June 20, 2021
Americas Tax Policy: This Week in Tax Policy News for June 18
This Week (June 21 - 25)
Congress: The House and Senate are in session.
Trade hearings: The only hearings in the tax-writing committees next week are the SFC trade subcommittee holds a hearing on “The Strategic Benefits of a Multilateral Approach to Trade Policy in the Asia-Pacific Region” on Tuesday, June 22; and a hearing on USTR and HHS nominations on Thursday, June 24.
Last Week (June 14- 18)
The big picture:
Infrastructure: The infrastructure plan emerging from a 10-Senator bipartisan group that includes Senator Joe Manchin (D-WV) now has the support of at least 21 senators, but there are challenges in terms of the viability of pay-fors and timing, as the Administration reportedly wants a signal about the odds of success soon but negotiations could last a while longer. Politico June 17 reported that a recent, tentative menu of financing/funding provisions includes infrastructure financing authority to leverage private investment, public-private partnerships & private activity bonds, direct-pay municipal bonds for infrastructure investment, reducing the tax gap, and redirecting/repurposing unused COVID funds. The list also includes indexing the gas tax to inflation, as a placeholder pending an alternative non-tax offset from the White House, which opposes that provision as well as a potential annual surcharge on electric vehicles. The exact parameters of what the group supports on the tax gap aren’t clear. Projected enforcement revenue can’t be counted for budget purposes. Revenue can be counted from information reporting proposals, though that portion of the Biden plan, involving the reporting of inflows to and outflows from financial accounts, has drawn opposition from Republican leaders over privacy concerns. Moreover, some of the listed offsets relating to state and local government infrastructure financing, such as reinstatement of direct-pay bonds, will not raise revenue.
On timing, Punchbowl News reported Senator Rob Portman (R-OH), a leader of the bipartisan group that is discussing $579 billion in new spending for a total package of $1.2 trillion, as saying the talks to nail it down could take weeks. “We’re working overtime to get the language, to get things in a position to get the right result. We don’t want to rush it and get things wrong. We’re going to take our time and do it right,” Portman said. He pushed back against a report that, after a meeting with White House counselor Steve Ricchetti on Tuesday, House Budget Committee Chairman John Yarmuth (D-KY) said the administration was “giving it a week or 10 days and then we move along with [budget] reconciliation.” As Democratic Whip Dick Durbin (D-IL) said earlier, in suggesting bipartisan talks must wrap soon, the June legislative period is passing by – the Senate calendar says they are out June 28-July 9 – then there are “three weeks in July and one in August and then we’re in the middle of September.” The Senate returns to session from the August recess the week of September 13. The House has two more weeks before a recess the week of July 5; returns through July and is out all of August; then has Committee Work Weeks – meaning no floor votes – until September 20.
Democratic package: Democrats on their own are discussing a package of their priorities, including a Medicare expansion, of as much as $6 trillion that would be paid for by perhaps about half that much in tax increases. That and the infrastructure efforts are being discussed on parallel tracks. Senate Majority Leader Chuck Schumer (D-NY) continues to signal that Democrats could reach a bipartisan agreement on infrastructure then do a larger package of Democratic priorities under reconciliation, though other Democrats want assurances from moderates like Senators Manchin and Kyrsten Sinema (D-AZ) that they will back a large Democratic follow-on bill. If bipartisan efforts are unsuccessful, infrastructure and Democratic priorities could be rolled into one massive bill. Politico reported June 17 that “Senate Democrats are weighing spending as much as $6 trillion on their own infrastructure package if the chamber’s bipartisan talks fail;” Senator Schumer has met “with Democratic members of the Budget Committee to discuss strategy;” and that “Senate Budget Chair Bernie Sanders (I-Vt.) has been pushing for an aggressive approach to the infrastructure talks and is angling to insert a large expansion of Medicare into Democrats’ plan.” It is envisioned that about $2.5 trillion in pay-fors would fall under the jurisdiction of the Senate Finance Committee (SFC), the report suggested. It said SFC member “Sen. Mark Warner (D-Va.) laughed when asked if the $6 trillion number is too high. He said he was ‘open’ to reconciliation but wants increases to the corporate income tax and capital gains to be more modest than as presented by Biden.”
Biden Budget hearings: The G7 and OECD efforts toward a global tax agreement were front and center during two hearings in the tax-writing committees with Treasury Secretary Janet Yellen this week. During the June 16 SFC hearing, Ranking Member Mike Crapo (R-ID) asked about the proposed 15% global minimum tax backed by the Administration and the G7 finance ministers in the context of a potential OECD agreement, while the President continues to push Congress to raise the GILTI minimum tax rate to more than 26% (given the FTC haircut). Sec. Yellen said if the US is able to make progress domestically on changing GILTI, which she said needs to be on a country-by-country basis rather than on a blended basis, and moves in the direction the US is asking other countries to do, there is a good chance for countries to agree by the time of the G-20 summit in October. Similarly asked about setting the GILTI rate higher than a OECD global minimum tax during the June 17 House Ways & Means hearing, Sec. Yellen said, “With the global minimum tax of at least 15%, the gap between the U.S. tax on foreign earnings and the tax that’s imposed by other jurisdictions will actually be narrower.” The Administration continues to maintain that the US GILTI rate of 10.5% (or 13.125% with the FTC haircut) today should be compared to a foreign jurisdiction tax rate of zero, and that by raising the GILTI rate to 21%, the gap between the US and the OECD minimum rate would be narrower than it is today. However, that argument assumes foreign jurisdictions today never impose their own taxes on GILTI or that the US foreign tax credit fully offsets those taxes, which oftentimes is not the case. For example, a Joint Committee on Taxation staff report on international taxes prepared for a Finance Committee hearing several months ago stated that based on a survey of 2017 tax returns the average GILTI tax rate was 16%, combining both foreign and US taxes on GILTI.
BEAT/SHIELD: At the SFC hearing, Sec. Yellen said for countries unwilling to adopt a minimum tax, “We’re proposing changes to the [BEAT] to make it more effective and to deny foreign corporations in the United States the deductions that enable them to shift their profits offshore.” She explained: “It’s intended to counter foreign company profit shifting by denying deductions to firms operating in the United States. When they make deductions that reflect payments to their own affiliates, a parent or another affiliate, if that affiliate is based in a tax haven that does not have a global minimum tax. So that’s a way that foreign companies operating in the United States make use of tax havens. And by denying those deductions, it makes it impossible for these firms to shift income derived from US activities… It’s not only something that we’re proposing in the Biden budget. But it’s also embodied in the OECD Agreement that’s being worked out… It’s called an Undertaxed Payments Rule. And a mechanism of this sort is one that every country will have available to it to deal with tax havens.” A June 16 Wall Street Journal story on the proposal to replace BEAT said the SHIELD “aims to leverage the size of the U.S. consumer market to give other countries a choice: impose a minimum tax or watch the U.S. tax your companies and take your revenue.” The plan faces hurdles in Congress and resistance from foreign headquartered MNCs, and is more aggressive than what other countries might do as part of their minimum taxes – denying full deductions while other countries would just top companies up to the minimum tax rate, the report said. “‘That is a very blunt instrument,’ said Barbara Angus, former chief tax counsel for the Republicans on the House Ways and Means Committee, now at Ernst & Young LLP.”
Disclosure bill: The House June 15 narrowly passed, 215-214, a package of measures (H.R. 1187) intended to improve corporate governance by requiring a number of new disclosures by public companies. No Republicans supported the bill, while four Democrats voted against. Notably, the package included a measure based on HR 3007, sponsored by Cindy Axne (D-IA), which would direct the SEC to issue regulations requiring larger multinational corporations to publicly disclose country-by-country financial information for each of their subsidiaries, including profits, taxes paid, employees and tangible assets. Under the bill, businesses that are part of larger multinational enterprises would have to publicly disclose the tax jurisdictions where each subsidiary resides for tax purposes, and any other jurisdictions where subsidiaries are organized or incorporated. Companies would also have to disclose aggregate or consolidated financial activities for each tax jurisdiction where a subsidiary resides, including:
According to the bill text, the “CbC” disclosure requirements would apply to “members of multinational enterprise groups with sufficient annual revenue as determined by the SEC to meet U.S. or international standards for country-by-country reporting.” In the United States, that threshold is $850 million in annual revenues. Companies would also have to file reports for entities that have no tax jurisdiction of residence. The SEC would have to issue a proposed rule to implement the provisions within one year of the bill’s enactment, and a final rule within 18 months. The requirements would be effective one year after the final rule is issued.
Energy: The Joint Committee on Taxation released a technical description of the Clean Energy Act marked up by the SFC May 26 (it received a tie 14-14 vote but can be brought to the floor.)