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July 4, 2021

Americas Tax Policy: This Week in Tax Policy News for July 2

This Week (July 5 - 9)

Congress: The House and Senate are out of session for the Independence Day recess until July 12.

Global tax: The G20 Finance Ministers are scheduled to consider the outcome of the Inclusive Framework meeting at their meeting in Venice July 9-10.

Publication note: This Week in Tax Policy News won’t be published next week during the congressional recess, but Tax Alerts will be issued as events warrant.

Last Week (June 28 - July 2)

Inclusive Framework: Most of the countries that make up the OECD’s 139-member Inclusive Framework July 1 endorsed a high-level agreement, years in the making, that addresses how the largest and most profitable multinational enterprises (MNEs) should allocate their taxable profits to customer jurisdictions under Pillar One of the OECD’s project and to a global minimum tax model ensuring that MNEs pay a minimum level of tax, no lower than 15%, in all the jurisdictions in which they operate, under Pillar Two.

  • Under Pillar One, the package will provide for the removal of Digital Service Taxes and a relatively new metrics for determining the largest MNEs subject to a formulary approach for allocating profits among jurisdictions that scopes in MNEs based on their revenues and profits, with exclusions for financial services and extractive industries.
  • Under Pillar Two, most Inclusive Framework members committed to enact in their domestic laws a minimum tax on the foreign source earnings of MNEs headquartered in their countries, along with a backstop rule aimed at ensuring those companies pay the minimum level of tax even if the minimum tax itself, called the income inclusion rule, is not adopted.

The scope of the Pillar One rules is to be multinational entities (MNEs) with global turnover above €20 billion and profitability (i.e., profit before tax/revenue) above 10%. The Statement indicates that work on Amount B, relating to a simplified approach for the application of the arm’s-length principle to in-country baseline marketing and distribution activities, is to be completed by the end of 2022 and will focus in particular on the needs of low-capacity countries. It describes Pillar Two as having two elements. The GloBE rules are a set of interlocking rules: an Income Inclusion Rule (IIR) that would implemented by headquarter jurisdictions to impose a top-up tax on low taxed income of foreign subsidiaries, and the Undertaxed Payments Rule (UTPR) that denies deductions or requires an equivalent adjustment for low-tax income that has not been subject to tax under an IIR.

The US GILTI rules are contemplated to be a “co-existent” IIR, so the US would be considered to already have an IIR in place, but the IF statement hints that it would be a good thing for the US to change GILTI from applying on a global blended basis to a jurisdictional basis. Specifically, the IF statement throws in a new wrinkle: “It is agreed that Pillar Two will apply a minimum rate on a jurisdictional basis. In that context, consideration will be given to the conditions under which the US GILTI regime will co-exist with the GloBE rules, to ensure a level playing field.”

The endorsement of Pillar Two is a big win for the Biden administration, which has been pushing for a global agreement in part to buttress support in Congress for its proposals to toughen global intangible low-taxed income (GILTI) rules. “I want to thank all the signatories of the Paris OECD statement — 130 countries — for coming together to endorse a global minimum tax rate of at least 15 percent…” President Biden said. “Building on this agreement will also require us to take action here at home. It’s imperative that we reform our own corporate tax laws… We must adopt the global minimum tax, among other measures I have proposed, to make sure corporations pay their fair share.” The nine members of the Inclusive Framework that have not joined the Statement are Barbados, Estonia, Hungary, Ireland, Kenya, Nigeria, Peru, Saint Vincent and the Grenadines, and Sri Lanka. An EY Alert is linked below.

Outlook: The Statement is an important step in advancing the work on the BEPS 2.0 proposals for fundamental changes to global tax rules. However, it reflects a conceptual agreement and there is significant work to be done to flesh out the technical details and address the remaining open questions. That work will need to be completed quickly in order to achieve the objective of reaching a final agreement in connection with the October 2021 G20 meetings. In the press:

  • New York Times (NYT): “Critical details still need to be worked out, including how to execute the plan ... Those details could also determine which American multinationals are subject to the new rules on digital taxation.”
  • Washington Post: “a great deal of work remains before a global minimum tax will become a reality. Each of the 130 nations, including the United States, must convert its endorsement of today’s five-page plan into the nitty-gritty detail of legislation that will rewrite its tax code.”
  • Wall Street Journal (WSJ): “It is still far from certain what tax increases, if any, will get through the closely divided Congress, where Republicans flatly oppose corporate tax increases and some Democrats say they are wary.”

House Ways and Means Committee Ranking Member Rep. Kevin Brady (R-TX) released a statement saying “the Biden Administration has already given up significant U.S. ground by opening the door to not grandfathering GILTI and agreeing to a global minimum tax structure that favors foreign-headquartered companies and workers over American ones.”

Infrastructure: The outlook for how the $1 trillion infrastructure deal President Biden proposed with a bipartisan Senate group can move in Congress is still unclear, especially whether it can pass without progress toward a follow-on bill covering health care, caregiving, and climate change, paid for in part by tax increases, and assurances from moderates they will support it. Five Senate Republicans support the deal and 5 more are needed to pass, plus all 50 Democrats. House Democrats can lose the votes of only four of their members if no Republicans support an eventual bill. On the latest dynamics:

  • Progressive Democrats like Reps. Ilhan Omar (D-MN) and Rep. Ro Khanna (D-CA) suggested infrastructure can’t move without the follow-on bill, and “predicted a united left flank would bring down an infrastructure-only bill,” the NYT reported.
  • On what she needs to see to feel comfortable voting for the bipartisan infrastructure bill, another progressive, Rep. Alexandria Ocasio-Cortez (D-NY), said, “I need to see progress on both. And I personally, you know, it’s not just about putting faith in leaders. It’s like, ‘Show me the beef.’ And to me, the beef is passing reconciliation in the Senate,” Punchbowl News reported.
  • Rep. Stephanie Murphy (D-FL), co-chair of the Blue Dogs group of fiscally conservative Democrats, said she wants to vote ASAP on Biden’s infrastructure deal — not wait on reconciliation, according to a tweet from NBC’s Sahil Kapur: “When you have the votes, you should take the vote.”
  • House Speaker Nancy Pelosi (D-CA) reiterated June 29 that the Senate must vote on the follow-on reconciliation bill before the House takes up the infrastructure legislation. The President has backed away from that position under pressure from Republican Senators.

A leader of the bipartisan group that struck a $1 trillion infrastructure deal with President Biden, Senator Rob Portman (R-OH), said work on the details is ongoing during the Senate recess this week and next, including through working groups, and there may be legislative language later this month. “It’s going to take a while because we’ve got to flesh out a lot of very complicated areas, but my hope is that over this two-week period, including this week right now, that we can make some progress,” said in a report. “We’ve got separate working groups in every major area, and my hope that is sometime in July we’re able to provide more specific language.” Politico reported July 2: “The 21 senators have divvied up the various spending (highway funding, airports, broadband, etc.) and revenue-raising (IRS enforcement, unused Covid relief funds, etc.) categories in the framework into working groups that are responsible for drafting legislative text.”

Financing/funding: Senator Portman provided perspective on some of the proposed pay-fors, namely that customs user fees are appropriate because the legislation will fund ports, and fees charged to chemical companies help clean up chemical waste sites. “Many of those chemicals do end up in a Superfund site, so the notion is to have a user fee, in essence, to help pay for the cleanups that are funded in this proposal,” he said. The Washington Post reported that the financing/funding provisions outlined June 24 aren’t all strong revenue generators but “a hodgepodge of measures” that are unlikely to create actual revenue:

  • “Unemployment insurance program integrity” is intended to cut only fraud and waste, leading some to question whether it can raise $70 billion;
  • $65 billion from the proceeds of selling the spectrum used by telecommunication companies to run 5G reflects a sale that occurred in February;
  • there is $80 billion in coronavirus relief funding “that nobody has yet identified or agreed to;”
  • a “mandatory sequester,” or cuts to government programs, has been waived repeatedly by Congress during the past decade; and
  • $100 billion from “public-private partnerships” and other collaborations with industry groups are “questionable because they are actually likely to increase the bill’s price tag.”

Regarding the $40 billion investment in the IRS to help recoup over $100 billion in unpaid taxes, “it is unclear whether Republicans ultimately will sign off on using the extra IRS funding to come down on wealthy tax cheats and big corporations, which is the administration’s priority,” and additional reporting requirements on financial institutions are out of the final agreement. The tax gap proposal is facing resistance from some Republicans, Axios reported:

  • Sen. John Barrasso (R-Wyo.), chair of the Senate Republican Conference, told Axios that “spending $40 billion to super-size the IRS is very concerning,” and “law-abiding Americans deserve better from their government than an army of bureaucrats snooping through their bank statements.”
  • Sen. Ted Cruz (R-Texas): “Throwing billions more taxpayer dollars at the IRS will only hurt Americans struggling to recover after waves of devastating lockdowns.”
  • Sen. Marsha Blackburn (R-Tenn.): “A $40-billion increase in funding for the IRS will lead to a huge potential for abuse. Bigger government results in more waste, fraud and abuse.”

Surface transportation: The House July 1 passed 221-201 largely along party lines (with 2 Republicans in favor) the INVEST in America Act (H.R. 3684), “a $715 billion surface transportation reauthorization and water infrastructure bill, with more than $44 billion added during the amendment process to make even greater investments in infrastructure, including EV charging and passenger rail grant programs, among other additions.” That and a $305 billion Senate Environment & Public Works bill are bedrock measures that could support a broader infrastructure package, and House Transportation & Infrastructure Chairman Peter DeFazio (D-OR) has noted similar funding levels between the House bill and the Biden-Senate group infrastructure deal. Republicans opposed the House bill in part for its climate change components, which include electric vehicle charging and alternative fueling infrastructure, and are associating it with the separate and much broader Green New Deal progressive climate change proposal. Defazio has been defiant in the face of such criticism, especially this week, as his state and that of another top T&I member, Rep. Rick Larsen (D-WA), in the Pacific Northwest are in the midst of record-breaking, and deadly, high temperatures. Republicans also criticized the House bill passing without a revenue title, which Chairman DeFazio said will come later. Citing a meeting last week between House Ways & Means Committee Chairman Richard Neal (D-MA), Treasury Secretary Janet Yellen, National Economic Council Director Brian Deese, and Senate Finance Chairman Ron Wyden (D-OR) to discuss pay-fors for infrastructure, he said, Chairman “Neal is fully ready to sit down … They’re ready to move when they’re ready to negotiate.”

Budget: House liberals were set to meet this week with Budget Committee Chairman John Yarmuth (D-KY) and have been in regular communication with Senate Budget Committee Chairman Bernie Sanders (I-VT), who, prior to the $1 trillion infrastructure deal, was eyeing $6 trillion in Democratic priorities, with $2.5 trillion in planned tax increases under the jurisdiction of the Senate Finance Committee. Senator Joe Manchin (D-WV) suggested last weekend he would vote for as much as $2 trillion in additional investment, all paid for, and he is willing to go to 25% on the corporate rate and “I think that basically capital gains should be at 28%.” The divergent perspectives – $2 trillion v. $6 trillion – will have to be addressed as the Senate crafts a FY2022 budget resolution, which will unlock the reconciliation process and potentially allow an all-Democratic bill to follow a bipartisan infrastructure package. Meanwhile, House Budget Committee Democrats “have decided to forgo their own fiscal 2022 budget resolution and wait to see what Senate Democrats can muscle through their 50-50 chamber,” Roll Call reported. “There was an overwhelming consensus for waiting on the Senate,” Chairman Yarmuth said.

Debt limit: Bloomberg reported Yarmuth as saying Democrats discussed suspending the debt ceiling to October 1, 2022 as part of a budget resolution. There has also been discussion of raising or suspending the debt limit as part of a broader reconciliation bill or separately under the reconciliation process. Those plans are complicated by questions of how fast a reconciliation bill can come together. Sec. Yellen urged Congress to address the debt limit soon after it is reinstated August 1 after a 2-year suspension.

Competitiveness: The House June 28 approved 345-67 the National Science Foundation for the Future Act, which would provide NSF funding and fund a new Directorate for Science and Engineering Solutions and is an alternative to the Senate-passed competitiveness bill. It is focused on financing research in climate change and cybersecurity, as opposed to the emerging technologies focus of the Senate bill and doesn’t include the Senate-passed $52 billion to fund semiconductor research, design and manufacturing initiatives. House passage is seen as setting up a House-Senate conference with the Senate bill passed June 8. The President released a statement anticipating the negotiations and hopeful for an outcome: “I was pleased to see the Senate pass crucially important investments in our domestic strength through the U.S. Innovation and Competition Act with massive bipartisan support, and I’m heartened today to see the House pass similar bipartisan investments in R&D and science tonight … My Administration looks forward to continuing to work with the House and the Senate in producing a final bill I can sign.”

CBO outlook: The July 1 CBO update of 10-year budget numbers said the federal deficit will total $3.0 trillion and federal debt will reach 103% of GDP in fiscal year 2021. Baseline deficits under current law are significantly smaller after 2021, dropping to $1.15 trillion in 2022 and averaging $1.2 trillion until 2031. The American Rescue Plan Act of 2021 increased the projected deficit by $1.1 trillion. The unemployment rate declines through 2022 and remains near or below 4% for several years, and inflation rises sharply in 2021 and then moderates, the report said.

IRS: Treasury and the Internal Revenue Service June 29 issued guidance for taxpayers developing renewable energy projects to address delays related to the COVID-19 pandemic. The IRS guidance provides relief on commencement of construction requirements.


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