October 31, 2021
Americas Tax Policy: This Week in Tax Policy for October 29
This Week (November 1-5)
Congress: The Senate and House are in session. The Senate has nomination votes teed up, including Jonathan Davidson to be Deputy Under Secretary of the Treasury.
Global tax agreement: G20 leaders are expected to approve the October 8 OECD-led global tax agreement during their summit in Rome October 30-31.
Washington Council EY’s “DC Dynamics ” podcast series looks at what’s coming up in US tax policy . Host Ray Beeman, leader of WCEY, draws on his experience as a former congressional staffer for the House Ways & Means Committee and the Joint Committee on Taxation to break down and examine current developments in Congress and put them into a political and policy context.
Last Week (October 25-29)
Reconciliation outlook: House Democrats October 28 released revised text of the Build Back Better Act (H.R. 5376) budget reconciliation bill with modifications to reflect some changes in the new framework released by President Biden earlier in the day. The changes in the tax titles drop a number of key tax increase proposals agreed to by the Ways and Means Committee in September and include new revenue offsets reflecting Senator Kyrsten Sinema’s (D-AZ) opposition to tax rate increases and support for other revenue raisers, including a corporate minimum tax on financial statement income. The President visited the Capitol to try to persuade House Democrats to back the reconciliation bill after the new framework was released, and House Speaker Nancy Pelosi (D-CA) asked progressives to support passage of the bipartisan infrastructure framework (BIF). That didn’t happen on Thursday – Congress instead extended authorization and funding for surface transportation programs until December 3, which was necessary in the absence of enactment of the infrastructure bill, aligning it with the current expiration of government funding. Despite the lack of progress this week on both bills, however, there appears to be growing consensus among Democrats to work to get both the reconciliation bill and BIF done in short order. Top progressive Rep. Pramila Jayapal (D-WA) said members would work to get both bills passed in the House next week (the first week in November). A number of issues still must be resolved in the reconciliation bill, including potential relief from the SALT deduction cap, several health policy related issues, and the possibility of a new government program for paid family leave. If the House can pass the reconciliation bill, it’s likely Senators will want to make further modifications, though Speaker Pelosi was previously seeking assurances that the Senate would vote on the exact same budget reconciliation bill brought before the House.
The strong push to get the BIF and reconciliation bills done was reminiscent of a similar effort at the end of September but took on perhaps greater urgency as President Biden was leaving for the G20 Leaders’ Summit in Rome and the COP26 climate change conference in Glasgow, and as the November 2 Virginia gubernatorial election approaches. Democrats wanted to notch one or both bills as victories as the President stepped on the global stage, and infrastructure bill enactment could have allowed a greater focus on transportation projects in the final days of campaigning for Virginia Democratic gubernatorial candidate Terry McAuliffe. President Biden said action soon is imperative for the party’s political fortunes. “The House and Senate majorities and my presidency will be determined by what happens in the next week,” President Biden told House Democrats, according to the New York Times. The NYT analysis said, “Biden and his aides gambled on Thursday, effectively calling for a final decision on his economic and environmental agenda and daring holdout Democrats not to back it. Senior administration officials said that the decision to go all-in was a product of the president’s belief that he had exhausted all avenues in the talks and secured the best possible package he could — and, crucially, that the package could command support from all corners of a fickle Democratic caucus.”
Senate Majority Leader Chuck Schumer (D-NY) reportedly told Democratic members October 28 they had about a week to negotiate things back in or out of the revised reconciliation framework. Senator Sinema released an optimistic statement about the framework but neither she nor Senator Joe Manchin (D-WV) emphatically endorsed it, and now progressives and other Democrats are dissatisfied with omissions from the plan. Speaker Pelosi said she wanted some version of paid family leave added in, for instance, “But that’s still a work in progress, shall we say.” Tax items aren’t completely settled – “the revenue portion of the reconciliation package is still open,” Punchbowl News reported – and estimates from the Joint Committee on Taxation have not yet been provided. “This is not done,” Senate Finance Committee Chairman Ron Wyden (D-OR) said, Politico reported. Wyden, who proposed a billionaires’ tax earlier in the week that was omitted from the revised House bill, took issue with the surtax approach that was included. The surtax is 5% on income above $10 million and an additional 3% surtax on income above $25 million (replacing the surtax in the Ways & Means bill of 3% on income over $5 million). “Many billionaires pay little or no taxes because they don’t take a wage,” he said, adding that the Administration “acknowledged that there is more work to do.” In the weeks leading up to the release of the Biden and House Democratic plan revisions released October 28, Ways & Means Chairman Richard Neal (D-MA) defended proposals in the original House bill and expressed skepticism that new proposals can be properly vetted. The October 28 Biden revision and House text retained some Ways & Means proposals and introduced some new elements from the Senate and the Administration. As the Wall Street Journal said, “[I]t still isn’t clear that the framework announced Thursday will be what gets through Congress. It needs to be turned into final legislative language, evaluated by nonpartisan congressional scorekeepers and accepted by all Senate Democrats and nearly all in the House.” The report observed, “Essentially, Democrats took the broad collection of tax ideas they had been developing for years, ran them through several filters and moved forward with the mix of policies that survived those obstacles.”
Revenue breakdown: President Biden’s revised Build Back Better framework included the following estimates for revenue proposals (as noted, JCT has yet to provide revenue estimates on the revised bill).
International tax: International tax changes remain a substantial part of the revised House package, but a number of changes were made to the GILTI, foreign tax credit, and BEAT provisions. The revised bill reduces the section 250 deduction for FDII to 24.8% and GILTI to 28.5%, yielding a 15% GILTI rate and a 15.8% FDII rate, with changes effective for tax years beginning after December 31, 2022, rather than December 31, 2021, as was the case in the Ways and Means bill. The provision to require foreign tax credit determinations on a country-by-country basis for GILTI, subpart F and branch purposes is also delayed until tax years beginning after December 31, 2022.
The new Biden framework calls for “imposing a penalty rate on any foreign corporations based in countries that do not” abide by the OECD agreement. This is reflected in the revised House bill through the BEAT provision, which includes a BEAT rate of 18% in 2025 and later. In the interim years, the BEAT tax rate is increased to 12.5% in 2023 and 15% in 2024. The BEAT revisions continue to reflect the narrowing of the scope of the BEAT to payments made to related parties that have low effective tax rates. The minimum tax rate for determining whether a payment is a base erosion payment is the BEAT tax rate, but it would be capped in 2025 and thereafter at 15%; the higher 18% that applies after 2024 is a penalty rate that therefore only applies if payments are base erosion payments. For banks and broker dealers, a higher BEAT tax rate of one percentage point applies, as it does under current law, but the minimum tax rate is the same for all taxpayers, including banks and broker dealers. And after 2024 the penalty rate of 18% applies to all taxpayers. Some of the BEAT changes from the Ways and Means bill reflect a push by the Treasury to accommodate more elements of its stopping harmful inversions and ending low-tax developments (SHIELD) proposal, which would have replaced the BEAT.
The revised bill retains the proposal to add IRC Section 163(n) to limit the interest deduction of certain domestic corporations that are members in an international financial reporting group to an allowable percentage of 110% of the net interest expense, but drops the IRC Section 163(o) 5-year carryforward limitation for excess interest expense under IRC Sections 163(j) and 163(n).
Other tax issues: Other main revenue raisers reflect Senator Sinema’s aversion to tax rate increases, which prompted a flurry of late proposals. The 15% corporate minimum tax based on book income for companies that report over $1 billion in profits to shareholders reflects what was proposed by Senators Wyden and Elizabeth Warren (D-MA) on Tuesday. The revised bill retains the Ways & Means proposal to expand the Net Investment Income Tax (NIIT) to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income, which the White House had pointed to as a viable non-rate increase proposal.
The revised bill also includes a 1% surcharge on corporate stock buybacks, down from the Wyden-Sherrod Brown (D-OH) bill’s 2%.
Addressing the IRC Section 174 TCJA cliff, the amortization of research and experimental expenditures would begin for amounts paid or incurred in tax years beginning after December 31, 2025.
Energy tax credits begin with the Ways and Means Committee expansion/extension of renewable energy credits, including the Production Tax Credit and Investment Tax Credit, for five years before moving to the technology-neutral approach proposed by the Senate Finance Committee, Politico reported, citing tax committee staff. The expanded Child Tax Credit would be extended for one year, through 2022.
Additional IRS resources for investment in enforcement is included, but new information-reporting requirements are not.
Some major tax increase provisions in the original Ways & Means bill left out of the revised version include:
Corporate minimum tax on book income: The corporate minimum tax provision reflects the October 26 Wyden-Warren proposal and is hybrid of the corporate AMT that was repealed in the TCJA and the minimum tax on book income included in the President’s budget. It would apply a 15% minimum tax to any corporation (other than an S corporation, RIC, or REIT) that has average annual adjusted financial statement income greater than $1 billion for three tax years. For inbound companies, the minimum tax only applies if they exceed both the $1 billion threshold (including the adjusted financial statement income of all related foreign members) and a separate $100 million threshold for their US income. For pre-effective date losses, only losses arising in tax years beginning after December 31, 2019, are taken into account. Adjusted financial statement income is the net income or loss reported in the applicable financial statement with adjustments for items like book-tax differences, related-party dividends, CFC income, disregarded entity income not otherwise reflected in the financial statement, and losses. The proposal would apply for tax years beginning after December 31, 2022.