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www.pwc.com Tax Legislative Update Andrew Prior, Managing Director, Washington National Tax Services Factors affecting US tax policy PwC | Tax legislative update 2 Case for US tax reform High statutory corporate tax rate and uncompetitive international tax system Changes in global tax environment since last US tax reform effort 1988-2015 30 28 Number of Territorial Countries in OECD 25 20 14.4 15 10 8 5 Excess of US Combined Statutory Corporate Tax Rate over OECD Average (excluding US) 0 -5 -5.7 PwC | Tax legislative update 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -10 3 US economic outlook GDP growth forecast – 2% versus 3% historical average 4.0 Annualized growth in real GDP 3.0 Blue Chip Forecast 3.1 2.5 2.0 2.4 2.2 2.6 1.7 1.6 2.2 2.2 2.1 2017 2018 20192027 1.5 1.0 0.0 -0.3 -1.0 -2.0 -3.0 -2.8 -4.0 19682007 Avg 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Bureau of Economic Analysis, July 2016, and Blue Chip Indicators, August 10 and April 10, 2016. PwC | Tax legislative update 4 US federal budget outlook Spending growth is outpacing revenue growth 26.0 2015 outlays 20.7% 50-yr historical average outlays 20.2% 24.0 Projected outlays 23.1% Percentage of GDP 22.0 20.0 18.0 Projected revenues 18.2% 16.0 50-yr historical average revenues 17.4% 14.0 2015 revenues 18.2% 12.0 1966 1976 1986 1996 2006 2016 2026 Source: Congressional Budget Office, The Budget and Economic Outlook: 2016 to 2026 (January 2016); PwC calculations. PwC | Tax legislative update 5 US federal budget outlook Spending growth due to Social Security, major health programs and interest 2016 30 2046 Net Interest 5.8% 25 Share of GDP Deficit (8.8%) 20 Net Interest 1.4% Deficit (2.9%) Other Revenues 1.7% 15 Other Noninterest Spending 9.2% Major Health Care Programs 5.5% 5 Other Revenues 1.5% Corporate Tax 1.6% Corporate Tax 1.8% Payroll Tax 5.9% 10 Other Noninterest Spending 7.3% Individual Tax 8.8% Social Security 4.9% Major Health Care Programs 8.9% Social Security 6.3% Payroll Tax 5.8% Individual Tax 0.5% 0 Spending Revenues Spending Revenues Source: Congressional Budget Office, The 2016 Long-Term Budget Outlook (July 2016). PwC | Tax legislative update 6 PATH Act – 2015 year-end tax extender package Permanent Tax Extenders (22) Expiring in 2016 (30) Expiring in 2019 (5) Other Provisions • Research credit • • Subpart F exceptions for active financing income Bonus depreciation (subject to phasedown) and election to accelerate AMT credits • • 199 deduction for income from domestic production activities in Puerto Rico Medical device excise tax suspended for 2016 and 2017 • • Electricity production and investment credit for non-wind renewable power facilities • CFC look-through treatment • Electricity production and investment credit for wind renewable power facilities Excise tax on high-cost employer-provided health benefits (“Cadillac tax”) delayed until 2020 • FIRPTA provisions, including exclusion for foreign pension and retirement funds investing in US real estate • REIT provisions, including restrictions on tax-free spinoffs • Section 179 expensing limits • 15-year cost recovery for qualified leasehold, restaurant, • and retail improvements • • Deduction for state and local sales taxes Exclusion parity for employerprovided mass transit and parking benefits • Deduction for qualified tuition and related expenses • Interest deduction for mortgage insurance premiums • Exclusion for discharge of indebtedness on principal residence • Charitable giving provisions (e.g., tax-free charity IRA rollover) • Expanded child credit, EITC • and American Opportunity Tax Credit provisions PwC | Tax legislative update Additional renewable energy and energy efficiency provisions • Work Opportunity Tax Credit • New Markets Tax Credit Medical expense deduction: 7.5% AGI floor for individuals age 65 and older 7 Post-election tax policy outlook PwC | Tax legislative update 8 A “perfect storm” for business tax reform? Pre-election focus on divided government and opportunity for incremental reform “I think the combination of Europe moving pretty aggressively on the state aid issue and the…bipartisan desire to find a way to pay for more aggressive infrastructure creates perhaps the perfect storm where you can overcome the inertia of inaction.” – Treasury Secretary Jack Lew (October 6, 2016) Total IRF earning balances (US $ Billion) 2,119 2,299 2,434 1,885 1,630 1,098 1,188 1,363 “We feel there’s one catch phrase that sums up EU State aid rulings.” 2008 2009 2010 2011 2012 2013 2014 2015 www.AuditAnalytics.com PwC | Tax legislative update 9 2016 election results – Republican sweep Increased potential for major US tax law changes in 2017 306 trump Clinton 232 2016 Elections – Final results as of Nov. 28,11 AM ET US House 46.5% votes | 62,352,375 270 electoral votes to win US Senate 64,429,062 | 48.1% votes 188 2014 46 247 2014 1 3 193 2016 Republicans Democrats Undecided 2016 Net change PwC | Tax legislative update 48 239 Republicans *includes 54 2014 247 188 Democrats 2016 239 193 3 House Ds +6 2016 51 Undecided 2014 2016 Republicans 54 51 * Democrats 46 48 Undecided 1 2016 Net change Senate Ds +2 two Independents: Senators Bernie Sanders (I-VT) and Angus King (I-ME) 10 President-elect Trump’s first 100 days agenda Tax reform may have to compete with other Administration priorities • Tax reform • Health care reform (ACA repeal and replace) • Infrastructure • Trade (NAFTA, TransPacific Partnership) • Financial regulation (D0dd-Frank) • Energy (Keystone pipeline) • Environmental de-regulation • Immigration PwC | Tax legislative update 11 Key dates affecting tax legislative agenda 2016 • November 8 Election Day • November 15 114th Congress “lame duck” session began • December 9 Temporary government funding measure (“continuing resolution” or “CR”) expires • December 16 Target adjournment date 2017 • January 3 New Congress (115th) begins • January 20 Inauguration Day • January/February President delivers annual State of the Union address • February 6 Deadline for submission of Administration’s FY 2018 budget • March 15 Suspension of federal statutory debt limit expires • April 15 Deadline for adoption of Congressional budget “resolution” • August Congressional summer recess period • September 30 FAA authorization and Airport and Airway Trust Fund taxes expire • October 1 New federal government fiscal year (FY 2018) begins; “sequestration” spending caps reinstated PwC | Tax legislative update 12 Comparison of Republican individual tax reform proposals 2014 Camp Tax Reform Bill House GOP Tax Reform Blueprint President-Elect Donald Trump Individual tax rate 10% and 25% with 10% surtax on modified AGI 12%, 25% and 33% 12%, 25%, and 33% Individual AMT Eliminate Eliminate Eliminate Investment income • Tax capital gains and dividends as ordinary income with 40% exclusion • • 20% top tax rate on capital gains, dividends and interest • Eliminate 3.8% net investment tax • Tax carried interest as ordinary income • Tax “carried interest” as ordinary income Standard deduction $22,000 (joint) and $11,000 (other) • Tax capital gains, dividends, and interest as ordinary income with 50% exclusion (16.5% top effective tax rate) Modify tax treatment of carried interest $24,000 (joint), $18,000 (single with child), and $12,000 (other) $30,000 (joint) and $15,000 (single); no head of household filing status Itemized deductions Limits or repeals many current-law deductions, including mortgage interest ($1 million cap gradually reduced to $500,000) and charitable contributions (2% floor) Eliminate all except mortgage interest and charitable contributions Limit to $200,000 (joint filer) and $100,000 (single filer) Estate tax Eliminate Eliminate and tax capital gains held until death with $5 million per-person exemption ($10 million per couple) Two tax rates: 25% and 35% PwC | Tax legislative update 13 Comparison of Republican business tax reform proposals 2014 Camp Tax Reform Bill 2016 House GOP Blueprint President-Elect Trump Corporate tax rate 25% with 5-year phase-in 20% 15% Corporate AMT Repeal Repeal Repeal Pass-thru business tax rate Current law 25% pass-thru business tax rate with “reasonable compensation” taxed as ordinary tax rates Election to apply 15% rate, with large pass-thru subject to dividend tax rate on retained earnings Cost recovery Repeal MACRS and implement ADStype system with inflation adjustment 100% expensing for equipment and real property (not land) 100% expensing election for US manufacturers Interest expense deduction Adopt thin capitalization rules and tighten earnings stripping rules Deductible only against net interest income; special rules for financial services No deduction for US manufacturers that elect full expensing Domestic production (section 199) Phase out and repeal section 199 Repeal section 199 deduction Eliminate most business tax preferences Research & development Permanent alternative increment research credit and 5-year amortization Business credit to encourage R&D Maintain R&D credit Foreign repatriation One-time mandatory tax (8.75% cash and 3.5% other) with 8-year payment period One-time, mandatory tax (8.75% cash and 3.5% other) 10% one-time, mandatory tax International tax 95% dividend exemption system 100% dividend exemption system; border adjustment that exempts exports and taxes imports Not stated PwC | Tax legislative update 14 Comparison of Republican tax reform proposals Tax CBO Baseline 2016 House GOP Blueprint (billions of dollars, 2016 – 2025) “Static” “Dynamic” President-Elect Trump* “Static” “Dynamic” Individual Income Taxes 20,265 (981) 566 (2,192)/(3,730) (1,058)/(2,458) Payroll Taxes 13,025 0 683 0 520/612 Corporate Income Taxes 3,634 (1,197) (1,324) (1,936) (1,958)/(1,959) Excise Taxes 1,059 0 57 0 44/52 (240) (240) (240) (240) Estate and Gift Taxes 263 Other Revenue 1,696 0 68 0 52/62 Total 39,942 (2,418) (191) (4,368)/(5,906) (2,640)/(3,932) Source: Tax Foundation (July and September 2016); Congressional Budget Office (August 2016) * Includes two estimates for “higher-rate” and “lower-rate” assumptions regarding pass-through taxation PwC | Tax legislative update 15 Questions? PwC | Tax legislative update 16 Thank you Andrew Prior, Managing Director, Washington National Tax Services Washington D.C. (202) 414-4572 [email protected] This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US federal, state or local tax penalties. © 2016 PwC. All rights reserved. In this document, "PwC" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.