Tax Policy Update

January 24, 2017

Pardon Our Dust

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The estimated impact of Trump’s tax plan on the federal deficit accordingto an analysis by the Tax Policy Center (TPC). At his confirmation hearinglast week, Steven Mnuchin, Trump’s pick for the Treasury secretary post,faced questions regarding the budgetary impact of the administration’s taxproposals. Sen. Mike Bennet (D-CO) cited the TPC’s $7-trillion figure andasked the nominee whether such a sum was acceptable. Mnuchin explained thatthe use of dynamic scoring will ultimately provide a more accurate pictureon the economic impacts of Trump’s tax plan.

In addition to tax policy, Mnuchin fielded a broad range of questions atthe five-hour hearing, sharing his views on potential reforms at theInternal Revenue Service, the renegotiation of existing trade deals, andchanges to the Dodd-Frank Act. Check out the section below for alist of key takeaways from the hearing.


Mnuchin Takes the Hot Seat. Last Thursday, the Senate Finance Committee held a confirmation hearing onthe nomination of Steven Mnuchin to be the secretary of the Treasury.Democrats on the panel had some tough questions and harsh words for thenominee, particularly in light of his failure to provide completeinformation on all of his business holdings in his financial disclosurereports to the committee.

Republicans on the panel roundly praised the Trump Administration’s focuson pro-growth economic policies. Throughout the Q&A portion of thehearing, Mnuchin restated his commitment to simplify the tax code andrewrite it so that American businesses can compete globally. For Mnuchin,making America competitive means lowering tax rates and eliminating most ofthe deductions in the code. Below are Mnuchin’s thoughts on othertax-related topics:

  • On Repatriation. Mnuchin stated that the administration is very interested in repatriating the profits currently parked overseas. According to Mnuchin, Trump, himself, believes the administration can bring back about $3 trillion. The Trump plan would impose a one-time repatriation tax of 10 percent—revenue from repatriation would then be reinvested in the United States to create jobs.
  • On Passthroughs . Mnuchin said that he is committed to making sure passthrough entities are treated fairly. But at the same time, Mnuchin wants to make sure that large passthroughs and hedge funds will not game the system to avoid paying taxes.
  • On the Production Tax Credit. Sen. Grassley raised the issue of the production tax credit, and Mnuchin agreed that as part of tax reform, there should be a plan for phasing out the credit.
  • On the Border Adjustment Tax. The only reference to the House GOP’s border adjustment tax proposal came when Ranking Member Ron Wyden asked which specific products would be subject to this “35 percent tax.” Mnuchin explained that Trump recently expressed some concerns with the border adjustment tax and noted that Trump has never suggested a 35 percent “border tax.” According to Mnuchin, Trump believes that companies that move jobs abroad should face some sort of repercussion.

On the other side of the aisle, Democrats are worried that Trump’s businesstax reform plan will end up neglecting the middle class and add to thenational debt. Ranking Member Ron Wyden repeatedly accused Mnuchin of goingback on his promise to not give the wealthy an absolute tax cut. Wyden alsoquestioned Mnuchin’s qualifications when the nominee failed to providedetails on how he would deal with Medicare and the Earned Income TaxCredit.

When Democrats pressed the nominee to give some examples on what tax relieffor the middle class would entail, Mnuchin struggled to cite examples ofpossible cuts. Democrats also took turns to criticize Mnuchin’s offshoreholdings, some of which he did not disclose to the committee. Mnuchinstated that he did not use these entities to avoid paying personal taxes,adding that such offshore activities are reasons why the tax code needs tobe simplified.

The Senate Finance Committee has not yet announced when it will hold a voteon Mnuchin’s nomination. In the interim, former Acting Undersecretary forTerrorism and Financial Intelligence Adam Szubin has assumed the role ofacting secretary at the Department of the Treasury.

Mnuchin Signals Support for Staff Increase at IRS. At his confirmation hearing, Mnuchin spent a fair amount of time citingways he would like to reform the tax collection agency, expressing concernswith the IRS’s inadequate staffing and poor technology infrastructure.Mnuchin believes that the agency needs to improve its customer service,cybersecurity, and technologies. For Mnuchin, good customer service meansthat the IRS should have the technology to allow taxpayers to interact orcommunicate with the agency electronically. Most importantly, the agencyshould have the right tools to protect taxpayers’ data from cyberattacks.

The Trump Variable to the GOP Constant. Since winning the presidential election, Donald Trump has been a wildcardfor the GOP establishment. Within the span of a week, Trump went fromcriticizing the House GOP’s border adjustment tax to confirming that somesort of border tax will definitely be imposed on those who ship jobsoverseas.

“If you go to another country and you decide that you’re going to close andget rid of 2,000 people or 5,000 people … we are going to be imposing avery major border tax on the product when it comes in,” Trump said.

Trump is yet to release concrete details on his ideas for a borderadjustment tax. In December last year, he tweeted out plans to impose a 35percent import tariff on the sale of goods back into the U.S. as a punitivemeasure against companies that ship jobs overseas.

Though Trump’s plan differs significantly from that of the House GOP, Waysand Means Committee Chairman Kevin Brady seems confident that Trump willcome around. Brady noted that the Trump team is currently diving into thetax reform plan and the “big, revolutionary” proposed changes that will“get us back in the game.”

Despite differences in their approach to the issue, both Trump and theHouse GOP seem to be on the same page on one thing: making products in theU.S. Recently, in a speech before business leaders visiting the WhiteHouse, Trump noted that there “will be advantages to companies that doindeed make their products here.”

Both Trump and the GOP are eager for some version of a border adjustmenttax and moving to a territorial system because it reduces incentives forcorporations to move their operations abroad. It also eliminates the needfor Congress to curb base erosion and profit shifting via legislation.

As the GOP ramps up to sell tax reform and the border adjustment taxoutside the Beltway, the backlash against these proposals has alreadystarted. Amongst large retailers that may be negatively affected are BestBuy, Gap, Levi Strauss, and Target. Additionally, the conservative KochBrothers have publicly opposed the tax, throwing another wrench into GOPplans for reform.

As the debate continues, the GOP is also mindful that its border adjustmenttax may run afoul of World Trade Organization rules. In order to avoidthis, experts suggest a tax that closely mirrors a value-added tax (VAT).

For a border adjustment tax to comply with WTO guidelines, it must bestructured correctly – preferably as a VAT with a wage credit. Under thesecircumstances, it is likely that a border adjustment tax would withstandWTO scrutiny. However, the current GOP tax plan skirts a gray line, sinceit contains elements that differentiate it from a VAT. Until now the GOPhas been reluctant to use the term “VAT,” fearful that people will see itas a new tax, rather than a completely new system. It remains to be seenwhether they might change their tune in order to gain approval from theinternational community.

Trump Presses ACA’s Self-Destruct Button.The Trump Administration recently issued an executive order giving theDepartment of Health and Human Services (HHS), the IRS and other agenciesthe authority to dismantle the Affordable Care Act to the fullestextent permitted by the law – effectively gutting the law from within.

When the Obama Administration enacted the healthcare law, it relied heavilyon guidance from agencies like the HHS to implement it. While this gave theadministration wide latitude and control over key decisions, it is now thelaw’s Achilles Heel. The Trump Administration now has the same power toreverse every decision made at the executive level to start weakening thelaw, without any Congressional action.

Unfortunately, for proponents of the ACA, some of the cornerstones of thelaw were enacted through federal regulation. For example, the TrumpAdministration could stop subsidizing health care costs such as co-pays anddeductibles for ACA participants under a certain income threshold. Adecision to discontinue these payments would essentially cause healthinsurers to flee the exchanges or significantly increase premiums, makingthem unaffordable for many Americans. Essentially, the decisions made byfederal agencies may cause the health care law to implode, leaving millionsuninsured before Republicans have a replacement plan.

Speaking of which – Sens. Susan Collins (R-ME) and Bill Cassidy (R-LA)announced that they have worked out a compromise plan that will providemore Americans with coverage than the ACA, at no additional cost.

The Cassidy-Collins plan gives states three options: (1) maintain thestatus quo under the ACA; (2) reject federal assistance; (3) or transitionto a new system that will automatically enroll certain individuals in ahigh-deductible health plan (HDHP) linked to a health savings account(HSA). While the two senators are yet to release more specifics, theirproposal would keep the ACA’s taxes in place to pay for a replacement andwaiting until 2020 to transition into the new system.

Democrats are wary of the proposal on the grounds that it may not allowthose currently covered by the ACA to maintain their health insurance plansat current rates. Senator Chuck Schumer stated that the plan was far fromthe full replacement plan Republicans have been promising for years.

The plan is likely to be a difficult sell to Republicans as well, who wantto repeal and replace the ACA as soon as possible. Additionally, accordingto the latest reports, the GOP has not decided on whether to maintain allACA taxes. But based on chatter picked up by McGuireWoods’ tax policy team,the Cadillac tax will likely remain intact.

Cabinet Nominees to Get Their Hands Stamped. Senate committees are voting on several cabinet nominees this week, pavingthe way for confirmation votes on the Senate floor. Committees are expectedto vote on the following nominees:

  • Sen. Jeff Sessions  nominee to be the U.S. attorney general
  • Dr. Ben Carson, nominee to be the HUD secretary [approved Jan. 24]
  • Elaine Chao, nominee to be the Transportation secretary [approved Jan. 24]
  • Wilbur Ross, nominee to be the Commerce secretary [approved Jan. 24]
  • Rex Tillerson, nominee to be the secretary of State [approved Jan. 23]


Trump as Mr. Freeze. After the festivities on Inauguration Day, the Trump Administration movedquickly to put a halt to the current regulatory agenda. In a memo to allfederal departments and agencies, the administration called for an“immediate regulatory freeze” in order to give the new administration sometime to review existing regulations. Regulations that have not yet takeneffect will have their implementation dates delayed for 60 days. This meansthat the Master Limited Partnership guidance, earnings stripping guidance,and other recently-released tax rules will be caught in the cross-hairs ofthe Trump Administration’s new regulatory freeze. A copy of the memorandahas not yet been posted on the new White House website. See the memohere.

Q&A With Cordray. Consumer Financial Protection Bureau Director Richard Cordray sat down withthe Wall Street Journal today for a Q&A session. Cordray facedtough questions about the future of the agency and his interpretation ofPresident Trump’s executive order to freeze new or pendingregulations. While the director mostly reiterated that he could notanswer hypothetical questions, he did emphasize that the bureau is anindependent agency that has been directed by Congress to enforcecertain regulations and protect the interests of consumers. Cordraycited to statistics that the CFPB has made $12 billion available to 27million consumers and that regardless of who holds power, the bureauwill continue its mission. With regards to the regulatory freeze,Cordray stated that the bureau is still digesting these orders andtrying to address them. He added that the agency will continue toregulate the markets in an even-handed manner as mandated by Congress.

Cordray was also asked about his response to the House GOP’s plans tochange the structure of the agency and subject it to the congressionalappropriations process. Cordray replied that neither he nor the CFPBhave the power todictate structure of the agency; only Congress has that power. Cordraypromised to comply with any legislation changing the structure of theagency. Corday also added that in his opinion, there is considerablecongressional oversight over the agency. He highlighted the fact that hehas testified before Congress over 10 times, complied with numerousdocument requests, and always implemented the recommendations set forth invarious GAO and Inspector General reports.

When asked about the bureau’s most important initiatives for 2017, Cordraysaid that the CFPB will continue to monitor the Wells Fargo scandal, notingthat the incident illustrated the importance of monitoring performanceincentive programs. Cordray added that the CFPB’s enforcement andsupervisory role is key to all its 2017 initiatives.

U.S. Releases Voluntary Country-By-Country Reporting Rules. On Jan. 19, the IRS released Revenue Procedure 2017-23, allowing the parentcompanies of multinational enterprise groups the power to decide whetherthey will voluntarily file country-by-country reports. The guidanceprovides instructions for parent companies on how to file CBC reports ifthey are required to comply with the rules of the U.S. and a foreigncountry with an earlier effective date. The U.S. expects other countries toaccept this voluntary regime, despite threats from the European Union toblacklist the U.S. for its failure to comply with CBC reporting set forthby the Organization for Economic Cooperation and Development in its actionplan on Base Erosion and Profit Shifting (BEPS). CBC reporting requiresmultinational entities to disclose certain tax information in eachjurisdiction where they conduct operations.


President Trump’s two simple rules for his pro-growth economic agenda:


  1. In a letter to the House and Senate tax-writing committees, Sens. Marco Rubio (R-FL) and Mike Lee (R-UT) said they oppose any child-care tax proposal that might “privilege wealthier families” or discriminate against parents who choose to stay at home. The statement is in response to the child-care deduction proposed under Trump tax plan.
  2. As the Treasury Department finalizes its estate tax valuation discount rules, it may consider exempting closely held businesses, according to Catherine V. Hughes, an estate and gift tax attorney-adviser in the Office of Tax Policy. Hughes notes that the exemption that the department is considering “would make most of the objections to these proposed regulations go away.” The department’s revision of the proposed rules comes after members of Congress criticized the regulations as being overly broad during a hearing in December. The release of the final regulations will of course be stalled by Donald Trump’s regulatory freeze. Hughes expressed hope that the department will be allowed to continue its comment process so that they can work out some of the remaining issues before the release of final regulations.
  3. On Jan. 19, the IRS published T.D. 9815, final and temporary regulations on dividend equivalents that clarify the obligations of nonresident aliens and foreign corporations that hold certain financial products. The agency notes that the final rules reflect comments from the industry, including provisions about the substantial equivalence test.
  4. On Sunday, Kellyanne Conway, White House counselor, admitted that President Trump is unlikely to release his tax returns, even after audits are complete. “We litigated this all through the election. People didn’t care,” Conway said. A White House petition seeking to make Trump’s returns public already has over a 100,000 signatures — the threshold required for a comment from the White House.
  5. Fun fact — if you want a hefty discount on the new Bentley you’ve been eyeing, look no further than Montana. The state has a law that allows people to set up a limited liability company in the state in order to make a purchase, without paying sales tax in their home state. The Montana Secretary of State’s Office even provides a list of contacts for people seeking to use this tax planning strategy. Of course, other states have caught on — California and a handful of other states have passed laws that retaliate against Montana LLCs that were set up purely for tax avoidance purposes.
  6. Former Saturday Night Live Star, Joe Piscopo, plans to give Gov. Chris Christie a run for his money by running to replace him as governor. Piscopo has come out with a revolutionary new tax plan to help make his bid competitive – it includes a plan to eliminate the income tax for firefighters, police officers, and teachers.
  7. The IRS extended its deadline to claim the health coverage tax credit for people who lost their jobs due to free trade agreements. In Notice 2017-16, the agency said that taxpayers who are eligible for the credit from June 30, 2015, to Dec. 31, 2016, have three years to claim it.
  8. Tax-filing season opened on Jan. 22. The IRS expects to receive approximately 153 million tax returns. This year, those claiming the Earned Income Tax Credit and the refundable portion of the Child Tax Credit will have to wait until Feb. 15, at the earliest, to receive a refund.


Congressional Activity

Thursday, 1/26

Congressional GOP Annual Retreat
GOP lawmakers are heading to Philadelphia for their annual retreat.Devising and agreeing on a strategy to repeal and replace the Affordable Care Act will be at the top of the meeting agenda.

Other Activity

Wednesday, 1/25

Atlantic Council
The council holds a discussion on “Too Big to Fail? The Power ofTransparency in Preventing Future Financial Crises.”

Thursday, 1/26

Cato Institute
Cato holds a briefing on “The Economics of Health Insurance Reform.”

Washington International Trade Association
WITA holds a discussion on “Border Adjustment Taxes, Tax Reform, andTrade.”

For listings of all the week’s tax and financial services happenings, read below to find out how you can become a subscriber.

The McGuireWoods’ Tax & Financial Services Policy Group assists clients in understanding how the latest legislative and regulatory proposals anddecisions may impact their business and industry. To learn more about how our team can help you monitor, analyze, and navigate all relevant legislativeand regulatory developments, please contact any of our attorneys and consultants below at (202) 857-1700. For more information on how to subscribe toour weeklyTax Policy Update and tax news alerts, please contact Radha Mohan,, (202) 857-2944.

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