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Spotlight

Republican efforts to move tax legislation stalled in the House this week, as doubts grew regarding whether Congress would enact tax extenders and other new tax provisions before the new year. The House cancelled all votes the week of 3 December, following the death of former President George H.W. Bush. The House had planned to take up Ways and Means Committee Chairman Kevin Brady's proposed tax package for a floor vote this week, following the cancellation of a vote planned for 30 November. The nearly 300-page legislative package, the Retirement, Savings, and Other Tax Relief Act of 2018 and the Taxpayer First Act of 2018, addresses tax extenders, retirement policy provisions, seven Tax Cuts and Jobs Act (TCJA) technical corrections, proposals from the House-passed innovation tax bill, and Internal Revenue Service (IRS) reform provisions.

Congressional Democrats continued to voice skepticism on the possibility of enacting stand-alone tax legislation before the new year. Another open possibility is that some tax provisions could be included in a year-end spending bill that must be passed before Congress adjourns for the holidays.

Treasury on 6 December sent final Section 965 transition tax regulations to the Office of Management and Budget (OMB)'s Office of Information and Regulatory Affairs (OIRA) for review. Government officials previously had indicated their desire to see the final rules released to the public before the end of the year. These regulations would be the first final regulations issued that are related to the TCJA.

Treasury on 4 December also forwarded proposed regulations under Section 864(c)(8) on the tax treatment of foreign partners' gains on the sale of a US partnership to the OMB. New Section 864(c)(8) treats the portion of gain (or loss) from the sale or exchange of an interest in a partnership that is engaged in a US trade or business as effectively connected income (ECI), to the extent the gain (or loss) from the sale or exchange of the underlying assets held by the partnership would be treated as ECI allocable to such partner. This provision effectively overruled the 2017 Tax Court decision in Grecian Magnesite Mining, Industrial & Shipping Co. v. Commissioner.

Other TCJA international regulatory packages currently with OMB for review include proposed regulations addressing certain related-party amounts paid or accrued in hybrid transactions or with hybrid entities and proposed regulations on the base-erosion and anti-abuse tax (BEAT) under Section 59A.

European Union (EU) Finance Ministers met on 4 December to discuss the proposed EU Digital Services Tax (DST), failing to reach agreement on compromise text released on 29 November. That more limited proposal provided for a 3% tax on revenues from targeted advertising on a digital interface, intermediation services and the sale of user data, with some exemptions. A joint declaration by the French and German delegations suggested that the Economic and Financial Affairs Council (ECOFIN) re-focus on taxing advertising revenue only, and later bring forward proposals in line with multilateral efforts at the Organisation for Economic Co-operation and Development. The Franco-German proposal, which was met with concern by some EU Member States, would enter into force on 1 January 2021, if no international solution is agreed upon. The Council working group is expected to continue trying to reach a digital tax compromise, with a March 2019 timeframe being floated.

Ways and Means Committee Chairman Brady weighed in on the week's EU developments, issuing a statement on 4 December. It read in part: "The EU's abandonment of their proposal for a new digital services tax is welcome news. … Introduction of a new tax targeting cross-border digital services would have singled out a key global industry dominated by American companies and … a clear revenue grab. The new idea for a tax on advertising revenue that is being floated by some countries is similarly flawed and is appropriately being greeted with significant skepticism."