March 20, 2022
Americas Tax Policy: This Week in Tax Policy for March 18
This week (March 21-25)
Congress: The Senate is in session. The House is out of session and there is a House Republican retreat in Florida during the latter half of the week. Senate business includes a procedural step related to an eventual conference committee on competitiveness legislation. A March 23 Senate Foreign Relations Committee business meeting includes consideration of the US-Chile tax treaty.
Last week (March 14-18)
President's Budget: The President's FY2023 budget proposal will be released on March 28, Bloomberg reported, citing a White House official. On a related note, the Senate March 15, by a 61-36 vote, confirmed Shalanda Young to be Director of the Office of Management and Budget (she had been acting director) and she has been sworn in.
Treaties: At least one long-lingering tax treaty, between the US and Chile, is on the move. The Senate Foreign Relations Committee put it on the agenda of a business meeting on Wednesday, March 23 — "The Convention between the Government of the United States of America and the Government of the Republic of Chile for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital." The SFR Committee was considering holding a vote on the treaty in 2019, under Republican leadership, but it never materialized. Several Republican members urged Chairman Robert Menendez (D-NJ) to bring the convention to a vote in late 2021. It is among treaties that may require reservations to account for enactment of the base erosion anti-abuse tax (BEAT) in the 2017 TCJA, though it hasn't been made clear how that issue will be handled. Consideration of the prior batch of tax treaties (Switzerland, Luxembourg, Spain, Japan) faced objections from Senator Rand Paul (R-KY) that were overcome. The U.S. Chamber of Commerce called on the Committee for prompt ratification of the Chile treaty in a March 17 letter. "Due to changes in Chilean tax legislation that went into effect in 2014, corporate tax rates in Chile have increased. Without a ratified treaty to avoid double taxation, taxes on U.S. companies with Chilean operations will climb as high as 44%," the letter stated. "However, companies headquartered in the two dozen European, Asian, and Western Hemisphere countries with which Chile already has a tax treaty in force will benefit from a much lower tax rate and would thus secure a significant competitive advantage over their U.S. competitors."
Global tax: The Inclusive Framework released its Commentary on the GloBE Rules under Pillar Two of the BEPS 2.0 project March 14, providing detailed technical guidance on the operation and intended outcomes under the rules. The commentary is 228 pages long and is accompanied by 50 pages of examples and addresses a host of issues. Among them, the commentary confirmed there could be top-up tax allocable under the Undertaxed Payments Rule (UTPR) when domestic income earned by a company in its headquarter jurisdiction has an effective tax rate as computed under the Model Rules that is below 15%, an outcome that has raised the ire of many US companies that make investments in US infrastructure and other projects that generate general business tax credits. Effectively, US companies facing this top up tax would be paying taxes in other countries because they utilized these tax credits. OECD said the next step in work on the GloBE rules turns to development of the Implementation Framework, and Inclusive Framework members are seeking public input on the issues that should be addressed as part of this project by April 11. A public consultation meeting is to be held virtually at the end of April.
Meanwhile, the European Union, with France in the Presidency, appears to be moving towards adoption of the model rules under Pillar Two with an effective date that is one year delayed from that agreed to by Inclusive Framework members and the G20 finance minister last year. While 27 member states did not achieve unanimous support for the Pillar Two minimum tax proposal during an ECOFIN meeting March 15, a draft Directive was amended to delay implementation: member States would be required under revisions to the original draft to bring the Directive into force through their own laws and regulations by December 31, 2023, rather than the end of this year as the Inclusive Framework and the G20 finance ministers had previously agreed. The revised draft also aimed to address concerns of a few countries that Pillar One and Pillar Two are not being implemented at the same time by including a statement confirming the commitment of all Member States to the ongoing process on Pillar One. Still, Malta, Poland and Sweden all failed to express support for the modified draft directive at the ECOFIN meeting. Politico reported: "Poland said a mere statement of intent wasn't good enough, while Malta said the rules should be watered down some more. Swedish Finance Minister Mikael Damberg, after having consulted with his parliament, said it was 'too early to agree,' asking for more time." The Directive is expected to receive the requisite support at a future meeting, with the next ECOFIN meeting scheduled for April 5.
Politico reported on a group of trade associations preparing to ask the Treasury Department to reopen the Inclusive Framework negotiated deal on the model rules in order to seek modifications that will preserve the full value of US tax credits meant to promote research and development, low-income housing, and other infrastructure projects "'This is going to basically undermine a lot of tax credits for U.S.-headquartered companies that they've long enjoyed, long made use of, and it just didn't make sense,' said Barbara Angus, global tax policy leader at Ernst & Young and formerly chief tax counsel for the House Ways and Means Committee." Morning Tax also had an item about the letter saying the agreement appears to spare similar breaks in other countries. "'As proposed, the rule would leave the U.S. tax base particularly exposed compared with the tax treatment of foreign companies in their home jurisdictions,' said Jake Colvin, head of the National Foreign Trade Council."
Reconciliation: There was no movement this week toward a budget reconciliation bill that could pass the Senate. Second-ranking Senate Democrat Dick Durbin (D-IL) has a 'if it happens, it happens' attitude toward a reconciliation bill getting done this year in the wake of the Senate stalemate over the House-passed Build Back Better Act, and he is not assuming that it will be part of the list of Democratic accomplishments ahead of the midterm elections. "If it turns out to be, great. Maybe it'll surprise me. But I've been burned by this stove enough times. I'm not going to grab it another time," he said in a Business Insider story. He added later, "We've had the football pulled so many times, I'm not gonna run up to it anymore." Senator Durbin said he'd like to see a list of priorities from "two senators in particular," an implicit reference to Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ). A Vox article said there are three paths a reconstituted bill can take, with the first being splitting the revenue between deficit reduction and spending on climate, which Senator Manchin said he could support and Finance Chairman Ron Wyden (D-OR) said, in the article, that he can work with. "In the House bill, the prescription drug and tax provisions would raise $1.5 trillion over 10 years, according to the Joint Committee on Taxation," the story said, though some proposals like IRS enforcement didn't score for official budget purposes. "Were half this revenue dedicated to deficit reduction and combating inflation, there would still be $750 billion left over to cover new spending. This funding would be sufficient to pay for the $555 billion in clean energy tax credits and job investments that were previously part of BBB." The story said if Democrats aren't able to reach a deal on a reconciliation bill, "it's possible they turn to bipartisan alternatives on some of the issues they hoped to address, like lowering prescription drug prices." The third option is nothing happening.
Competitiveness: Senate Majority Leader Chuck Schumer (D-NY) and Republican leader Mitch McConnell (R-KY) "have been discussing the contours for a formal conference negotiation to work out a final agreement on the" America COMPETES Act approved by the House in February and the United States Innovation and Competition Act (USICA) passed by the Senate in 2021, Punchbowl News reported. Senate aides said the aim is to begin a formal conference negotiation this work period, which ends on April 8 prior to a two-week spring break, and the story noted that it could take weeks more for a conference agreement to be struck, setting up potential floor action sometime in May or June. The February 2021 Schumer-McConnell agreement governing certain procedures in the 50-50 split Senate addressed reporting bills from committees but not conference committees, which like standing committees typically have more members from the majority party. (For instance, the 2017 TCJA conference committee included eight Senate Republicans, who were in the majority at the time, and seven Democrats.) USICA was supported by 19 Senate Republicans but the COMPETES Act had one Democrat opposed and one Republican in favor. Both bills include $52 billion in CHIPS Act funding, but the House bill includes trade, climate, immigration, and other provisions criticized by Republicans. They both include funds to encourage emerging technologies but, as the Wall Street Journal has noted, "The Senate for its part focuses largely on encouraging cutting-edge technologies, such as artificial intelligence and quantum computing. The House, by contrast, wants to give more flexibility to federal science officials to decide which new ideas deserve to be jump-started." Additionally, advocates for a modification to the IRC Section 174 R&D provision included in TCJA have focused on the USICA/COMPETES conference as a potential vehicle for a fix.
Charities: The March 17 Senate Finance Committee hearing, "Examining Charitable Giving and Trends in the Nonprofit Sector," focused on the role charities have played during the pandemic and the situation in Ukraine, and what Congress can do to encourage charitable giving, including reinstating the temporary $300 charitable deduction for nonitemizers that was in effect for 2020—2021. There was also discussion of the Employee Retention Tax Credit (ERTC), which was important to the nonprofit sector. Daniel Cardinali, President and CEO, Independent Sector, encouraged Committee members to restore and increase the nonitemizer deduction, as well as restore the ERTC, pass the Legacy IRA Act, increase the charitable mileage rate, and strengthen the partnership between nonprofits and the Federal government.
Filing season: The House Ways & Means Oversight Subcommittee Hearing with IRS Commissioner Rettig on the 2022 Filing Season focused on the tax-return backlog crisis, an issue exacerbated by the pandemic that has caused a multitude of problems regarding refunds to individuals and businesses. Commissioner Rettig underscored the dire need for increased IRS funding, and a shift to more electronic tax return submissions, as it is far more efficient than paper. Congress recently enacted legislation to increase IRS funding by around 6%, but that is not nearly enough according to Commissioner Rettig. Rep. Carol Miller (R-WV) mentioned her support for the reinstatement of the ERTC (H.R. 6161). In the context of his comments about high gas prices, Rep. Steven Horsford (D-NV) said smaller/lower income businesses and individuals are disproportionately sought after by the IRS for tax purposes compared to corporations. Rettig explained this by noting the lack of resources within the IRS to go after the "bigs or super bigs," and how they are "routinely outgunned in that space."