International Tax Review provides analysis on what the fiscal cliff agreement really entails, and where it leaves comprehensive corporate tax reform.
Fiscal cliff agreement
The American Taxpayer Relief Act (H.R.8) addressed the Bush tax cuts by permanently extending most of the individual income tax reliefs introduced in 2001 and 2003, and setting the top marginal tax rate at 39.6% for unmarried individuals earning more than $400,000 and for married taxpayers with income of more than $450,000.
But the Act also dealt with certain business tax measures, including many of the temporary extender tax breaks.
R&D, the production tax credit, and wind energy tax credits are extended, as is 50% bonus depreciation (for one year for qualified property, which will generally include property with a MACRS (modified accelerated cost recovery system) recovery period of 20 years or less as well as certain computer software, water utility property and qualified leasehold improvement property).
The active financing exception to subpart F is also extended, allowing banks and manufacturers to defer taxes when engaging in active financing transactions.
The Act saw the extension of the look-through rule for payments between related controlled foreign corporations (CFC), too. Both of these provisions expired in 2011 and are retroactively extended through to the end of 2013.
Energy provisions dealt with in the Act include tax credits for energy-efficient new homes, energy-efficient modifications and redevelopments, and incentives for renewable fuel sources, alongside the wind energy tax credit.
“Companies will continue to receive tax credits for the research that they do, the investments they make, and the clean energy jobs they create,” summed up President Obama, shortly after his declaration: “We have avoided the fiscal cliff!”
Some form of agreement was always going to be passed, however, said Jim Fuller, of Fenwick & West.
“It had to happen in some form, but the theatrics were unnecessary. That’s Washington I guess. The form of the fiscal cliff avoidance was the only open question. So-called high income earners will sure pay a lot more in tax with the agreement. But that’s what the President wanted, and he got it.”
Next steps
Fuller reacted positively to the extension of the business measures outlined above, saying “it shows Congress had at least some focus on business” but criticises the time taken to complete such extensions, and the potential problems this has created, adding “somebody should tell Congress about the accounting rules the next time they try to leave things for the last minute”.
“These provisions, including the 954(c)(6) CFC-to-CFC payment extension, should have been extended months ago, or a year ago. These extensions were going to happen, but why such a delay? Since the extensions didn’t become law until after calendar year-end, there’s a question whether calendar year companies can reflect the benefits of these extensions, to the extent they affect 2012, on their 2012 financial statements.”
There has also been criticism of the fiscal cliff agreement from the Business Roundtable (BRT) association of American CEOs.
“H.R.8 only just begins to address the scale of the fiscal and spending problem confronting our country and falls short as economic policy that could encourage a sustained and strong economic expansion,” read a BRT statement. “When pressed to the limit, political leaders averted some of the most immediate negative consequences of the short-term fiscal cliff, but left unaddressed the most serious and fundamental reforms required for the country’s long-term economic health.”
House Ways & Means Committee chairman Dave Camp (pictured left) said in his weekly Republican address that now the fiscal cliff has been averted, the next step must be fundamental reform of the tax code.
“We have acted to make those [Republican Bush era] tax cuts permanent. Now that we have prevented a Democrat tax increase, the Ways & Means Committee will lead the effort to reform our tax code to make it simpler and fairer for families and small businesses, while also making American businesses and workers more competitive in the global marketplace,” he said.
“Let’s face it,” added Camp, “the tax code is still a nightmare. It is too complex, too costly and too unfair. You shouldn’t need an army of lawyers and accountants to understand our tax code. That’s why we have to start work on a real solution to return accountability to our tax code by eliminating special interest loopholes. Everybody should play by the same rules. Your tax rate should be determined by what’s fair, not by who you know in Washington.”
Other Senate leadership figures have agreed that much is still to be done in terms of corporate tax reform, but that the fiscal cliff deal should facilitate progress.
“There are virtually no corporate provisions in here so the road is clear to do corporate reform, which is also very important,” said Senate Finance Committee chairman Max Baucus. “I think it makes it easier.”
The President, too, has recognised that tax reform must now be addressed.
“We can’t simply cut our way to prosperity. Cutting spending has to go hand-in-hand with further reforms to our tax code, so that the wealthiest corporations and individuals can’t take advantage of loopholes and deductions that aren’t available to most Americans,” he said.
Another crisis looms
Fuller questions whether fundamental tax reform is a realistic hope, given Washington leadership’s recent track record on getting things done.
“If they can’t do what should be the easy stuff in Washington, how will they ever do the more important fundamental stuff?” he asks.
And with the can having merely been kicked two months down the road, another crisis is looming.
“Moody’s said Congress didn’t do enough to reduce the deficit with the year-end legislation. This will be the next crisis, in February, when Congress will need to increase the US’ borrowing limit by March 1,” said Fuller. “The President wants even more tax increases – as well as some spending cuts; the Republicans want spending cuts. How will anything helpful or fundamental come out of all this?”
The lack of faith in Washington’s ability to agree on, and complete, comprehensive corporate tax reform during 2013 is clear, and Fuller is not hopeful of action the following year either. He would like to see the US adopt another revenue stream in the form of a consumption tax, though again this may be unlikely.
“Nonetheless, as an optimist, I do hold out some hope. What the US really needs is a VAT,” said Fuller. “That’s another area where the US is an outlier. But the folks in Washington seem to have blinders on when anybody mentions the US adopting a VAT. However, I don’t really see any other solution to the federal deficit. That could be coupled with serious corporate tax reform.”
