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14 Int'l Tax Rev. 21 (2002-2003)
Bush's New Tax Package Explained

handle is hein.journals/intaxr14 and id is 243 raw text is: Bush's new tax package explained President Bush's US 2004 Budget contains a number of revenue-raising provisions aimed at earnings stripping, tax shelters and executive compensation. Christine Halphen, Oscar Teunissen, Steve NauheIrn, Linden Smith and Larry Skor of PricewaterhouseCoopers explain what to look out for n February 3 the Bush admin- istration released its financial year 2004 Budget proposals, featuring a 10-year, $1.46 trillion tax package with economic growth and tax simplification proposals, including previously announced proposals to elimi- nate the double taxation of corporate earn- ings, and to consolidate and expand retire- ment and other savings incentives. The Bush Budget also includes several revenue- raising provisions aimed at earnings-strip- ping transactions, tax shelters, and execu- tive compensation. Limited relief on earnings stripping The earnings-stripping proposal reinstates a safe harbour, which appears to be the Treasury's response to widely-expressed The current law's safe harbour would be concerns that the earlier version of the administration's proposal was not consis- tent with the international arm's length standard, could be viewed as discriminato- ry, and could drive inbound business away. Although the safe harbour makes the pro- posal less restrictive than similar provisions introduced in a Bill sponsored by Ways & Means Chairman Thomas last July (the Thomas proposal), the overall proposal would for many taxpayers be significantly more limiting than current law. Under the administration's proposal, the current law's safe harbour would be replaced by a new debt-to-assets test. The proposal offers a safe harbour ratio that would vary depending on the type of assets owned by the taxpayer. Companies would group their e disallowed in a taxable Year would assets according to the following classes and greater of the amount disallowed unde multiply the value of assets by the leverage the limitati percentage assigned to the class: to y ecar qrwardper cash, cash equivalents and government disallowed intere under the ATI limitation; securities; disallow any cer orward of interest amounts municipal bonds, publicly-traded debt disalowed ur the worldwide limitation; securities and receivables; 0 eliminate the three-year carry forward publicly-traded equities, mortgages and limitation. other real estate loans, other corporate Unlike the Thomas proposal, the admini debt and third-party loans; would provide a new asset-based safe harbour. trade receivables and other current assets; inventory; For example, a company that has $1,000 land, depreciable assets, other invest- value in class 1, would be allowed $980 ments and loans to shareholders; and (98% of $1,000) of safe harbour debt in intangible assets. that class. The total amount of safe har- www.internationaltaxreview.comM May 2003

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