from Washington National Tax Services President Obama s FY 2017 budget reaffirms call for business tax reform, significant international and individual tax increases February 9, 2016 In brief President Obama on February 9 submitted an FY 2017 budget to Congress that reaffirms his support for business tax reform that would lower the top US corporate tax rate to 28 percent, with a 25-percent rate for domestic manufacturing income. The President s budget again reserves revenue from a large number of previously proposed tax increases to support business tax reform. Significant international tax increase proposals that have been re-proposed include a 19-percent minimum tax on future foreign income estimated by Treasury staff to raise $350.4 billion over 10 years. A one-time mandatory 14-percent tax on previously untaxed foreign income is also re-proposed, with the estimated $299 billion in the one-time revenues associated with this proposal to be used for increased spending on various policy initiatives. The Administration notes various proposals intended to prevent US companies from avoiding tax through inversions and to prevent foreign companies operating in the United States from using excessive interest deductions to strip earnings out of the United States. One significant new proposal is a $10.25-per barrel fee on oil production to fund investments in a clean transportation system that is estimated to raise $319 billion over 10 years. The budget also includes a new proposal to modify the Affordable Care Act s Cadillac excise tax on certain high-cost employerprovided health plans to account for regional differences in health care costs. The President s budget proposes more than $1 trillion in tax increases for upper-income individuals, including new proposals to increase the top capital gains and qualified dividends tax rate to 28 percent, limit step-up in basis for inherited property, and impose a new fee on large financial institutions, as well as previous proposals to limit the value of itemized deductions and impose a Buffett rule minimum tax on higher incomes. The budget also includes a large number of loophole closers and proposals to reduce the tax gap through new compliance measures and increased information reporting. The budget calls for revenue from these proposals to be used to offset the cost of new middle-class tax reforms and to reduce the federal deficit. The Treasury Department s general explanations of the Administration s FY 2017 revenue proposals are provided in a 283-page Green Book. www.pwc.com
In detail Business tax reform Reaffirming his support for businessonly tax reform, the President s FY 2017 budget calls for (1) lowering the top corporate tax rate to 28 percent, (2) providing a 25-percent rate for domestic manufacturing income, (3) reforming international tax rules, (4) simplifying and reducing taxes for small businesses. The budget does not specify all of the base broadeners that would be required to offset the cost of lowering the top US corporate rate from 35 percent to 28 percent, but states that the rate reductions would be paid for by eliminating dozens of inefficient tax expenditures and through additional structural reforms. Note: Revenue proposals in the President s budget are proposed to be effective generally after December 31, 2016. Foreign earnings minimum tax proposal: The President s budget re-proposes a 19-percent minimum tax that would apply to the foreign earnings of US corporations and their controlled foreign corporations (CFCs), less 85 percent of the 'per-country foreign effective tax rate.' The President s FY 2017 budget modifies the earlier FY 2016 version of this proposal to provide that the lookthrough exception to Subpart F (which was extended through December 31, 2019 by Congress last year) would be made permanent, and income qualifying for the lookthrough exception would be subject to minimum tax. Note: In response to concerns expressed last year about the President s minimum tax proposal by some Members of Congress, Treasury Secretary Jack Lew testified at House and Senate tax committee hearings that the Administration s minimum tax rate of 19 percent was subject to negotiation with Congress. The Administration also re-proposes a one-time 14-percent tax on previously untaxed foreign income. A credit would be allowed for the amount of foreign income taxes associated with such earnings, multiplied by the ratio of the one-time tax rate to the otherwise applicable US corporate tax rate. The earnings subject to the onetime tax could then be repatriated without any further US tax. The tax would be payable ratably over five years. Other previously proposed international tax measures reserved in the budget for tax reform include proposals that would: Repeal a delay in the implementation of worldwide interest allocation rules; this provision under current law has been delayed until taxable years beginning after 2020. Restrict deductions for excessive interest of members of a financial reporting group. Prevent avoidance of foreign base company sales income through manufacturing services arrangements. Create a new category of Subpart F income for transactions involving digital goods or services. Restrict the use of hybrid arrangements. Limit the application of exceptions under Subpart F for certain transactions that use reverse hybrids. Limit the ability of domestic entities to expatriate. Prevent elimination of earnings and profits through distributions of certain stock. Limit shifting of income through intangible property transfers. Modify tax rules for dual capacity taxpayers. Disallow deductions for excess non-taxed reinsurance premiums paid to foreign affiliates. Tax gain from the sale of a partnership interest on lookthrough basis. Prevent use of leverage distributions from related foreign corporations to avoid dividend treatment. Extend section 338(h)(16) to certain asset acquisitions. Remove foreign taxes from a section 902 corporation s foreign tax pool when earnings are eliminated. Other revenue-raising proposals to be reserved for tax reform would: Treat publicly-traded partnerships for fossil fuels as C corporations. Eliminate certain oil and gas preferences, including the domestic manufacturing deduction, expensing of intangible drilling costs, and percentage depletion. Eliminate certain coal preferences, including the domestic manufacturing deduction. Require that derivative contracts be marked to market with the resulting gain or loss treated as ordinary income. 2 pwc
Modify treatment of insurance companies and products, including dividends-received deduction for life insurance company separate accounts. Repeal LIFO method of accounting. Repeal lower-of-cost-or-market inventory accounting method. Modify like-kind exchange rules for real property. Modify depreciation rules for noncommercial general aircraft. Conform corporate ownership standards. Repeal gain limitation for dividends received in reorganization exchanges. Expand the definition of built-in loss for purposes of partnership loss transfers. Extend partnership basis limitation rules to non-deductible expenditures. Limit importation of losses under related-party loss limitation rules. Deny deduction for punitive damages. Tax increases to offset middleclass tax credits and reduce the federal deficit Previously proposed individual tax increase proposals would: Increase the top rates on capital gains and dividend income to 28 percent (inclusive of the 3.8- percent net investment income tax) for joint filers with incomes above $500,000, and would propose to change the estate tax carryover basis rules to limit the ability to step up the basis of inherited property. The Treasury Department estimates these changes in capital gains rules would raise $235.2 billion over 10 years. Limit to 28 percent the value of all itemized tax deductions and certain tax exclusions, including tax-exempt interest, employersponsored health insurance, and retirement contributions, for individuals with taxable incomes in the 33-percent, 35-percent, or 39.6-percent tax brackets. A similar limitation would apply under the alternative minimum tax. The Treasury Department estimates this proposal to raise $645.5 billion over 10 years. Implement a Buffett Rule by imposing a 30-percent minimum Fair Share Tax (FST) with carveout for charitable giving. The proposed FST would be phased-in for modified adjusted gross income starting at $1 million, and would be fully phased-in at $2 million. This proposal is estimated to raise $37.5 billion over 10 years. Fee on large financial institutions The President s FY 2017 budget also re-proposes a fee on large financial institutions. Specifically, the proposal would impose a 7-basis-point fee on the liabilities of large US financial firms with assets of more than $50 billion. This proposal is estimated to raise $111 billion over 10 years. Fee on oil production The President s FY 2017 budget proposes a new $10.25-per barrel fee on oil to be paid by oil companies. The fee would be phased-in over five years. This proposal is estimated to raise $319 billion over 10 years. High-cost employer-provided health coverage The budget includes a new proposal to modify the Affordable Care Act s Cadillac excise tax on certain highcost employer-provided health plans to account for regional differences in health care costs. Note: Congress last year enacted legislation delaying implementation of the Cadillac excise tax until 2020. Additional proposed revenue offsets and loophole closers include proposals to: Tax 'carried interest' partnership income as ordinary income. Conform net investment income taxes (NIIT) and self-employment contributions act (SECA) taxes for professional services businesses, including S corporations, limited partnerships, general partnerships, and LLCs taxed as partnerships. Limit the total accrual of all individual retirement accounts (IRAs) and other tax-preferred retirement accounts; currently, the maximum permitted accumulation of tax-preferred retirement accounts for an individual age 62 would be approximately $3.4 million. Reinstate the estate tax at 2009 levels, with a top rate of 45 percent and a $3.5 million exemption. Require current inclusion in income of accrued market discount and limit the accrual amount of distressed debt. Require that the cost basis of portfolio stock that is a covered security must be determined using the average basis method. Reinstate Superfund taxes. 3 pwc
Increase tobacco taxes and index for inflation. Make permanent the FUTA surtax. Increase certainty with respect to worker classification. Restrict deductions for certain conservation easements. Expand tax gap compliance requirements. Disallow the deduction for charitable contributions that entitle donors to a right to purchase tickets to sporting events. Middle-class tax relief Provide a new second earner tax credit up to $500 for two-earner married couples, subject to wage limitations. Expand child care tax benefits up to $3,000 per child, subject to wage limitations. Simplify education tax benefits by consolidating several overlapping education provisions and make permanent and expand the American Opportunity Tax Credit. Require 401(k) plans to expand eligibility to participate to longterm part-time employees, defined as those working at least 500 hours per year for at least three consecutive years. Expand earned income tax credit (EITC) benefits for workers without qualifying children. Business tax proposals The budget includes several business tax proposals that are intended to provide incentives for manufacturing, research, clean energy, and infrastructure. The budget proposes a new credit for businesses hiring graduates from community and technical colleges. Building on last year s action by Congress to make permanent the Section 41 research credit, the President s budget proposes to repeal the traditional method of calculating the research credit and make certain changes in the credit: (1) increase the alternative simplified credit (ASC) rate from 14 percent to 18 percent; (2) eliminate the reduced ASC for businesses without qualified research expenses in the prior three years; (3) allow the credit to offset alternative minimum tax (AMT) liability for all taxpayers; and (5) repeal the special rule for owners of a pass-through entity. In addition, the proposal would repeal the requirement that research and experimentation costs be amortized over 10 years when calculating individual AMT. These proposed changes to the research credit are estimated to cost $27.2 billion over 10 years. Small business provisions would: Allow businesses with gross receipts of less than $25 million to use an overall cash method of accounting, regardless of whether the business holds inventories. Exceptions under current law allowing the overall cash method of accounting to be used by personal service corporations and by business entities that are not C corporations (other than partnerships with a C corporate partner), regardless of size, would continue. Extend and increase Section 179 expensing to $1 million. Note: Congress last year permanently increased Section 179 expensing to $500,000, and indexed this amount for inflation. Additional previously proposed business tax incentives include proposals to: Modify and permanently extend the renewable electricity production tax credit and investment tax credit. Modify and permanently extend the New Markets Tax Credit, and other regional growth incentives. Modify and permanently extend the Work Opportunity Tax Credit. Note: Congress last year extended through 2019 the renewable electricity production tax credit and investment tax credit for wind and solar (with phase-outs), the New Market Tax Credit, and the Work Opportunity Tax Credit. Provide tax incentives for locating jobs and business activity in the United States, and remove tax deductions for shipping jobs overseas. The budget also includes several business tax simplification proposals, including: Repeal of Section 197 antichurning rules. Repeal of the telephone excise tax. Repeal technical terminations of partnerships. Next steps Most Congressional committees will hold a series of hearings on the President s budget. Treasury Secretary Jack Lew is scheduled to testify at a February 10 Senate Finance Committee hearing and a February 11 House Ways and Means Committee hearing. Citing objections to the President s approach to federal spending deficit reduction, the chairmen of the House and Senate Budget Committees last week announced that they will not invite White House Office of Management and Budget Director 4 pwc
Shaun Donovan to testify at hearings on the President s budget. The takeaway The President s budget is not expected to be accepted by the Republicancontrolled Congress. Key Republican leaders in the House and Senate have indicated that they plan to focus this year on developing tax reform proposals that may provide a basis for future legislation. For more details on this year s key tax policy issues, see the PwC 2016 Tax Policy Outlook: Setting priorities in an election year Let s talk For a deeper discussion of how this might affect your business, please contact: Tax Policy Services Pam Olson (202) 414-1401 pam.olson@pwc.com Scott McCandless (202) 312-7686 scott.mccandless@pwc.com Don Carlson (202) 414-1385 donald.g.carlson@pwc.com National Economics & Statistics Drew Lyon (202) 414-3865 drew.lyon@pwc.com Rohit Kumar (202) 414-1421 rohit.kumar@pwc.com Ed McClellan (202) 414-4404 ed.mcclellan@pwc.com Andrew Prior (202) 414-4572 andrew.prior@pwc.com Peter Merrill (202) 414-1666 peter.merrill@pwc.com Brian Meighan (202) 414-1790 brian.meighan@pwc.com Lindy Paull (202) 414-1579 lindy.paull@pwc.com Larry Campbell (202) 414-1477 larry.campbell@pwc.com 2016 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. SOLICITATION This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 5 pwc