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By Tom Hagy
“In this world nothing can be said to be certain, except death and taxes,” Benjamin Franklin is quoted as saying. Will Rogers added that the only difference between these inevitable facets of life is that “death doesn’t get worse every time Congress meets.”
While taxes are a certainty, the future profile of the tax landscape is far from it.
“Politics, an evolving economic outlook and a heightened focus on tax transparency could add incredible uncertainty to the tax landscape in 2015, which will make effective planning very challenging,” said Jeffrey C. LeSage, Vice Chairman – Tax for KPMG. “To provide the best value for their companies, leaders will need to stay informed and carefully consider a range of tax scenarios when making near- and longer-term decisions.” LeSage went on to say that chief executives need to carefully evaluate their programs and initiatives with tax implications in mind.
The U.S. audit, tax and advisory firm, at the end of 2014, said the issues to watch include federal business tax reform and changes in state-tax laws.
While many in Congress believe in the need for reform, such as lowering corporate tax and reducing the number of tax preferences, KPMG said, “the challenge of reconciling several fundamental issues could make for a difficult and uncertain road ahead.” The firm added that once Congress leaves for the summer at the end of July, and the presidential campaign kicks off in earnest, it will be difficult to reform the U.S. tax scheme.
At the state level, KPMG said that Republican victories in the mid-term elections could mean lower corporate taxes, or even their elimination in some cases. Tax incentives for business will continue or expand. In other states, though, taxes might rise, offsetting operational savings for businesses from the tax-reducing states, the company said.
KPMG said executives should watch the “on-going drive for tax transparency” from base erosion and profit-shifting initiatives, or BEPS, coming out of the Organisation for Economic Co-operation and Development, and compliance obligations under FATCA, the U.S. Foreign Account Tax Compliance Act. Tax considerations from corporate divestures of non-core businesses should also be watched, KPMG cautioned, adding that taxes should be considered early in discussions about divestures to maximize value.
Reasons for Optimism
On January 14, 2015, KPMG released “Five for 15: Five Tax Legislative Issues to Watch
in 2015,” once again putting tax reform at the top. When looking at the issue optimistically, the report noted that momentum for reform has been building for several years and much groundwork has been laid.
They point to Republican control of the House and Senate, President Obama’s support of revenue-neutral corporate-tax reform, and use of reform to generate revenue for infrastructure.
The report notes that both incoming chairs of the tax-writing committees are interested in reform, and that the House recently changed the “scoring rules” for major tax legislation—requiring macroeconomic changes to be taken into account in official estimates of major tax legislation. Noting the possibility that the Senate may follow suit, the change could “reduce the amount of revenue raisers needed to offset the cost of rate cuts—and could make it easier for Congress to move forward tax-reform legislation,” the KPMG report says.
Reasons for Pessimism
When taking off the rose-colored glasses, however, KPMG sees “significant obstacles” to tax reform. Neither the chairman of the House Ways and Means Committee nor that of the Senate Finance Committee has his own tax-reform bill. KPMG says drafting such a comprehensive proposal takes time and compromise. Some wild cards may also be in the deck. KPMG notes the potential ramifications from such things as a Supreme Court ruling on healthcare subsidies, immigration, the Keystone pipeline and increasing the debt ceiling.
The beginning of the 2016 presidential campaign season, which will ramp up this summer, is yet another reason for pessimism. While reform is a long-shot, KPMG says reform could be enacted “off-hand” with regard to business taxes. Leadership of both Houses has said reform should address pass-through businesses, and the president may announce a “serious and detailed” reform proposal. KPMG says this could signal that the White House and Congress “may move from talking about tax reform to acting on it.”
Among the other issues to watch, according to KPMG, are the following:
Macroeconomic revenue scoring. This requires revenue estimates of the larger potential impact on the U.S. economy accompany major tax legislation, such as change in the GDP, employment or capital stock. It has passed in the House; the Senate may follow.
Expiring provisions. More than 50 tax-incentive provisions have expired for taxpayers. This leaves taxpayers uncertain as to whether the provisions are truly dead, whether they will be retroactively resurrected or will be revived on a temporary basis. The fate of incentives like the research and experimentation tax credit and the production tax credit is uncertain.
Medical device excise tax. Both chambers of Congress are expected to vote on repealing this tax. Repeal is a Republican priority; the president said he was open to repeal on a stand-alone basis; and there is some Democratic support as well.
Gasoline tax increase. “With the highway trust fund chronically underfunded and gasoline prices dropping, some Republicans and Democrats have been hinting at the possibility of increasing the federal gasoline tax,” KPMG says. While passage and signing are not forgone conclusions, this “serious talk” about the tax makes an increase a possibility.
The complete report is available at KPMG.com.
Link to this URL: https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/five-for-15.pdf.