Washington in Review - November 10, 2017

This week in Washington was filled with everything from high-profile indictments to an assortment of congressional hearings, elections in several key states, and the beginning of a 13-day presidential tour through five Asian nations. However, the Republican’s proposal for sweeping tax reform has taken immediate precedence as the party races to pass legislation before year-end. While there is a long way to go on tax reform, it has the potential to have a transformational impact on companies in the TMT sector. It is important to keep on top of the latest developments and PwC’s Tax Insights is a great resource for staying informed.

While most eyes were on tax reform, last week’s hearings on Russian election interference and the passage of the Stop Enabling Sex Trafficking Act (SESTA) by the Senate Commerce Committee left both Congress and big tech struggling for compromise. Three days of testimony from tech company executives left the American public skeptical of effective self-regulation -- and equally wary of regulatory overreach. However, despite ongoing rhetoric, Washington is not expected to pass any significant legislation or issue regulations impacting the online advertising industry in the near term -- at least not without significant buy-in and participation from some of the big players. 

Meanwhile, international leaders are becoming more willing to take on big tech. Be it for inadequate self-regulation, adept tax avoidance, or alleged anti-competitive practices -- policymakers outside the US have been much more successful in building public support for sweeping regulatory reform and sizeable, punitive fines. Once the congressional year-end has passed and the push for tax reform has subsided -- we may begin to see chatter and rhetoric turn into something more tangible. 

Here are some of the other developments we’ve been tracking:

• The Senate and House both revealed differing tax reform plans on Thursday, which could prove challenging to reconcile, especially on a tight calendar.
• The FCC is opening up the airwaves, auctioning off more space for network operators and digital infrastructure to increase network coverage.
• The US is continuing to leverage its position in the world economy by not endorsing China as a Market Economy; this tension increases as President Trump visits China and continues to champion US manufacturing and imports.
• The Internet Association and the Interactive Advertising Bureau are advocating for self-regulation when it comes to transparency in online advertising sources in an effort to try to resist the imposition of federal regulation. 
• The world’s leading manufacturer of civilian drones is putting identifiers likened to license plates on drones as a way of getting ahead of potential regulation. 
• The FCC has decided to prematurely review 2016 regulations to vote on revoking existing barriers for media consolidation. 

What happened?

• Last week the House Ways and Means Committee Chairman Kevin Brady (R-TX) released the “Tax Cuts and Jobs Act of 2017.” Following a markup session this week that included significant amendments to individual and business provisions, the Ways and Means Committee will advance the Bill to the full House for consideration next week. Just as Ways and Means completed their efforts, the Senate Finance Committee Chairman Orrin Hatch (R-UT) released the Senate's attempt at a tax reform bill. The two bills share and diverge on a number of similar provisions that are very important to the technology industry. Both bills propose lowering the corporate tax rate to 20 percent and provide a new 25-percent tax rate for certain business income of passthrough entities, however the Senate bill would phase in the rate over a couple of years.
• Both preserve the research and development tax credit.
• Both provide a 100-percent dividends received deduction for certain qualified foreign-source dividends received by US corporations from foreign subsidiaries.
• Both impose a one-time mandatory ‘deemed repatriation’ tax on previously untaxed earnings and profits of foreign subsidiaries of US corporations. The House Bill has higher rates of taxation on this one time repat (14% on cash and 7% on non-cash earnings) compared to the Senate (10% and 5%, respectively).
• Both propose rules intended to prevent the erosion of the US tax base: each including a minimum tax on foreign earnings, interest deduction limitations and provisions intended to target inbound base erosion. However, the approaches have a notable difference – the Senate Finance bill also includes a new special deduction for foreign-derived intangible income earned in the U.S., a concept that was noticeably absent from the House bill.

What does it mean?  

• Tech companies finally have details about elements of the bill that could have an outsized effect on their business. While the statutory reduction in the corporate tax rate is a boon for most companies, the one-time deemed repatriation tax will impact the billions in profits these companies presently have invested overseas. If passed by both chambers, the influx of cash may allow these companies to accelerate their M&A activity, create more investment capacity, and/or provide cash for distribution.
• The differences between the Senate and House bills are a function of politics and budget rules and could prove challenging to reconcile, especially on a tight calendar. Republicans hope to pass bills in both chambers without Democratic support by Thanksgiving in order to approve a final bill by the end of the year.

What happened?

The Federal Communications Commission (FCC) is freeing up even more airwaves for auction. During their October Open Meeting, they approved a proposal that would expand the geographic areas and extend the license lifetimes for a spectrum band that will be key for internet of things (IoT) infrastructure. In their upcoming November 16 vote, they will attempt to open more satellite spectrum to network operators and remove limits on bidders in the spectrum auction allowing flexibility for network deployment. 

What does it mean?  

• Not only is more capacity being made available to network operators and digital infrastructure developers, but also under more favorable terms during and after auction.
• IoT companies will be able to deploy in more areas due to increasing network coverage and will be able to negotiate longer term service agreements with network operators.

What happened?

After almost 16 years in the World Trade Organization, China has again not been granted Market Economy status by the US, placing it in a disadvantaged trade position. China has made no secret of its displeasure with this decision ahead of President Trump’s visit to Beijing, in which the president took a much softer stance on trade than expected. President Trump and Chinese Leader Xi Jinping appeared to have productive meetings during the visit, with agreement reached on new deals for energy and electronics, and an overall agreement to better work together on trade terms in the future. However, with many US industries and manufacturers still impacted by Chinese trade practices (tech transfer, steel, aluminum, etc.), it will take significant and lasting change to alleviate dissatisfaction on both sides.

What does it mean?  

• The US will continue to use China’s status as a bargaining chip to leverage favorable outcomes on trade, particularly in areas impacting US manufacturing and imports, and negotiating for better export terms. 
• On the heels of the announced aluminum foil tariff, the pending steel investigation, and others we expect China to protest or request consultation from the WTO, as it already has for the aluminum foil ruling, and fan the flames of a battle regarding its non-market status.

What happened?

The Internet Association and the Interactive Advertising Bureau (IAB) have been actively addressing the proposals from Capitol Hill for more regulation around online advertising. The Internet Association published policy principles for legislators including transparency, accountability, and modernization; meanwhile, the IAB proposed an update to digital advertising protocols that aim to add transparency and reliability to the automated advertising supply chain. The groups are asking lawmakers to consider light-touch rules and industry self-regulation, rather than federal requirements that would greatly impact its members.

What does it mean?  

• It remains to be seen whether policy makers will be persuaded by industry proposals as lawmakers in both parties take issue with how online platforms have dealt with political advertising and their manipulation by foreign actors, but thus far have not landed on an approach.

What happened?

A Federal Aviation Administration (FAA)-assembled panel on remote identification and tracking of drones recently disbanded without agreement on a consensus approach. A May court decision restricting the FAA’s ability to require lobbyists to register drones further complicates the issue. However, there remains great demand for technology like this with broad ramifications for commercial drone operations.

What does it mean?  

• Companies looking to be proactive in addressing security concerns while balancing commercial needs have an opportunity to pre-empt the type of regulatory restrictions that may impact commercial interests. For example, the world’s leading manufacturer of civilian drones recently unveiled identification technology that it likens to a ‘license plate for drones’. It can broadcast a unique identifier to track location, altitude, speed, and direction.
• Authorized customers (e.g. law enforcement and airports), would be able to use the tech to monitor all company-made drones within a 5km radius. If authorities start utilizing this feature on drones from the world’s leading manufacturer, accounting for roughly two-thirds of the civilian drone market, they can potentially set a de facto standard for drone service providers to allow for the tracking and identification of their machines. 

What happened?

Every four years, the Federal Communications Commission (FCC) is required to review its media ownership rules. However, instead of waiting for the next quadrennial assessment, the FCC will vote to revoke its 2016 findings that maintained existing regulations, arguing that they are onerous and outdated. The vote next week aims to eliminate multiple rules including the Newspaper/Broadcast Cross-ownership Rule, the Radio/Television Cross-ownership Rule, and the Eight-Voices Test for media markets.

What does it mean?  

• This deregulatory effort would eliminate another set of barriers for media consolidation, particularly for major deals being evaluated by antitrust authorities at this moment.
• Content creating companies may have fewer transactions to deal with but also may have a tougher time negotiating their licenses with fewer media outlets, covering more territory.

Additional information

For additional information about these topics and how PwC can help, please contact:

David Sapin

Advisory, Risk & Regulatory Leader

(202) 756-1737; [email protected]

Alison Kutler

Advisory, Strategic Policy Leader

(202) 730--4233; [email protected]

Christopher Castelli

Integrated Content, Risk & Regulatory, Director

(703) 918-3912; christopher.castelli@pwc.com

Jocelyn Aqua

Advisory, Risk & Regulatory Principal

(202) 730-4862; jocelyn.aqua@pwc.com

Brian Dunch

Advisory, Risk & Regulatory Principal

(202) 756--1757; [email protected]

Julie Riccio

PwC Government Relations Team, Director

(202) 312-7668; [email protected]

Contributors: Marc Mazzie, Hannah Wyman, Rachel Blumenthal, Lenora Zimmerman, Chris Caulfield, Priya Kamdar, Sohail Mathur, Antonio Sweet, Nicholas Hall, and Shanna Holako

For past issues of Washington in Review and other commentary on risk and regulatory issues impacting Technology, Media and Telecommunications companies, please visit: (https://www.pwc.com/us/en/industry/tmt/publications/washington-in-review.html)

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

? 2017 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.