David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: TCJA at 5, federal edition.
We're approaching the fifth anniversary of the passage of the Tax Cuts and Jobs Act. So we've been talking about global intangible low-taxed income, foreign-derived intangible income, and the state and local tax cap for half a decade. To mark the occasion, we're spending three episodes taking a closer look at how the TCJA has affected taxes on the state, federal, and international levels.
This week's episode, the second in our series, takes a look at the TCJA's relationship with federal taxes. Tax Notes legal reporter Nathan Richman will talk more about that.
Nate, welcome back to the podcast.
Nathan Richman: Always a pleasure.
David D. Stewart: Could you give us a brief — and I understand that's going to be difficult — overview of the effect that TCJA had on federal taxes?
Nathan Richman: As you pointed out, there is no brief summary of what the TCJA did to federal taxes. There's everything from the corporate rate cut to the new passthrough deduction, bonus depreciation changes, and interest deduction changes. It's rightly been called the biggest change to the tax code since the 1986 recodification.
David D. Stewart: Now, I understand you recently spoke with someone. Could you tell us about your guest?
Nathan Richman: Sure. I spoke with Jennifer Acuña from KPMG. While now in private practice, she was one of the congressional staffers working on the TCJA in 2017.
David D. Stewart: All right. Let's go to that interview.
Nathan Richman: Hi, Jen. Thanks for joining us.
Jennifer Acuña: Happy to be here.
Nathan Richman: We keep hearing that the TCJA was the largest, most comprehensive piece of tax legislation since 1986. Can you give us a broad overview of the breadth and sort of changes that it made?
Jennifer Acuña: Sure, and I'm happy to. What made the TCJA different than a lot of the big tax bills that we see nowadays, even including the most recent rather large tax bill, Inflation Reduction Act, is that it was tax for the sake of tax.
Usually tax is the tail that wags the dog in these bills. People say, "Oh, let's not forget about tax." They tack on a tax title to a bill. This was a tax-only bill.
There was the desire to change the corporate rate. It moved from 35 percent to 21 percent. An overhaul of the international tax system; for a long time, members had been hearing again and again, had been concerned about the capital lockout effect of our previous system and the rate of inversions leading up to the TCJA. That was on the international side. Those were big changes.
But I always like to say there's a little something sweet and some pain for everyone in the TCJA because even though it had a $1.5 trillion deficit over the 10 years — there was a lot of spending in that bill, but also a lot of raisers in that bill as well. We saw section 199A, that's that passthrough deduction, that cost a significant amount of revenue, and that was paid for with some of that pain that I was talking about, like section 163(j) for instance, the interest limitation.
There was just a laundry list of individual provisions as well. We had rate cuts on the individual rates. There was some alternative minimum tax relief provided in the bill, but like I said before, there was were some raisers also. There was that SALT limitation, that $10,000 cap on the state and local tax deduction, that really impacted a significant number of folks in high-SALT states.
It was just a wide, sweeping bill. Like I said, it had $1.5 trillion in net deficit, but really, it raised a lot of money in the contours of the bill. And also, there were a lot of tax expenditures within the contours of that bill as well.
Nathan Richman: Things like a great big new bonus depreciation, right?
Jennifer Acuña: Yep. There was expensing, which is one of the topics of the day because the first scheduled crank down of the 100 percent expensing is scheduled to come at the end of this year. That goes from a 100 percent expensing to 80 percent at the end of this year. So now it's an extender.
The TCJA created a ton of extenders, too. It's the tax bill that keeps on giving with respect to tax changes.
Nathan Richman: Speaking of giving, it's been about five years and Treasury and the IRS seemed to have a lot of guidance to give on the TCJA, from notices all the way up through proposed regs and final regs, with of course, the smattering of procedures and revenue rulings throughout. We even had some of these final regs coming out as chief counsel Mike Desmond was getting ready to leave at the end of the administration.
There have been these thousands and thousands and thousands of pages of final regs. And we're done, right? There's just the standard upkeep left. Everything major from the TCJA has had its clarification for people to be able to apply it. Right?
Jennifer Acuña: Are you insinuating that Treasury has done a 100 percent perfect job and anticipated every problem that could potentially come into the future with their regs?
Nathan Richman: No, just that every main issue has been dealt with.
Jennifer Acuña: Yeah. No. I wish, but I hate to be the bearer of bad news. Treasury's work is never done. I mean, I remember back during the TCJA in 2017, there were reg projects that were in progress that related back to the 1986 act. So unfortunately, Treasury is not ready to close the book, at least not yet.
That's the thing about Treasury. It's a lot easier for Treasury to be more nimble, issue regulatory guidance, and issue other taxpayer guidance, than it is for Congress to change laws. That's one of the takeaways of the TCJA.
It took 30 years to change that, but reg projects come and go on a regular basis. Sad but true. I'm sure that we still have thousands of pages and new regs ahead of us in the future.
Nathan Richman: Speaking of which, there's the long-delayed, and who knows what will happen now, change from expensing to amortization for research and experimentation (R&E) expenditures, right?
Jennifer Acuña: Yes. On the legislative front and on the regulatory front, [section] 174, the amortization of R&E, that was a raiser, some of the pain that was afflicted in the TCJA, that kicked in at the beginning of this year. It's considered an expiring tax provision because it kicked in. It's kind of the reverse expiration.
That's something that we've been waiting to see if Congress would act to potentially reverse it kicking in at the beginning of this year. Right now, almost a full year since it kicked in at the beginning of this year, that's still under discussion for the potential inclusion in a year-end package.
Nathan Richman: One of those tax tails.
Jennifer Acuña: Yeah. That's right. That is another instance of a tax tail that wags a dog. Everyone has their eyes on a potential extenders package in this big end-of-the-year package. Let's see if it gets negotiated.
Nathan Richman: All the while, we still don't have a clarification of what's a research expenditure and what's a simple business expenditure, right?
Jennifer Acuña: Yep. Still waiting to get that guidance. Like I said, Treasury is never done.
Nathan Richman: Everybody knew when it was supposed to take effect, and IRS, Treasury, and Congress all seem to have been waiting, waiting, waiting to this point.
Jennifer Acuña: It's funny. There was a lot of bipartisan support to include relief on [section] 174. Remember last year, 174 relief was included in the Build Back Better Act, and that Democratic reconciliation bill passed the House.
So when that bill had momentum, everyone said: "Hey, this is not going to kick in. It's not going to kick in at the beginning of next year. No worries." And then that got pushed into January, and they said, "Oh no, we're going to come back and do the Build Back Better Act in January." Remember Sen. Charles E. Schumer, D-N.Y., said, "We're going to put a pause."
So it's kind of been in this weird limbo for the last year. But I mean, most folks on the Hill — Republicans, Democrats — support providing 174 relief. It's the noncontroversial provision that can't seem to make it over the finish line, at least not yet.
Nathan Richman: Given that Treasury and the IRS seem to have been, "Somebody's coming to our rescue," right?
Jennifer Acuña: That's always preferable.
Nathan Richman: Well, you mentioned bonuses getting ready to wind down, and here's 174. That's two extenders. What other TCJA extenders could be coming?
Jennifer Acuña: These are all the TCJA extenders that kind of hang together because they all expired at the end of last year. [Section] 163(j). It moved from an earnings before interest, taxes, depreciation, and amortization to an earnings before interest and taxes standard that is taxpayer-unfavorable. That also kicked in at the beginning of this year. That's another extender that's in the mix.
One that is not a TCJA extender, just throwing it out there because we're talking about the year-end deal, is the child tax credit. The expanded child tax credit, included in the American Rescue Plan Act, also is part of the gang of extenders that expired at the end of last year.
That's another one where you have the child tax credit, those expanded benefits also expired when 174 kicked in, when 163(j) was modified, and now this year we have bonus [depreciation] that starts ratcheting down. There's a lot. It's not a large number of extenders in terms of just volume, like the number of extenders, but just those handful of extenders, they really pack a revenue punch. I mean that there's a lot of dollars associated with that package of extenders, especially the child tax credit.
Nathan Richman: So my hopes that we were done with extenders when the Protecting Americans From Tax Hikes (PATH) Act passed were really naive.
Jennifer Acuña: I was on the Hill at Ways and Means when the PATH Act was negotiated and everyone high-fived that: "This is great. We're clearing out all of these extenders." And sure enough, new bill, new extenders aplenty.
Nathan Richman: Now, one other blast from the past. Correct me if I'm wrong, but there's also a whole bunch of just straight expirations on the individual side. Do all of these things coming up resurrect the fiscal cliff discussions that were from the 2001 and 2003 tax cuts?
Jennifer Acuña: With all those individual extenders that we're talking about, that's 2025. I mean, that's so far down the road. I was joking with someone yesterday that 2025 may as well be 3025 in the legislative world because there are just so many issues. We're dealing with extenders now that expired last year. Even though they have an eye on the extenders that are coming up in 2025, I don't think it's something that is top of mind or has much time pressure associated with it.
Nathan Richman: OK, I have one more complication for you. You mentioned the Inflation Reduction Act earlier; do any of these expirations or extenders interact with anything from that, particularly that very interesting corporate alternative minimum tax based on book revenue?
Jennifer Acuña: Well, that's a fascinating question. And thank you for the complication. No, just kidding.
Nathan Richman: I love complications.
Jennifer Acuña: We're tax people, of course we love complications.
So it's unclear. I mean, they do interact. Right? Section 163(j), that's a revenue raiser. But now this corporate AMT, which I think everyone is calling the CAMT now, so it has its very own fun way to deduce the corporate alternative minimum tax. Now we call it the CAMT. It's unclear how [163(j)] is going to interact with the CAMT. Some of these provisions like bonus [depreciation] starting to ratchet down, how that's going to interact with the CAMT? I think everyone is really focused on seeing the first tranche of CAMT guidance to see how Treasury is going to hash that out.
Nathan Richman: With the recent visit between President Biden and French President Emmanuel Macron, beyond all sorts of other discussions, we're hearing so much about how the Inflation Reduction Act is interacting with international rules like pillar 2 and the corporate AMT or various subsidies. But didn't the TCJA have any interactions with prior base erosion projects from the OECD?
Jennifer Acuña: Thank you for bringing that up because that is something that I always remind folks of. We talk about BEPS 2.0. Before BEPS 2.0, there was BEPS 1.0, which was just then known as BEPS, the base erosion and profit-shifting OECD project.
BEPS did not drive the international tax changes that took place in the TCJA. But I can say that the TCJA changes like the GILTI and the base erosion and antiabuse tax really did drive.
It's kind of a blueprint, at least it was a starting point for the discussions on BEPS 2.0. Right? The United States really took that first step towards what's now known as pillar 2. I always find that interesting. We always talk about, "The United States hasn't signed on yet." The United States really did, with the TCJA, lead the BEPS 2.0 effort before there was a BEPS 2.0.
Nathan Richman: Is this sort of the Foreign Account Tax Compliance Act proceeding country by country?
Jennifer Acuña: I think that's exactly it.
Nathan Richman: You mentioned blueprint. Is that to say that the blueprint that preceded the TCJA drafts with the border-adjustment tax was not drawn from the first BEPS project?
Jennifer Acuña: Now, it's funny. See, you remember the border-adjusted tax. Remember that little policy that was so important to House Republicans, until it was not in the negotiations for the TCJA? Yeah, the border-adjusted tax. I would like to say ahead of its time, but I just think that was just not the right time for a border-adjusted tax. It was just a step too far for members of Congress to kind of wrap their heads around this type of complete overhaul of the way the United States taxes international profits.
Nathan Richman: And it couldn't have helped that the co-groups were trying to claim it was unconstitutional, I'm sure.
Jennifer Acuña: Constitutionality does matter in tax. So, unclear. That was never fully hashed out, but I think it had a more basic issue that there were just a lot of questions. Territoriality, for instance, is an international framework that has been road-tested before. Our trading partners have territorial tax systems. So it's not like a bridge too far.
Border-adjusted taxes as the international corporate method of taxation was just something that had never been road-tested truly in that form. That was just too much to overtake. Congress likes incremental changes, especially in tax, and there were just too many question marks to make it politically feasible.
Nathan Richman: Speaking of one other incremental change from the TCJA, there's the domestic production deduction of section 199 translated quite conveniently and eliminated as a revenue raiser at the same time into the passthrough deduction of 199A.
Jennifer Acuña: That's right. That was the trade-off. The desire was to provide a broader benefit. Also, there was a missing piece in the passthroughs area in the TCJA. I remember I mentioned earlier, they tried to make for there to be something for everyone, and there was that missing chunk in the passthrough space, which is a huge swath of the business community in the United States. They're organized as passthroughs. So yep, that was the trade-off, and they now share the same code section.
Nathan Richman: Well, thanks again for joining us. It's been fascinating.
Jennifer Acuña: Thank you for having me.
David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?
Paige Jones: Thanks, Dave. In Tax Notes Federal, Philip DeSalvo and Corey Dalton examine the core principles of section 704(c) and how the ceiling rule may result in unanticipated consequences for taxpayers. Elizabeth Blickley criticizes proposed regulations meant to implement the Taxpayer First Act.
In Tax Notes State, Tram Le examines sales and use tax issues in the construction industry. Nikki Dobay and Catalina Baron outlined the project to develop a multi-state power of attorney form.
In Tax Notes International, Lucas de Lima Carvalho and Victor Guilherme Esteche explain what it means for AI to be sentient and break down the technicalities of taxing them. Isaiah Hunter explains how the Inflation Reduction Act's new excise tax could discourage companies from reverting to the United States.
In Featured Analysis, Bob Goulder considers the recent Court of Justice of the European Union state aid decision in Fiat, and the implication for the European Commission's appeal in Apple.
On the Opinions page, Marie Sapirie breaks down the IRS and Treasury guidance on how indirect book accounting factors should be considered when calculating the Inflation Reduction Act's section 45V credit.
Bob Goulder and Joe Thorndike consider the historical context of why the IRS Criminal Investigation Division carries guns all in five minutes.
And now, for a closer look at what's new and noteworthy in our magazines, here is Tax Notes Executive Editor for Commentary Jasper Smith.
Jasper Smith: Thank you, Paige. I'm here with Michelle Markham, a professor at Bond University in Australia. Michelle, welcome to the podcast.
Michelle Markham: Hello, Jasper. Thank you for inviting me.
Jasper Smith: Hi, you're most welcome. So we're here to discuss your article, "Advancing Tax Certainty: The New OECD Bilateral APA Manual," which is the first in your new Tax Notes International column Markham on Managing Disputes. So Michelle, can you start by giving us a brief overview of this article?
Michelle Markham: Yes, of course. So my first article deals, as you've said, with the OECD's new bilateral advanced pricing arrangement manual. And this is part of the tax certainty work program of the Forum on Tax Administration.
It's a really important document as bilateral APAs are the only process by which international transfer pricing issues, especially the potential for double taxation, can be addressed with certainty on a prospective basis. Bilateral APAs are all about dispute prevention, and they're an invaluable controversy management tool in the global tax arena. And interest in them worldwide is growing.
Bilateral APAs have many advantages, but one of their main disadvantages is that they take too long to conclude, and this seems to be a problem on a global basis. There's a growing criticism that the use of the term "advance" is something of a misnomer. Some agreements have taken 10 years to conclude.
What this manual attempts to do is offer guidance in the form of 29 best practices that should assist in streamlining bilateral APAs. I examine and evaluate some of the main best practices in this article. And in doing this, I refer to current national bilateral APA practices. I hope your readers will find this discussion interesting and of value.
Jasper Smith: Well, thanks, Michelle. You definitely did a nice job of explaining and articulating the importance of the topic. Was there anything in particular that prompted you to write about it this time?
Michelle Markham: Essentially it's just a brand new publication by the OECD.
Jasper Smith: Understandable. Understandable. Thanks. I hope our readers look forward to it or will enjoy it as well. I'm sure they will. So, Michelle, can you talk a little bit about where the idea for your column came from?
Michelle Markham: Yes, thank you. The prevention and resolution of international tax treaty disputes has long been an important issue for both taxpayers and tax administrations.
The OECD has been talking about improving tax treaty dispute mechanisms for at least the last 40 years. But I've noticed how this issue has moved to the forefront in recent years. The OECD began publishing annual statistics on the mutual agreement procedure or MAP caseloads in 2006. Today, these statistics cover over 100 jurisdictions. The MAP is the mechanism contained in the OECD's model tax convention at Article 25, and in the United Nations Model Double Tax Convention, also at Article 25, to provide a resolution by the respective tax treaty authorities of any disputes that may arise, where a taxpayer considers that taxation contrary to the terms of the treaty as occurred.
Now in practice, contrary to the terms of the treaty, usually refers to a situation where the taxpayer is potentially subject to double taxation, which is an inequitable situation.
A significant problem is that a number of these international taxation disputes remain unresolved, and that's to the detriment of the free flow of trade and investment and to all stakeholders. The problem is exacerbated by the fact that it's often that multimillion or billion dollar cases that remain unresolved. Currently, even though strenuous efforts have been made to resolve these international tax treaty disputes, the number of transfer pricing disputes is increasing on an annual basis, as are the MAP and inventories in a majority of jurisdictions.
This is therefore a critical time to focus on the application of various procedures to prevent and resolve these tax treaty disputes. In other words, to effectively manage these tax disputes and to provide a column on this topic.
Jasper Smith: So can you give us an idea of other topics we might see in your column in the future?
Michelle Markham: Well, the OECD has said they're going to be publishing another manual, hopefully sometime early in the new year. And that's on multilateral MAPs and APAs. And I think this would be another very interesting topic.
Jasper Smith: Very nice. Very well put, Michelle. And before we let you go, can you just tell our listeners where they can find you online?
Michelle Markham: Jasper, I'd be delighted to connect with your audience on LinkedIn. And I can also be contacted at my email address at Bond University. And that's at mmarkham@bond.edu.au.
Jasper Smith: Well, once again, thanks Michelle. We appreciate you adjusting your schedule. We know you're on the different side of the world from us. We thank you for making the time to come on the podcast today.
Michelle Markham: Thank you very much for inviting me.
Jasper Smith: And you can find Michelle's column online at taxnotes.com. And as always, be sure to subscribe to our YouTube channel Tax Notes for more in-depth discussions on what's new and noteworthy. Again, that's Tax Notes, with an S. Back to you, Dave.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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