A spirit of bipartisan cooperation in the U.S. Congress may provide more than mere after-dinner conversation for nostalgia buffs. John Gimigliano caught a whiff of give-and-take emanating from Capitol Hill earlier this summer and believes the oil and gas industry should not be complacent about tax legislation under consideration.

Gimigliano, KPMG LLP’s principal in charge of U.S. federal legislative and regulatory services, observed signs of bipartisanship and members of the House and Senate working together (“neither of which we’ve seen a whole lot of in recent years”) on passage of the $10.8 billion highway bill. While the highway measure doesn’t directly affect energy interests, Gimigliano finds relevance in its negotiations that indicate a thawing of the legislative cold war that has gripped Washington since 2010.

“Is that the beginning of a trend or just an anomaly?” he asked rhetorically during the Aug. 27 KPMG Global Energy Institute webcast, “Key Tax Developments Affecting the Oil & Gas Industries.” “We just don’t know, but it’s certainly one of the things that we’re going to be watching for this fall and going forward.”

Gimigliano pointed to three areas of legislation that warrant attention:

  • Tax inversion, an issue that gathered more steam recently with Burger King’s plan to purchase Tim Horton’s and move operations to lower-tax Canada;
  • Tax extenders, the issue that is most likely to see congressional action, he believes; and
  • Tax reform, an issue that is slowly gaining traction.

‘It’s not impossible’

A number of bills have been introduced by Democratic lawmakers, including one by Sen. Carl Levin of Michigan. Levin’s Stop Corporate Inversions Act of 2014 is designed to discourage U.S. companies from merging with foreign companies and avoid paying taxes on overseas earnings. Among other aspects of the bill, Levin wants to increase the required U.S. stock ownership from 20% to 50% for the company to continue to be treated as a domestic entity.

Other lawmakers working on legislation to dissuade inversions include Sen. Chuck Schumer, D-N.Y., and Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee. Wyden has hinted that he’d like to put together a bipartisan bill with Sen. Orrin Hatch, R-Utah, the ranking Republican on the committee.

“It’s not impossible that Congress could act,” said Gimigliano in an admonishment to industry cynics. “That both Democrats and Republicans are talking about it opens that possibility.

“I think there’s a theme by some that, ‘Well, Congress can’t get any tax legislation done. How are they going to agree on this anti-inversion stuff?’” he said. “And I think that’s just a little too simplistic. I think you have to be watching what reaction Hatch will have when Congress comes back after the August recess, to see whether or not he wants to introduce his own legislation. That’s something that remains a possibility. I’m not saying it’s a likelihood, but it is a possibility.”

But tax inversion restrictions could become a reality even if Congress doesn’t act. News reports circulated recently that Treasury Secretary Jack Lew is considering administrative curbs on corporate tax inversions, a move clearly intended to apply pressure both to corporations considering taking such action and to Congress. It also raises the issue of the limits of the executive branch in this area.

“It’s a very interesting thing to see how far Treasury thinks it can go without getting Congress involved,” Gimigliano said.

‘A different view’

Expect the needle to move on tax extenders, probably during the lame duck session after the November midterm elections. Legislation in the Senate affects about 50 temporary tax breaks totaling about $85 billion.

Gimigliano perceives two quite different approaches to the issue by Congress. The Senate is handling tax extenders the way it has since 2006: allow the extenders to expire, enact them retroactively to the beginning of the year and then forward one year. This is what moved through committee in a markup and what Gimigliano considers the most likely outcome.

Then there is the U.S. House approach.

“For the first time in modern memory, there’s a potential for a different outcome,” Gimigliano said. The House is working through the list of extenders, one by one, and moving them through committee to the floor of the chamber for a vote in an effort to make the tax breaks permanent.

So far, he said, the House has approved a 50% depreciation, a research credit, some charitable provisions, some of the expensing and some of the S corporation provisions, all as permanent provisions. The Ways and Means Committee has done the same for the active financing exemption.

“The House clearly has a different view on what it should do about extenders,” Gimgliano said. “Now, not all the extenders are on that list. Unknown whether that means they just haven’t gotten to them, or maybe it means they don’t intend to. But that’s one of the things to be looking for as the Senate and the House get together to do their work on extenders: whether the House is going to hold out and ask for some of these provisions, or perhaps even insist for some of them to be made permanent.”

Reform on back burner

In February, Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, introduced his comprehensive Tax Reform Act of 2014. Some, like Forbes contributor Yevgeniy Feyman of the Manhattan Institute for Policy Research, argue that tax reform would eliminate the need for inversion legislation because it would take away the temptation for corporations to relocate.

It’s not likely to be passed this year, though. Chairman Camp is preparing to retire and Chairman Wyden is expected to put his own stamp on a reform bill proposed by former Sen. Max Baucus, D-Mont., who now serves as ambassador to China. With the presidential election coming up, Gimigliano expects no movement on this issue until 2016.