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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
  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-


May 2003

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