June 6, 2021
Americas Tax Policy: This Week in Tax Policy News for June 4
This Week (June 7 - 11)
Congress: The Senate is back in session after a one-week recess. When the Senate reconvenes on June 7, Democrats want a vote on H.R. 7, the Paycheck Fairness Act on equal pay for women, Senator Schumer said. The House holds a committee work week, meaning hearings and other business but no floor votes.
SFC IRS hearing: The Senate Finance Committee will hold a hearing on the IRS Budget with Commissioner Charles Rettig on Tuesday, June 8 (10:00 a.m.).
Tax gap hearing: The House Ways and Means Select Revenue Measures and Oversight subcommittees will hold a joint hearing on “Minding the Tax Gap: Improving Tax Administration for the 21st Century” on Thursday, June 10 (12:00 p.m.).
Last Week (May 31 - June 4)
Global tax/G7: There is the potential for progress on a global tax agreement at the G7 meeting in London over the weekend, during which finance ministers are expected to pledge support for the BEPS 2.0 talks, including a global minimum tax.
- “We cannot continue to rely on a tax system that was largely designed in the 1920s,” UK Chancellor Rishi Sunak said to open the meeting. “And I will just say this: the world has noticed. And I believe they have high expectations for what we all can agree over the coming days.”
- Reuters cited a draft communique by the group, which consists of the United States, Canada, France, Germany, Italy, Japan and the United Kingdom, as saying, “We commit to reaching an equitable solution on the allocation of taxing rights and to a high level of ambition on the rate for a global minimum tax.”
- “Treasury Secretary Janet L. Yellen will try to secure international support this week for a broad agreement that aims to put an end to global tax havens when she makes her first trip as President Biden’s top economic diplomat to the Group of 7 finance ministers summit in Britain. Such a pact has been elusive for years…” the New York Times reported June 2. “A Treasury Department official said on Wednesday that it was not certain that a consensus would be reached this week on details like a minimum tax rate, but expressed optimism that the negotiations were moving in a positive direction.”
- A May 31 Washington Post story said, “Finance ministers from Group of Seven nations meeting in London on Friday are expected to back President Biden’s call for a global minimum tax on corporate profits.” It continued, “Biden catalyzed the global tax debate this month by lowering to 15 percent from 21 percent his proposed worldwide minimum. If he can secure agreement from the world’s leading democracies — en route to a broader global consensus later this year — it could eventually produce the most significant global tax shift in decades.” Also, “Amid all these moving parts, the expected G-7 endorsement ‘is good news in terms of the possibility of a global agreement,’ said Michael Mundaca, U.S. national tax department leader for Ernst & Young. ‘But it’s still very early.’”
- Republican tax-writers in Congress have been expressing concerns about an eventual deal, but Democratic House Ways & Means Committee Chairman Richard Neal (D-MA) and Senate Finance Committee Chair Ron Wyden (D-OR) June 3 issued a joint statement saying, “We applaud the Biden Administration for taking a leadership role in moving forward on what would be a landmark achievement on international taxation. After months of productive engagement by Secretary Yellen and the Treasury Department, we are optimistic that a strong multilateral agreement can be reached to harmonize our international tax rules, end the race to the bottom, and put a stop to digital services taxes. We look forward to working with the administration and evaluating the outcome of these negotiations for American workers, businesses, and taxpayers.”
DST tariffs: In a related development, on June 2, USTR announced additional tariffs on goods from Austria, India, Italy, Spain, Turkey, and the UK stemming from Section 301 investigations of Digital Service Taxes (DSTs) from those countries, but they are suspended up to 180 days “to provide additional time to complete the ongoing multilateral negotiations on international taxation at the OECD and in the G20 process.“
Infrastructure: There have been some shifts in the bipartisan infrastructure talks led by President Biden and Senate Environment & Public Works (EPW) Ranking Member Shelley Moore Capito (R-WV), which continued this week despite Congress being out of session. They are scheduled to talk again on Monday, June 7.
- White House press secretary Jen Psaki confirmed June 3 that President Biden is focusing on proposals like a 15% minimum tax on corporate book income to help pay for infrastructure legislation to entice bipartisan support, rather than more widely targeted tax increases that directly change TCJA provisions like a corporate rate hike to 28%. The President is still trying to win Republican support for efforts to narrow the tax gap, including a proposal to have financial institutions perform additional reporting on inflows and outflows from financial accounts.
- The Wall Street Journal June 3 reported that during the previous day’s meeting, “Biden’s list also included changing the longstanding income-tax rules for investment appreciation when a taxpayer dies and eliminating tax provisions that benefit fossil-fuel companies.” The New York Times (NYT) reported June 3 the President also proposed “closing a small number of business tax loopholes.”
- In Kentucky this week, Senate GOP leader Mitch McConnell (R-KY) on Wednesday continued to suggest unspent COVID funds be tapped as a pay-for and on Thursday dismissed any creative coaxing to get Republicans to support tax provisions, i.e. by targeting provisions outside the TCJA. “Once you get into this tax increase area, you are going to create an enormous amount of controversy, so I don’t think that’s going to appeal to members of my party,” McConnell said June 3.
- Politico reported June 3, “Biden wants $1 trillion in new spending and is set on corporate tax hikes to help pay for it, while the latest GOP counteroffer included only $257 billion in new spending in their $928 billion infrastructure plan.” The NYT reported, “Biden has also insisted on including some spending provisions, like building 500,000 new charging stations for electric vehicles, that have little Republican support in Congress. He said any new spending should be in addition to the $400 billion he wanted to maintain for existing programs over the next five years.”
Timing: The Administration is signaling they won’t wait much longer for a deal and want progress by the time Congress returns June 7 from this week’s recess. “There is a time limit on this ... you’re not going to play this back and forth much longer,” Energy Secretary Jennifer Granholm told CNBC June 2. Democrats in Congress see the urgency but predict a little longer runway for a deal to take off. Senate Finance Committee member Ben Cardin (D-MD) said in the NYT that the next 10 days would be critical for a deal.
Budget: With the May 28 release of the President’s FY2022 budget and Treasury Green Book, we know (1) more details than we knew before about the tax proposals but not (2) whether the President will reach a deal on infrastructure with Republicans, which would likely exclude tax increases, and (3) what combination of tax increases can be supported by Democrats in an infrastructure bill if bipartisan talks crater or, if they succeed, in a potential follow-on reconciliation bill on “human infrastructure” and maybe climate provisions. The budget’s release hasn’t made clear which tax increase proposals Democrats can unite around because it isn’t yet known whether they will be working with Republicans on infrastructure – which would take most tax increases out the equation for now – or going it alone. On May 28, Chairman Neal, who has questioned the need to offset infrastructure costs, praised the budget’s “crucial investments” in a number of areas and said “Ways and Means Democrats will consider the administration’s proposals carefully and look forward to working together to achieve our shared goals,” without mentioning tax increases. Politico June 3 reported, “ongoing uncertainty around the larger infrastructure talks has only encouraged some Democrats to take more of a wait-and-see approach to big tax increases, though they can at least now look to the Treasury Department’s Greenbook for better clarity on the administration’s tax hike wish list. But not all are sure how much of the budget document to take seriously, said Sen. Bob Menendez (D-N.J.), a senior tax writer who argued that the administration has taken a ‘shotgun approach, a blunderbuss approach where you throw out all these things — that’s a lot of different revenue changes, with a lot of different consequences.’”
Some of the highlights from the Treasury Green Book:
- In the international tax area, the changes to the GILTI tax regime have been expanded to include repealing the subpart F high tax exception and the statutory authority the Trump administration relied on to issue the GILTI high tax exclusion regulations. The GILTI tax rate increase would be implemented through a reduction in the section 250 deduction from 50% to 25% (against a proposed US corporate rate of 28%). In addition, not only would GILTI be calculated on a jurisdiction by jurisdiction basis, but so would the foreign tax credit branch basket. Also key are additional details on the workings of the SHIELD proposal to replace the BEAT, which would deny deductions on related party payments but by reference ETR on deductible payments in the local jurisdiction.
- Treasury brought back to the debate offshoring/onshoring provisions: a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a US trade or business, matched with a denial of deductions for expenses paid or incurred in connection with offshoring a US trade or business.
- The announcement that “long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates … effective for gains required to be recognized after the date of announcement” may mean the April 28 Administration rollout of the Families Plan, though there is precedent for congressional tax-writers ignoring such suggestions and tying effective dates to steps in the legislative process.
- On energy, the Administration mostly aligned with House Democrats’ approach to expand and extend clean energy provisions that are already in the tax code, as opposed to Senate Democratic efforts under Chairman Wyden to consolidate current provisions into a new system, with the shared goals of clean electricity, clean transportation, and energy efficiency for homes and commercial buildings. Two important add-ons in the Green Book are a clean energy hydrogen credit, and the additional $10 billion of 48C tax credits allocated to advanced energy manufacturing projects with $5 billion specifically allocated to projects in coal communities.
A WCEY Alert on the budget is available here.
Bloomberg Tax reported June 1 that a Treasury official conceded last week the Administration hadn’t been specific about the budget proposal to replace foreign-derived intangible income (FDII) with other research tax incentives, and said the Department wants to work with Congress. Ideas floated include “eliminating a change in how companies record their R&D costs that’s scheduled to take effect next year and would cost companies more in taxes,” referring to the Section 174 requirement that R&D expenses be amortized over 5 years beginning in 2022.
Several Biden campaign tax proposals were omitted from the budget. A Wall Street Journal story on the Section 199A pass-through deduction said “Administration officials haven’t said why they haven’t proposed curbing the break at this point” despite Biden campaigning on it. Senator Wyden “is working on a series of changes to the break that could sharply curb it for the highest-income households while opening it up to upper-middle-class service-business owners,” it said.
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