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This week (December 20-24)

Congress: The House is out of session, and the Senate will be done after clearing some nominations.

Note: This Week in Tax Policy will not be published for the next two weeks, but Alerts will be issued as events warrant.

Last week (December 13-17)

Reconciliation on hold: Following a call with Democratic congressional leaders December 16, President Biden said his discussions with Senator Joe Manchin (D-WV) regarding the Build Back Better Act (H.R. 5376) budget reconciliation bill will continue and a Senate vote could be weeks away. "It takes time to finalize these agreements, prepare the legislative changes, and finish all the parliamentary and procedural steps needed to enable a Senate vote," the President said. "We will advance this work together over the days and weeks ahead; Leader Schumer and I are determined to see the bill successfully on the floor as early as possible." The statement came hours after news broke, around the time of a Senate Democratic lunch meeting, that Senate Majority Leader Chuck Schumer (D-NY) had decided to delay consideration of the bill until next year after previously saying he wanted a vote before the holiday break. There have been persistent challenges to a Senate vote on the BBBA: the "Byrd bath" discussions with the Parliamentarian are ongoing; Senator Manchin has yet to back the bill and is at an impasse with President Biden over the temporary nature of most of the enhanced spending and tax cut provisions, and what the true costs of those provisions are if made permanent (including the extension of the expanded Child Tax Credit (CTC)); and an approach to state and local tax (SALT) deduction cap relief has not been decided. Senate Finance Committee (SFC) Chairman Ron Wyden (D-OR) said earlier in the week there were "more than 20 additional areas that we're going over with the parliamentarian" to determine adherence to the reconciliation rules and Ranking Member Mike Crapo (R-ID) expected more than 30 challenges from Republicans, including to the additional EV bonus tax credit for vehicles manufactured in unionized shops.

"Several administration officials said privately this week that they now expect the legislation, which passed the House earlier this year, to slip into next year, perhaps into the spring," the New York Times reported. Some expressed disappointment in the delay. "We missed an opportunity," Senate Majority Whip Dick Durbin (D-IL) said in a Washington Post story. Others see the delay in Senate action as appropriate. "I don't think it's going to be before Christmas, but it shouldn't be — it should be when we're ready," Sen. Mark Kelly (D-Ariz.) told reporters, adding he thought it might be "one of the first things after the holiday." "While many Democrats expect the process for negotiating the bill to last into next year, top Democrats haven't put a new timeline on the legislation," the Wall Street Journal reported. Punchbowl News suggested that the next backstops for the BBBA could be the as-yet-unscheduled State of the Union address or the expiration of government funding on February 18. "[If] you look at the House and Senate calendars, there are several Tuesdays in mid-January or early February that would make good candidates for that [SOTU] speech. Setting that date and then ramping up pressure on senators to have a deal in place before Biden heads to the Hill for his big speech is a good tactic," the report said.

CTC: Senator Manchin has long expressed concerns that the one-year expanded CTC extension in the BBBA hides the true cost of the bill because it is assumed the provision would be renewed in the future. Manchin wants to keep the bill to $1.75 trillion. A 10-year extension of the expanded CTC would cost more than $1 trillion on its own, and Senator Manchin said prior to the Senate Democratic lunch meeting that "he supports it being put in place for 10 years and paying for it," Punchbowl reported. The report also said, "Sen. Elizabeth Warren (D-Mass.) said the Democratic Caucus lunch was 'intense.' Other Democrats said there is a lot of frustration with Manchin and Sen. Kyrsten Sinema (D-Ariz.)." The potential lapse of the monthly CTC payments is a concern for congressional Democrats and the White House, even independent of the BBBA. Finance Committee Chairman Wyden, who has said the expansion needs to be addressed by December 28 to avoid interruption to payments, unsuccessfully sought Senate consent for a program extension. House Speaker Nancy Pelosi (D-CA) said it's unclear such a standalone bill can pass the Senate — which the White House agrees with — and appears inclined to use the potential lapse to urge action on the broader BBBA. "I don't want to let anybody off the hook on the BBB to say "well, we covered that one thing, so now the pressure is off,'" she said December 15. "I think that that is really important leverage in the discussion on BBB, that the children and their families will suffer without that payment … And so, we're just still optimistic about BBB passing, and perhaps even if it were after the 1st of the year, which I hope it is not, that it could be retroactive, if it's early enough … "

SALT: Other changes to the bill, including a possible income threshold for SALT deduction cap relief, haven't been decided. Senator Manchin says he is uncomfortable with the SALT provision because of the contrast between a tax cut to the wealthy and Democrats' message that the wealthy will pay for the BBBA. Democratic Senators generally have criticized the House proposal to increase the cap to $80,000 through 2030. Senator Bernie Sanders (I-VT) wants to eliminate the cap for those earning under about $400,000 in annual income, while Senator Robert Menendez (D-NJ) wants a higher income threshold. Politico Morning Tax reported, "Those talks have flatlined for weeks, with opponents sparring over being overgenerous to the rich in trying to help middle-class households in high-cost states like New York and New Jersey. 'No conclusions,' said Sen. [Menendez], who's pushed for more generous treatment than others who worry about the windfall it would give the wealthy." Democrats from high-tax states say there won't be a BBB Act without SALT cap relief, and it's one of the most contested aspects of the bill. Senator Manchin's WV Senate colleague Senator Shelley Moore Capito (R-WV) has promised to offer an amendment to strip the BBB Act of any SALT cap relief.

163(n): The SFC released an updated BBBA title on Saturday with changes including, for purposes of the new IRC Section 163(n) interest deduction limitation, permitting an international financial reporting group's (IFRG) common parent to elect to compute its allocable share by reference to the aggregate adjusted bases of assets (except stock or partnership interests held in other group members), rather than using EBITDA. Bloomberg reported December 14 that the change "softens a proposal to limit interest deductions for multinational companies that have too much of their global interest in the U.S. But the bill doesn't change a separate tightening of interest-deduction limits slated to kick in next month that is broader and, for some companies, harsher. Companies can currently deduct interest of up to 30% of their adjusted income. But starting Jan. 1, the definition of what makes up adjusted income will change under a provision in the 2017 tax-overhaul law."

An EY ITTS Alert on the SFC changes to the bill released December 11 is available here.

FTC regulations: Final rules on the foreign tax credit could be released soon, as review by OMB/OIRA was completed December 10. The 2020 proposed regulations would fundamentally revamp the rules for determining the creditability of a foreign tax, among other things. Treasury officials have said publicly that the final regulations will be published in two packages, one by the end of this year, dealing with creditable taxes, and another sometime in 2022 relating to other aspects of the 2020 proposed regulations.

Global tax: The OECD is set to release the final Pillar Two model rules in coordination with the OECD-led global tax deal on Monday, December 20. An EU draft directive based on the model rules is also expected next week, but the OECD commentary on the model rules is still being drafted and will not be released until early next year. A Wall Street Journal editorial, "Yellen and the Global Tax Stall," said, "negotiators are falling behind on a 'commentary' document of several hundred pages to be released alongside the model legislation" for Pillar Two, regarding the global minimum tax. "That commentary now isn't expected until January or February, making it unlikely the global minimum tax would take effect anywhere by 2023 as the OECD hopes," the editorial said. "The European Union's 27 members are especially prone to delay. Brussels will soon release a draft directive instructing those 27 governments how to implement the OECD's minimum tax, and it faces a tough slog."

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