have been considering to close the tax loopholes and stop inversions. 

Nothing was and is going to happen before the Nov elections. But the thing is that Treasury’s move will slow down any further planned inversions, and there won’t be any corporate villains in the news portrayed as deserting America to avoid taxes.

With no public outrage and press coverage about inversions after the elections, it’s a good bet that Congress will be looking at other things. Any proposed action on inversions will be pushed back and lumped into the comprehensive tax reform proposal.

In other words, the Treasury’s action has all but assured that any possible standalone bill to stop inversions is now a dead duck.  

This would have been acceptable if the Treasury had cracked down hard on the “inverters.” But the actions taken are at best being described as a bandaid.

Business Roundtable President John Engler issued a statement in which he says that "tax inversions are a symptom of a U.S. corporate tax system that is outdated, uncompetitive and puts American companies and workers at a disadvantage with the rest of the world. Unfortunately, the regulations proposed by the Treasury Department yesterday amount to a Band-Aid solution that will only make matters worse.”

On the other hand, Susan Harley, Deputy Director, Public Citizen’s Congress Watch Division, applauded the Treasury’s actions in a statement issued by Public Citizen. “Treasury’s actions are needed to combat a longtime culture of tax dodging within some multinational corporations. Without teams of wily tax lawyers, small businesses and average taxpayers are left to pick up the tab when corporations like Burger King announce they are skipping town and relocating in another country,” said Harley.

It needs to be pointed out here that the Burger King-Tim Hortons deal wasn’t about a tax inversion. But Harley’s broader point about teams of wily tax lawyers helping large corporations avoid taxes through inversions and other complicated schemes is true enough and needs to be addressed through proper legislation.

Photo credit – Whitehouse.gov

Tax Office Burned Down in France by Protesting Farmers

It’s not exactly the storming of the Bastille, but the pitchforks are really out in France, and it’s a tax office this time that had to bear the brunt of the wrath of a bunch of very angry farmers.

The tax office in the Town of Morlaix, in Brittany, was invaded by farmers who first laid siege to the tax office using artichokes, cauliflowers and manure.

Trailers loaded with the stuff were dumped on the streets around the tax office to block off access, and then the building was then vandalized and set ablaze.

The blocked streets prevented fire fighters from reaching the tax office in time to put out the fire, and the Town of Morlaix is now in need of a new tax office. Plus, the tax collectors are going to be very careful from now on about doing anything untoward in order not to set off another rampaging mob of farmers on the town.

This whole protest wasn’t exactly about tax, but it was in part about the government’s tax policy. It began more as a protest about the international trade standoff between the EU and Russia.

Because of sanctions imposed on Russia over the Ukraine issue, Russia has responded with a blockade of agricultural produce from the EU and the U.S.

A group of 100 farmers descended down on the town’s insurance office in their tractors and trailers and completely burned it to the ground. Then they made their way over the tax office and dumped their unsold produce to block the roads and burn down the tax office.

The farmers are negotiating with the country’s agriculture ministry and other departments for emergency assistance, and they have protested before against proposed new tax policies and regulations.

Last year, farming associations used tractors to block seven major highways that lead into Paris to protest against a proposed trucking levy and a hike in the value-added tax on fertilizer, in addition to new environmental regulations that limited use of tractors on certain days.

The proposed Ecotax levy on trucks was scrapped after the Brittany protests turned violent and one person was killed and others injured in the protests.

Earlier this year, another group of farmers burnt rice straws in front of the National Assembly to protest against tax hikes and restrictive regulations.

The French government already collects some 46 percent of GDP as taxes, and the latest International Tax Competitiveness Index from the Tax Foundation shows France as the worst of the 34 OECD countries in terms of a competitive tax code.

Photo credit - Bibliothèque nationale de France/Wikimedia

Tax Foundation’s 2014 International Tax Competitiveness Index

If you’ve been looking down your noses at France’s take-no-prisoners approach when it comes to taxing corporations, then maybe it’s time to take a closer look in the mirror.

Portugal is apparently the only thing that stands in between the United States and France, in terms of the least competitive tax code among OECD countries.

This, according to the Tax Foundation’s 2014 International Tax Competitiveness Index, which finds that Estonia tops the list of developed nations with the most competitive tax code.

Estonia is followed by New Zealand in second place and Switzerland in third place. The ITCI attempts to serve as a guide to show which countries offer the best tax environment for companies with business growth and development plans looking to make investments.

The rankings are based on more than 40 tax policy variables across five categories – corporate income taxes, personal income taxes, property taxes, consumption taxes, and tax treatment of foreign earnings.

The United States got ranked abysmally low with an overall score of 44.6 (with Estonia at 100) because of the 39.1 percent corporate tax rate - the highest in the developed world. Not to mention the fact that the U.S. is one of only six OECD countries that still have a worldwide system of taxation.

The Tax Foundation also cites the mess in the U.S. tax code in terms of the structure of taxation on individuals, property, dividends and capital gains.

Estonia at the top of the list of 34 OECD countries has a corporate tax rate of 21 percent, and there is no double taxation on dividend income. Estonia’s individual income tax rate is likewise a flat 21 percent across the board, and the country only has a property tax on land (as opposed to taxes on land, buildings and structures).

If it’s any consolation for the U.S., it can be found in France, ranked dead last on the Tax Foundation’s ITCI. Apart from the 34.4 percent corporate tax rate, France also has high property taxes and extremely progressive individual taxes that are poorly structured.

Tax Foundation Economist and co-author of the report Kyle Pomerleau, said in a statement that “No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance.”      

Pomerleau adds that many countries have recognized this fact and have moved to reform their tax codes in order to stay competitive. However, others [read United States] have failed to do so and are falling behind.

The Tax Foundation notes that the last major overhaul of the U.S. tax code was in 1986, when the top marginal corporate income tax rate was reduced from 46 to 34 percent in order to make U.S. corporations competitive all over world.

The rest of the world followed the U.S. lead and most have since reformed their own tax laws, the result being that the U.S. is now behind the curve and sorely in need of tax reform.

Read the full Tax Foundation 2014 International Tax Competitiveness Index.

Photo credit – Tax Foundation

Inversion Tax Law Bills Finally Reach Congress

After a lot of talk by a lot of people, a set of three pieces of inversion legislation has finally been introduced in the House by U.S. Rep. Mark Pocan (WI-02).

Announcing the introduction of the trio of bills, Rep. Pocan said that “Enough is enough. This legislation will stop corporate deserters from abusing the U.S. tax system.”

Bold words, and now all he has to do is get the bills through the House and Senate and past the President’s desk – with the 2014 midterm elections just round the corner.

Let’s put aside the question of what’s going to happen for now, because nothing much is going to happen. Instead, let’s just look at what’s in the legislation.

These are the three bills:-

- Corporate Fair Share Tax Act (H.R. 5444);

- Putting America First Corporate Tax Act (H.R. 5443); and            

- Corporate Transparency and Accountability Act (H.R. 5442)

The first one (Corporate Fair Share Tax Act - H.R. 5444) cracks down on earnings stripping where the U.S. operations of a multi-national company are loaded up with debt owed to the foreign affiliates. The high interest on debt paid by the company to itself allows it to claim deductions that wipe out its U.S. tax liability.

Making H.R. 5444 law would raise $48.6 billion in additional tax revenue over the next ten years. 

The second one (Putting America First Corporate Tax Act - H.R. 5443) would change Section 956 of the tax code so that controlled foreign corporations to pay U.S. taxes on future active income.

This means that corporations would be unable to hoard overseas earnings outside without paying tax on it until they actually repatriate it into the U.S. at a convenient time through dividends and other means that help them save on the tax that would otherwise be owed.

Making H.R. 5443 law would raise $114 billion in additional tax revenue over the next ten years.

The third one (Corporate Transparency and Accountability Act – H.R. 5442) would restore a rescinded part of the tax code that required corporations to disclose pre-tax profits as well as the actual amount paid in state and federal taxes.

This bill would also require that all this information be publicly available on the SEC website and must be easily searchable, downloadable and sortable.

Photo credit - Allison Harger/Flickr

IRS Facing Class Action by Tax Preparers Over PTIN Fees

It’s the IRS’ bad penny that just won’t go away. When the IRS first decided to take an activist role in regulating tax preparers, they had no idea what kind of quagmire they were wading into.

Back in 2010, the IRS issued regulations requiring paid tax preparers to register and pay user fees to obtain a preparer tax identification number (PTIN) and enter it on the returns they prepare.

In order to keep their PTIN, tax preparers are required to renew their registration each year and pay additional renewal fees, failing which they wouldn’t be able to prepare federal income tax returns for their clients.

But tax preparers rebelled against the regulatory regime by filing a lawsuit (Loving vs. Commissioner of the IRS), and a federal district court sided with the tax preparers, noting that the IRS does not have the authority to impose such requirements on tax preparers.

The appellate court hammered in another nail into the issue by upholding the district court’s verdict.

Having failed to regulate the wild, wild west of tax preparation, the IRS is now looking towards Congress to give the agency the same authority which the courts said it doesn’t have.

Meanwhile, the tax preparers are back with the pitchforks, trying to flog the dead horse some more. This time, it’s a class action suit (h/tForbes) filed by tax preparers Adam Steele and Brittany Montrois, seeking to recover the PTIN fees which the IRS has squeezed out of them to-date.

Adam Steele is a CPA in Bemidji, Minnesota and Brittany Montrois is a CPA residing in McDonough, Georgia.

The class seeks to include some 700,000 tax preparers, and wants the court to force the IRS to issue refunds of all user fees paid related to the PTIN, plus interest. The plaintiffs also want the court to issue an injunction prohibiting the IRS from charging any fees for issuing or renewing a PTIN.

Furthermore, they want the Treasury to stop collecting more information than is necessary for issuing a PTIN, and they want such necessary information to be collected only once.    

Photo credit – irs.gov

IRS Getting Ready to Take a Bite of Corporate Meals

 

The free in-office cafeteria meals that your employers provide to you out of the kindness of their hearts may soon be yanked, and you can thank the IRS for this latest blow above the belt.

The latest 2014-2015 Priority Guidance Plan for the IRS includes a pointed reference to “employer-provided meals” and regulations on “cafeteria plans.”

Granted that this issue is one of hundreds of others mentioned in the guidance plan, but the fact that the IRS is even considering focusing on something that is now common practice in large corporate offices should be enough to send the accountants scurrying to figure out the tax implications in advance of the guidance being issued (if at all).

The main section of the tax code under the microscope here is section 119. It says that the full value of employer-provided meals are deductible if they are provided on the business premises and for the convenience of the employer.

The key issue here is how companies have chosen to define the second criterion – the convenience part. It’s supposed to be mean that employees don’t other convenient choices, such as if meal breaks are too short and/or there no restaurants nearby for employees to go out, find a place to eat and get back in time.

Or if the nature of the business and possible emergencies make it critical for employees to be available throughout the work day.

But nobody has really given a hoot about these nuances. If a company wants to start providing free meals within the office, they do so and continue to claim the deductions for the full value of the meals because the IRS has until now left it alone.

There must be very few companies who have followed the letter of the law and avoided taking deductions for offering free meals or a cafeteria within the premises when there are plenty of other good options just outside the door.

In fact, Silicon Valley companies make it a point to offer fabulous food choices as a way to hire and retain talent. Apple is perhaps the only one of the tech giants that makes people pay for food in the company’s own cafeteria. Most of the rest offer free food as a perk, and it’s a good bet that a lot of them have convenient alternatives for employee meals just outside the doors.

According to the WSJ, the IRS has already started flagging such cases, and is seeking 30 percent of the meal value in back-taxes.

Photo – nga.gov

Affordable Care Act’s Growing List of Tax Implications

The problem with introducing health care reform through changes in tax law is that it sets the ball rolling on the impact of the changes.

As the Affordable Care Act’s roll-out and implementation moves towards the second year, the tax implications of whatever was done in the first year are only now being felt.

Because the government handed a huge new group of customers to the heath care industry, they’re expected to pay some $8 billion worth of taxes which are due on Sept 30.

This is the first time this tax is being collected, and there’s an unintended consequence – the federal government is taxing itself and forcing state governments to pony up their share to cover the cost of the new tax imposed on the health care industry.

That’s because some private insurers have passed on the cost of the higher taxes to policy holders, and reimbursements for Medicare health plans have been hiked because of the increase in cost to plan enrollees.

States have to pick up part of the increased tab. For example, California’s cost has increased by $88 million, with the federal government paying $48 million and the State chipping in $40 million. In Florida, the cost is $100 million, with a 60-40 split.

Another issue that’s just popped up on the radar is that people who enrolled into a health plan through a federal or state marketplace may possibly face delays in filing their tax returns and getting refunds.

That’s because the HHS and state agencies have to send out Form 1095-A to help those who got their insurance from the marketplace and were eligible for tax credits made available under the ACA. That’s about seven million people.

The HHS has to send out these forms to people from 36 states who signed up through the federal marketplace. The remaining states which established their own marketplace will have to send out the form on their own to those who enrolled using the state’s marketplace and are eligible for tax credits.

Some people will also get too much in subsidies if their financial condition and income improves in the interim. This means the IRS will then be required to grab some of their refund to adjust for the extra health care tax credit granted.

Oh, and this isn’t just about ordinary people. A new “CEO tax” that’s one of the tax code changes introduced in the ACA has already collected tens of millions of dollars.

That’s because the deduction cap for compensation provided to a health care company’s top executives was brought down from $1 million to $500,000, and the new cap includes all forms of compensation including performance bonuses.

According to the Institute for Policy Studies, this new change in the tax law has by itself managed to raise $72 million in additional taxes last year from the 10 largest insurers.  

Warren Buffett’s Involvement Protects Burger King Inversion Deal With Tim Hortons

An inversion deal of epic proportions such as the merger of Tim Hortons Inc. (TSX, NYSE: THI) and Burger King Worldwide Inc. (NYSE: BKW) to create a $23 billion behemoth based in Canada should have been enough to get the protectionists screaming bloody murder.

But the reaction to Burger King becoming a Canadian company has been muted, as compared to the outrage expressed when Walgreen and Pfizer and other such large companies tried their own inversions.

This could be because it’s just a hop north to Canada instead of a long swim across the Atlantic to Europe. There’s also the fact that this merger is not just about saving taxes by merging with a smaller company.

It’s more of a marriage of equals, since the new merged entity with 18,000 restaurants in 100 countries enhances the reach of both parties to the merger and allows them to continue growing their unique brands while leveraging each others’ strengths in the international market.

Secondly, Burger King isn’t going to save billions in taxes by paying $11 billion for coffee and doughnuts and changing their on-paper corporate headquarters to Canada.

In fact, both companies have an effective tax rate of around 27 percent, and the merger isn’t going to make that big a difference in taxes to either of them.

3G Capital, the Brazilian investment company which owns Burger King, will continue to hold a 51 percent majority stake in the merged entity.

The Tim Hortons headquarters in Oakville, Ontario will continue to be the global home of the Tim Hortons business even after it becomes a part of Burger King. And Burger King’s headquarters in Miami, FL will in effect continue to be the operational global home of the Burger King side of the business.

But all the anger towards corporations ditching America can’t be forgotten just because this deal is happening close to home in Canada and it seems more sensible than some of the other recent merger proposals that were purely tax inversions.   

One of the main reasons for the muted criticism is the involvement of Warren Buffett. Berkshire Hathaway is reportedly putting up $3 billion to help finance the merger through preferred shares.

These large corporate mergers usually send the stock of the acquired firm soaring, while the buyer’s share price drops a bit because of concern over the huge outflow of capital and additional debt.

However, in this case, shares of both Burger King and Tim Hortons soared over 20 percent. Some of the credit for investors’ unusual confidence in the value of the deal can be attributed to Buffett’s involvement.

More importantly, Buffett is looked upon as an investor who cares about the American economy more than profits, and if he’s got no problems supporting the Burger King-Tim Hortons deal, then well…this poutine can’t be that bad a whopper.

Photo credit – scazon/flickr

BofA’s $16.65B Settlement With DOJ Reduces Tax Bill by $4B

Last Thursday, Attorney General Eric Holder announced that the Dept. of Justice had reached a historic $16.65 billion settlement with Bank of America to settle financial fraud leading up to the subprime mortgage crash.

The AG said in a statement that it was “the largest civil settlement with a single entity in American history.”

What the AG didn’t mention was that the taxpayers will be on the hook for about $4 billion of the settlement amount.

The settlement closes the book on $10 billion worth of federal and state claims against BofA and its current and former subsidiaries including Countrywide Financial Cop. and Merrill Lynch.

"Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue,” said AG Holder.

The settlement also includes fines and penalties. To be specific, the bank will be paying a $5.02 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act. In fact, this is also the largest FIRREA penalty ever.

The remaining $11.63 billion part of the settlement is entirely deductible.

At the 35 percent corporate tax rate, this massive deduction allows BofA to reduce its tax bill by over $4 billion. BofA recently stated that their effective tax rate for the latter half of this year will be 31 percent which would peg the tax savings from the deduction at around $3.6 billion.

The $5 billion the bank is paying in penalties is not deductible since payments for civil penalties and fines don’t qualify as deductions.

But the U.S. Public Interest Research Group notes that BofA could still characterize the $5 billion in penalties as ‘compensatory penalties’ which are deductible. If they do so, it would make the entire $16.65 settlement deductible and raise the tax savings to $5.8275 billion.

“Giving tax write offs for Wall Street’s misdeeds means less deterrent against future misbehavior. It sends the wrong message to treat the costs of the settlement as a normal business expense,” said PIRG Senior Analyst Phineas Baxandall.

Oh, and the tax largesse is not limited to BofA alone. As part of the settlement, BofA will be funding a tax relief fund to the tune of $490 million.

This fund will help defray the tax liability incurred by consumers getting mortgage relief assistance – if Congress fails to extend the tax relief previously provided under the Mortgage Forgiveness Debt Relief Act of 2007.

This Act has already received two extensions. The Emergency Economic Stabilization Act of 2008 extended it through 2012, and then the American Taxpayer Relief Act of 2012 extended it until Jan 1, 2014.

Photo credit – Michael Fleshman/Flickr