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Spotlight

As Congress returns to Washington, the $1.7 trillion Build Back Better Act (BBBA, H.R. 5376) social spending package, paid for with proposed international, corporate, and individual tax increases, faces an uncertain path following Senator Joe Manchin's announcement before the holidays that he would not support the BBBA in its current form. The focus now is on what provisions may be dropped to satisfy Senator Manchin, as well as other challenges to Senate passage.

Senate Majority Leader Chuck Schumer told his caucus in a 3 January "Dear Colleague" letter that the Senate would turn to voting rights legislation and reforming the filibuster rule in the near term, making no mention of the Build Back Better Act. Any potential Senate action on BBBA looks to be at least weeks away, with the press quoting Senate Democratic aides as saying the legislation may be delayed perhaps until at least March with major revisions necessary.

Senator Manchin confirmed this week that he is not currently engaged in any negotiations with the Biden Administration or Senate Democratic leadership in regard to the proposed BBBA.

Senator Manchin also said he was interested in bipartisan legislation, adding: "Our country is divided and I don't intend to do anything that divides our country anymore." Negotiations between President Joe Biden and Senator Joe Manchin reportedly will not resume until after a "cooling off" period. According to a Democratic Senator who attended a caucus meeting on 4 January: "We all acknowledge … we need to give a little distance to Manchin and Biden on this so they can come back together and try again."

Treasury and the Internal Revenue Service on 28 December 2021 released final regulations (T.D. 9959) that significantly restrict the ability to credit certain foreign taxes. The final regulations address a wide range of topics, including the definition of a foreign income tax, the disallowance of a credit or deduction for certain foreign income taxes, the allocation and apportionment of foreign income taxes, when foreign income taxes accrue, and related rules under the Internal Revenue Code. The final regulations follow the proposed regulations, published on 12 November 2020, but include several notable changes.

Among other things, the final regulations overhaul the requirements that a foreign tax must satisfy to be claimed as a credit. The most significant change is that a foreign tax must satisfy a new "attribution requirement" (known as the "jurisdictional nexus requirement" under the proposed regulations) for the tax to be creditable under IRC Sections 901 or 903. Under the attribution requirement, foreign taxes are not generally creditable unless the foreign tax law requires a sufficient nexus between the foreign country and the taxpayer's activities or investments. For example, a foreign tax may satisfy the attribution requirement if its sourcing rules are reasonably similar to US sourcing rules.

The final regulations also defer application of the attribution requirement to Puerto Rico's expanded effectively-connected-income regime and excise tax on certain goods and services. An EY webcast is scheduled for 13 January.

On 30 December 2021, the IRS released final regulations (TD 9961) that provide guidance on the elimination of and pending transition away from the use of certain interbank offered rates (IBOR), including the London interbank offered rate (LIBOR), in certain financial contracts, including debt instruments, derivatives, and other contracts. The final regulations address whether a modification of the terms of a contract to replace an existing IBOR with a new reference rate results in a taxable event and the realization of income, deduction, gain, or loss.

The final regulations adopt, with certain changes, proposed regulations issued by Treasury on 9 October 2019, and incorporate, where relevant, additional guidance regarding recommended fallback language in certain financial contracts issued in Revenue Procedure 2020-44 on 9 October 2020. Although the final regulations share many of the same fundamental rules as the proposed regulations, the structure of the final regulations differs significantly from the proposed regulations and is primarily intended to simplify the operative rules.

The final regulations, principally contained in Treas. Reg. Section 1.1001-6, apply to any modification of the terms of a contract that occurs on or after 7 March 2022. A taxpayer may choose to apply the final regulations to modifications of the terms of a contract prior to the applicability date, provided that the taxpayer and all related parties apply the final regulations to all modifications of the terms of contracts that occur before that date.

Publication of all currency and term variants of LIBOR (with the exception of certain US$ LIBOR tenors, and certain "synthetic" British sterling and Japanese yen LIBORs) ceased publication immediately following 31 December 2021. The publication of the overnight, 1-month, 3-month, 6-month, and 12-month US$ LIBOR is scheduled to cease immediately following 30 June 2023, and the publication of the "synthetic" LIBORs will continue until the end of 2022.