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June 13, 2021

Americas Tax Policy: This Week in Tax Policy News for June 11

This week (June 14-18)

Congress: The House and Senate are in session.

Budget hearings: There will be plenty of tax discussion in the tax-writing committees next week with hearings on the President's FY2022 budget featuring Treasury Secretary Janet Yellen: Wednesday, June 16 (10 a.m.) at the Senate Finance Committee, and Thursday June 17 (10 a.m.) at Ways & Means.

Disclosure bill: The House Financial Services-passed Disclosure of Tax Havens and Offshoring Act (H.R. 3007) has been rolled into a broader bill, the Corporate Governance Improvement and Investor Protection Act (H.R. 1187 ), set for House consideration next week. The bill would require public companies with annual revenues of $850 million or more to disclose their total pre-tax profits, tangible assets and total amounts paid in state, federal and foreign taxes. The bill would also require companies to disclose a number of specific tax-related items for each of their subsidiaries, as well as on a consolidated basis, such as total accrued tax expenses, stated capital and total accumulated earnings. The disclosure legislation has an uncertain future in the Senate.

Last week (June 7-11)

The big picture:

  • G7 leaders meeting in Cornwall, England, are set to endorse a global minimum tax of at least 15%
  • Infrastructure talks pivoted to a bipartisan Senate group that announced a deal without tax increases (other than indexing gasoline excise taxes)
  • Senate Finance approves nomination of Lily Batchelder as Asst. Sec. for Tax Policy
  • Treasury's Clausing says mark-to-market capital gains taxation not ready for primetime, the absence of a proposal to repeal IRC Section 199A in Biden's budget plans doesn't equal a rejection of the idea
  • Committees held similar hearings on the tax gap and Republicans ramped up their privacy concerns

Global tax/G7: Following on the G7 finance ministers' communique from last weekend, the White House announced June 11 that G7 leaders will "endorse a strong global minimum tax of at least 15%" to end the "race to the bottom that pushes nations to compete over who can offer the lowest tax rate to large corporations." A fact sheet also said, "In addition to agreement on a global minimum tax, the G7 also reached historic agreement on a plan to replace DSTs with a broader reallocation of taxing rights to the places where the largest and most profitable multinational corporations are doing business and making money … This is an important principle for the United States, and will ensure that big multinational companies across the economy will pay a little more in the places where they operate, whether or not they have their headquarters there." An administration official said on a background press call, "It's a major statement to have G7 unity on this effort. It will serve as a springboard to getting broader agreement at the G20." The G20 meeting in early July will consider endorsing the approach backed by the G7. A June 9 Washington Post op-ed by Secretary Yellen and finance ministers from Mexico, Indonesia, South Africa, Germany on "Why we need a global corporate minimum tax" said "[W]e endorse a fairer allocation of taxing rights over the largest and most profitable corporations to replace the uncoordinated unilateral measures that have destabilized the international tax system in recent years. We also endorse the creation of a globally agreed-upon minimum tax that would ensure countries tax corporate income at least at a base level." A June 8 Wall Street Journal (WSJ) article on the "G-7 Tax Plan: What We Know About the Global Corporate Tax Deal" said, regarding the breadth of the minimum tax, "In each of the past five calendar years, between two dozen and three dozen companies reported effective tax rates of less than 15% among the 100 biggest companies by market capitalization, according to data from S&P Global Market Intelligence." Also, "The reallocation of profits to places where products are consumed will only apply to the roughly 100 largest companies with profit margins over 10% — with some industries like agriculture, banking and the oil industry potentially carved out in part because their income isn't as mobile."

An EY Alert on the finance ministers' announcement is available here.

GOP resistance: Republican leaders in Congress continue to express concern over the support for a global tax agreement expressed at the G7 finance ministers meeting last weekend and related OECD BEPS 2.0 negotiations. Politico reported: "'We were relying on the administration to put up a fight here and prevent the singling out of the most successful American companies for this punishment, but apparently the administration was too determined to get the global tax increase and so they were willing to give up the fight,' said Sen. Pat Toomey (R-Pa.), a key architect of the 2017 GOP tax law that overhauled the U.S. international system." A House Ways & Means Republican press release based on an interview by Ranking Member Kevin Brady (R-TX) said "President Biden's Global Tax Hike Is a Surrender of American Jobs. The Biden Administration knows that $6 trillion in new tax hikes will send jobs fleeing overseas. To mitigate this self-inflicted sabotage of our economy, they're asking foreign countries to raise their rates, too." Another Ways & Means release said, "A minimum tax on foreign profits acts as a 'top-up' tax — meaning a country can collect additional tax if companies headquartered within its borders earn profits in lower-tax foreign jurisdictions," and provided examples.

Infrastructure: The 10-Senator bipartisan infrastructure group that includes Senator Joe Manchin (D-WV) June 10 announced they had reached an agreement on a framework "to modernize our nation's infrastructure and energy technologies" that "would be fully paid for and not include tax increases," according to a statement from Senator Rob Portman (R-OH). "We are discussing our approach with our respective colleagues, and the White House, and remain optimistic that this can lay the groundwork to garner broad support from both parties and meet America's infrastructure needs." Punchbowl reported the framework is $579 billion in new spending above the baseline, $974 billion total/five years, and paid for with unspent COVID funds, an infrastructure bank, public-private partnerships, and gas tax indexing, which the Administration opposes. Some Democratic senators are becoming restless with the bipartisan talks. Senate Finance Committee Chairman Ron Wyden (D-OR) told The Washington Post he would reject a deal that did not address the climate crisis or raise taxes on multinational corporations, which are sure to be excluded in a deal with Republicans. Democratic Whip Dick Durbin (D-IL) expressed a sense of urgency in The Hill, saying, "I look at the calendar, I see two more weeks in June, three weeks in July and one in August and then we're in the middle of September. I mean, zoom. It's gone." Senate Majority Leader Chuck Schumer (D-NY) said June 8 that there could still be a bipartisan bill on issues the parties agree on, then a reconciliation bill with Democratic priorities. "We all know as a caucus we will not be able to do all the things that the country needs … in a bipartisan way … And it may well be that part of the bill that'll pass will be bipartisan and part of it will be through reconciliation."

Treasury: The Senate Finance Committee (SFC) June 10 voted 22-6 to approve the nomination of Lily Batchelder as Assistant Treasury Secretary for Tax Policy. A former chief tax counsel for the Committee, her full Senate confirmation could help President Biden move his tax agenda on the Hill and kickstart the tax regulatory process. During a Tax Policy Center event June 10, Kim Clausing, Deputy Assistant Treasury Secretary, Tax Analysis, said mark-to-market taxation of capital gains is an area that deserves further study — and is being looked at by Chairman Wyden — and not "ready for prime time." Proposals on taxation of capital income that are ready: the taxation of capital gains at ordinary income rates for those with more than $1 million in income and repeal of stepped-up basis. She described the tax plans presented by the Administration as those that could be readied in the first 100 days, and not the last word on the issue. Asked about the absence of a proposal addressing the Section 199A deduction in the Biden plans released thus far, Clausing said there should be no inference that omission of a proposal in any area is a signal that it has been rejected. Regarding international tax proposals, Clausing said they are complementary with the multilateral negotiations at the G7, OECD, etc., and a multilateral tax agreement could remove arguments against the President's proposals like eliminating the 10% return on tangible assets, i.e. that they would disadvantage US companies relative to global competitors. Clausing also said the revenue proposals serve three purposes: 1) raise revenue; 2) create more equity in the system; and 3) make the tax system more efficient.

Tax gap: The June 8 SFC hearing on the IRS Budget with Commissioner Charles Rettig included discussion about efforts to narrow the tax gap, which have intensified since the Commissioner's comments at an April 13 hearing that the difference between taxes owed and paid may have swelled to $1 trillion annually in the age of cryptocurrency. The Biden administration FY2022 budget proposed more funding for IRS enforcement and technology alongside a proposal to have financial institutions perform additional reporting on inflows to and outflows from financial accounts, and Republicans at the hearing expressed concerns over the privacy aspects of the proposal. Ranking Member Mike Crapo (R-ID) said, "I have long been critical of big data collection activities, and oppose turning banks and brokers into government tax collectors. I also have strong concerns about the proposed IRS big data requirements." Chairman Wyden said his own tax gap proposal would be released soon and, in general, "We are going to move pretty quickly on these issues." The June 10 House Ways & Means Select Revenue Measures and Oversight subcommittees' joint hearing on the tax gap was similar. Democrats voiced support for President Biden's budget proposals for more funding for IRS enforcement and technology alongside a proposal to have financial institutions perform additional reporting on inflows to and outflows from financial accounts. Republicans expressed concerns over the privacy aspects of the proposal, and additionally said a report this week based on leaked information about high-income and high-profile taxpayers demonstrates the dangers of providing more information to the IRS. Witnesses were Treasury's Mark Mazur and Doug O'Donnell of IRS. O'Donnell made points similar to those Commissioner Rettig made to the SFC, including that there is a taxpayer-positive aspect to the increased reporting because the better the information IRS has, the better chance the agency will spot instances in which taxpayers are fully compliant and avoid audit. Mazur said that if $25,000 in inflows and $25,000 in outflows are reported, there is no need to audit; if there is a disparity in the amounts, that is something that needs to be looked at. Five former Treasury Secretaries published a joint essay in the New York Times (NYT) June 9 citing cuts to IRS resources over the past 25 years and antiquated agency IT, and said, "We are convinced that better information-reporting requirements can be designed that will permit significant increases in revenue collection without imposing any burden at all on taxpayers and imposing no significant increase in regulatory burdens across the economy. Relying on financial institutions to relay some basic information about account holders is a sensible way forward."

Supply chains: The Senate June 8 approved 68-32 the United States Innovation and Competition Act of 2021 (S.1260). "The legislation is likely to face stiffer headwinds in the House, where top lawmakers have expressed skepticism about its focus on bolstering emerging technologies. That debate played out in the Senate, which ultimately watered down the original ambition of the bill to accommodate those objections," the New York Times reported. "The measure, the core of which was a collaboration between Mr. Schumer and Senator Todd Young, Republican of Indiana, would prop up semiconductor makers by providing $52 billion in emergency subsidies with few restrictions." The White House June 8 released "Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth: 100-Day Reviews under Executive Order 14017." Recommendations include: at least $50 billion in investments to advance domestic manufacturing of semiconductors; expanded incentives to spur consumer adoption of US-made electric vehicles; new incentives to support battery cell and pack manufacturing in the US; a Supply Chain Resilience Program at the Department of Commerce, to monitor, analyze, and forecast supply chain vulnerabilities; support for technologies that will reduce the critical mineral requirements of next generation electric vehicle and grid storage technologies; agencies increasing their funding of advanced manufacturing technologies to advance continuous manufacturing and the biomanufacturing of APIs; and updating manufacturing requirements in federal grants, cooperative agreements and R&D contracts to ensure that taxpayer funded R&D leads to products made in the US.

R&D bill: Senators Chris Coons (D-DE), Steve Daines (R-MT), Catherine Cortez Masto (D-NV), Todd Young (R-IN), and Maggie Hassan (D-NH) June 8 introduced The FORWARD Act (S. 1979) to provide expanded tax support for American companies that invest in R&D of new products and technologies:

  • Firms with up to $20 million in gross receipts would be eligible to use the credit to reduce their payroll tax obligation during a span of 8 years, up from current thresholds of $5 million and 5 years
  • The R&D credit would be increased for companies that generate the majority of their gross receipts from manufacturing their products in the United States
  • The full R&D credit would be expanded to cover R&D-related worker training costs

In the press:

  • A June 8 WSJ story on President Biden's proposed capital gains hike said, "The rate increase would take effect for sales of stock and businesses after the April 28 announcement of the plan. With some business sales already in process, that retroactive date has frozen some moves and could change what buyers are willing to pay. 'Deals are slowing down or waiting for clarity or being repriced,' said David Herzig, who advises wealthy families for Ernst & Young LLP." A June 9 NYT story said, "A jaw-dropping report by ProPublica detailing how America's richest men avoided paying taxes has intensified interest in Congress, even among some Republicans, in changing the tax code to ensure that "the wealthy pay their fair share. It said SFC Chairman Wyden "said he was working on an array of proposals to get at the issue, possibly including a return to some kind of minimum tax, and would soon unveil specific proposals. 'Billionaires are going to have to pay their fair share, every year,' he said." The story also said, "The details of the report may bolster the cause of a wealth tax, pushed by Senator Elizabeth Warren" and "Mr. Wyden said he was also examining the approach." A June 9 NYT story focused on a donor-advised fund bill by Sens. Chuck Grassley (R-IA) and Angus King (I-ME) to "speed the provision of money to working charities" through 15- and 50-year DAFs.


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