Pardon Our Dust
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QUOTE OF THE WEEK
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“The Congress is stumbling. Republicans in the Congress – we’re tied up in knots […]. The House is talking about a tax plan that won’t get 10 votes in the Senate.” – Sen. Lindsey Graham (R-SC) on Face the Nation |
It’s as if the House GOP’s border adjustment tax proposal(“BAT”) is doing its own ice bucket challenge these days.Appearing on CBS’s Face the Nation, Sen. LindseyGraham became the latest lawmaker to throw cold water onthe controversial BAT.
LEGISLATIVE LANDSCAPE
Senators Throwing Shade at the BAT. Sen. Graham has joined Sens. David Perdue (R-GA), JohnCornyn (R-TX), Tom Cotton (R-AR) and Mike Rounds (R-SD) tocast doubt on the viability of the House GOP’s proposal totax imports while exempting exports. The BAT has beenstruggling to make friends in the Senate, making life alittle harder for House Ways and Means Chairman Kevin Brady(R-TX) and Speaker Paul Ryan (R-WI) — the proposal’s twobiggest cheerleaders. To make things worse, rumors arecirculating that the border adjustment plan will not be apart of the Trump Administration’s forthcoming tax reformplan, which could arguably seal the fate of the BAT forgood.
Even if the BAT survives the onslaught of criticisms, Bradymay have to contend with industry groups (and lawmakers)agitating for exemptions. However, Brady has said, onseveral occasions, that there will be no carve-outs, butthat decision may ultimately be out of the chairman’s handsif he wants the BAT to be included in any tax reformlegislation. With divisions and questions growing, Sen.Cornyn and Rep. Jim Renacci (R-OH) are calling for hearingson the BAT. “I think having hearings would help answer someof those questions,” Renacci said, noting that othermembers have been asking for a hearing as well.
Last week, Speaker Ryan made a trip over to the SenateGOP’s weekly lunch to give a presentation on the proposal,the speaker apparently ruffled some feathers when he askedsenators to “keep [their] powder dry” on the topic. Thepresentation left senators with more questions than answers— many were unmoved by Ryan’s sales pitch. What is clear,however, is that both Brady and Ryan have their work cutout for them this summer.
Brady Talks BAT at TCPI Conference. Don’t get too excited — House Ways and Means ChairmanBrady’s speech at the 18th Annual Tax Policy& Practice Symposium is essentially a rehash of earlierremarks on tax reform and the border adjustment taxproposal. Brady gave a simplified explanation of how theBAT would work. According to the chairman, companies wouldonly need to answer one question: “Is your product orservice sold in the United States?” Companies that answer“yes” would be subject to a 20 percent tax regardless ofwhere the product was made. Sales abroad, however, will notbe subject to U.S. tax at all. Additionally, under the BATsystem, import costs will no longer be tax deductible.
GOP Continues to Spring Leaks. On Feb. 16, following a House Republican all-membersmeeting on how to repeal and replace the Affordable Care Act (ACA), a policy memopresenting options for an alternative healthcare system wasleaked to the press.
The policy memo provided for a universal, portable, monthlytax credit to provide financial assistance to low-incomeindividuals and families, and it proposed enhancing healthsavings accounts (HSAs) by increasing the contributionlimit to match the maximum out-of-pocket thresholds forhigh deductible health plans (HDHPs).
On the controversial issue of Medicaid, the proposal callsfor a repeal of the ACA’s Medicaid expansion forable-bodied adult enrollees and reforms to Medicaidfinancing, considering block grants and per capitaallotments. Though, according to chatter picked up byMcGuireWoods’ tax policy team, House Republicans areleaning towards block grants. This of course, will make itdifficult for the proposal to pass muster in the Senate,especially since 20 GOP senators are from states thatexpanded Medicaid.
The policy memo also called for the repeal of allACA-related taxes, including the following:
- Employer and individual mandate
- Medicare payroll tax increase
- Exclusion of reimbursement of over-the-counter drugs without prescription
- Tax on health insurance premiums, the medical device tax
- Prescription drug tax.
The memo was silent on additional pay-fors, but Republicansare still considering capping the healthcare tax exclusionas part of “a menu of pay-fors” for a replacement billexpected this spring. This provision is a controversialmeasure that has been strongly opposed by business groupsrepresenting plan sponsors, like the Chamber of Commerce.Chairman Kevin Brady and Speak Paul Ryan are interested inhearing from stakeholders to understand the impact of thisprovision. In the meantime, the House GOP is waiting for aCBO score of this provision and a score on the repeal ofthe ACA taxes, including the individual andemployee mandates.
House Republicans expected to move forward with mark-ups incommittees by the first week of March, though earlierreports indicated that a mark-up was scheduled for the weekof Feb. 28.
After the release of the memo, it has become increasinglyapparent that Republicans are deeply divided on how to moveforward with repealing and replacing the ACA. Thebiggest differences remain on what type of tax creditsindividuals should receive in lieu of subsidies in order tohelp them purchase coverage and how Medicaid reform shouldbe structured. While Ryan claims that the GOP will find away to bridge the state divide on Medicaid, the clock isticking — there are only a few weeks left before theindividual markets collapse, according to private insurancecompanies.
REGULATORY WORLD
HHS to the Rescue. On Feb. 15, the Department of Health and Human Servicesreleaseda ruleaimed to stabilize the individual markets under the Affordable Care Act. A list of the provisions inthe rule are below:
- Limiting special enrollment periods (SEP) to prevent abuse
- Revising guaranteed availability to promote continuous coverage
- Shortening annual open enrollment periods (OEP)
- Deferring network adequacy reviews to states
- Preserving access to essential community providers (ECP)
- Amending de minimis ranges for actuarial value (AV) requirements
A Second Bite at the Apple. Apple plans to appeal a European Commission ruling orderingthe tech giant to pay €13 billion, plus interest, in backtaxes to Ireland. In a summary ofApple’s appeal, submitted to the European Court of Justice on Feb. 20,the company accused European Commission regulators ofignoring critical evidence and violating basic proceduralrights, which are in breach of the EU’s Charter ofFundamental Rights. Apple also contends that the court madefundamental errors when determining how Apple makes itsprofits and in interpreting Irish tax law.
In August 2016, the European Commission ordered Apple topay Ireland €13 billion after it found that the company hada tax deal in the country that constituted illegal stateaid. At the time of the ruling, European CompetitionCommissioner Margrethe Vestager maintained that Apple’s taxdeal with Ireland enabled the company to pay less tax thanother businesses, with an effective corporate tax rate of 1percent on its European profits in 2003, down to 0.005percent by 2014.
EU Taxman: “Be Thankful I Don’t Take it All.”On Feb. 21, after a meeting in Brussels, European Unionfinance ministers agreed on new anti-tax avoidance rules toclose loopholes available through third-country taxsystems. The regulations target various planning strategiesused by multinational enterprises to exploit the taxregimes of EU and non-EU nations and to avoid or lowertheir tax obligation in each jurisdiction. Specifically,several companies exploit “hybrid mismatches” in tax law toavoid taxation of dividend income. The new rules go intoeffect in 2020 and should help EU countries recoup lostrevenue from tax-saving schemes.
EU finance ministers also addressed criteria to define atax haven, reaching a potential compromise. Ministersagreed that countries that have zero tax rates will not beautomatically considered tax havens, but they will besubject to checks based on other criteria, including thenumber of off-shore structures in their jurisdictions. TheEU has kicked off the process by sending letters to 92countries, including the U.S., to screen practices thatmight be viewed as aiding or encouraging tax avoidance. Thetax haven list should be finalized by the end of the year.
CFPB Lives to Breathe Another Day. The Consumer Financial Protection Bureau won a much-neededreprieve on Feb. 16 — theD.C. Circuitvacated a three-judge panel ruling from October 2016 inwhich Judge Brett Kavanaugh gave the White House the powerto remove its independent director at will. The D.C. Courtof Appeals will now rehear the bureau’s case. The full D.C.Circuit scheduled oral arguments for March 24, withbriefing to begin on March 10.
Last week’s court order gives Richard Cordray – thebureau’s director – temporary job security and anotherchance to defend the structure of the agency. Since theelection, the agency has become a target for Republicanswho would like to restructure the agency and install abipartisan commission in its stead.
House Financial Services Committee Chairman Jeb Hensarling(R-TX) issued a statement after the decision came out,noting that the case will not affect his plans to pass abill to restructure the bureau.
COMMANDER-IN-TWEET
LINE ITEMS
- The IRS plans to continue to accept tax returns, even if taxpayers fail to indicate whether they have health insurance. Experts say this will not have a major impact on the Affordable Care Act’s individual mandate. The IRS had planned on rejecting tax returns that do not contain this information starting this year, but the agency changed its mind following the Trump Administration’s executive order mandating that federal agencies lessen the burdens of the ACA.
- House Ways and Means Democrats welcomed Kara Getz as their new chief counsel on Feb. 21. Previously, Getz served as a senior tax counsel for the Senate Finance Democrats.
- The Trump Administration is exploring the idea of establishing a federal tax credit scholarship program to help low-income families send their children to private schools. The proposal could be included in the White House’s forthcoming tax reform plan. Critics of the proposal consider such tax credits to be nothing more than a voucher program by another name. Others fear that the program would only expand the federal government’s role in education
LOOKING AHEAD
**Congress is in recess until Feb. 27**
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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, rmohan@mwcllc.com, (202) 857-2944.
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