Treasury describes Administration's fiscal year 2011 tax proposals

In February, the US Treasury Department released its explanation of the tax proposals included in President Obama's fiscal year 2011 budget. The Administration has proposed to increase from $23 billion over 10 years to $33 billion the assessment of pharmaceutical manufacturers approved by the Senate as part of health care legislation. Further, President Obama has called on Congress to complete action on health care legislation within the next several weeks. House and Senate Democratic leaders appear prepared to use budget reconciliation procedures to complete this legislation over the objections of Congressional Republicans. These and other details are discussed below.

Business tax increases

Two proposals of particular interest to taxpayers in the Pharmaceuticals and Life Sciences sector call for:

1. the repeal of the last-in, first out method of accounting for inventories, effective for the taxpayer's first taxable year beginning after 2011 (estimated to raise $59.1 billion)
2. the repeal of the lower-of-cost-or-market method of accounting for inventories, effective for taxable years beginning after 12 months from the date of enactment (estimated to raise $7.5 billion).

Another proposal of particular interest to taxpayers in the Pharmaceuticals and Life Sciences sector calls for the reinstatement of the Superfund taxes that expired in 1995 (estimated to raise $18.9 billion).

The Administration's fiscal year 2011 budget includes several "tax gap" compliance proposals, including information reporting on payments to corporations (estimated to raise $9.2 billion). Additional information reporting proposals include increased information reporting penalties. The Administration also proposes new rules on worker classification (estimated to raise $7.3 billion).

Additional business tax increases carried over from last year's budget would:

  • Codify the economic substance judicial doctrine.
  • Repeal gain limitation for dividends received in reorganisation exchanges.
  • Deny deduction for punitive damages.
  • Levy payments to Federal contractors with delinquent tax debt.
  • Extend permanently the unemployment insurance surtax.
  • Modify the cellulosic biofuel producer credit.

Business tax relief

The Administration's budget also proposes to make permanent the research credit (estimated to cost $82 billion). The Administration proposes to extend through 2011 a number of business tax provisions that have expired or will expire, including the Subpart F exception for active financing, controlled foreign corporation (CFC) look-thru, and 15-year depreciation for qualified leasehold improvements and qualified restaurant property

International provisions

The Administration's fiscal year 2011 budget does not include an international proposal from last year's budget to eliminate the "check-the-box" rules. The Administration also has scaled back a proposal in last year's budget to limit deductions related to deferred foreign income by applying the proposal only to interest expenses (estimated to raise $26 billion over 10 years). Several other international tax proposals from last year -- including a proposal to determine the foreign tax credit on a pooling basis (estimated to raise $32 billion) -- have been carried over to this year's budget.

The Administration's fiscal year 2011 budget includes two new international tax proposals. The first would tax currently "excess returns" associated with transfers of intangibles offshore (estimated to raise $15.5 billion). Under this proposal, if a US taxpayer transfers an intangible to a related CFC in circumstances that demonstrate "excessive" income shifting from the US, then an amount equal to the excessive return would be treated as subpart F income. The second new international proposal would disallow a deduction for "excess" non-taxed reinsurance premiums paid to affiliates (estimated to raise $519 million). Each proposal would be effective for tax years beginning after 2010.

Other international provisions include:

  • Repeal 80/20 company rules.
  • Limit earnings stripping by expatriated entities.
  • Modify tax rules for dual capacity taxpayers.
  • Combat under-reporting of income through use of accounts and entities in offshore jurisdictions.
  • Prevent avoidance of dividend withholding taxes.
Economic growth proposals

The Administration's budget includes several temporary economic recovery provisions, including extension of bonus depreciation through 2010. The Administration proposal also would extend the election to claim additional research or AMT tax credits in lieu of bonus depreciation. Additional economic recovery proposals include an extension of COBRA health insurance premium assistance, the "making work pay" tax credit, and the temporary increase in expensing for small business. The Administration also proposes to provide an additional $5 billion in tax credits for investment in qualified advanced energy manufacturing projects.