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April 3, 2022

Americas Tax Policy: This Week in Tax Policy for April 1

This week (April 4-8)

Congress: The House and Senate are in session, prior to their spring break/Easter recess for the two weeks following (April 11-22). On the Senate agenda for next week, the Judiciary Committee will vote on Judge Ketanji Brown Jackson to be a Supreme Court Justice. "The Senate is on track to have Judge Jackson confirmed by the end of this work period," which is April 8, Majority Leader Chuck Schumer (D-NY) said this week. Punchbowl reported the House could vote next week to replenish the Restaurant Revitalization Fund.

Customary post-Budget release tax hearings haven't been set at Ways & Means and Finance and may not be for some time.

Filing season: The Senate Finance Committee has set a hearing on "The IRS, the President's Fiscal Year 2023 Budget, and the 2022 Filing Season" for Thursday, April 7 (10:00 a.m.). IRS Commissioner Chuck Rettig is the sole witness.

Senate Budget: There will be a Senate Budget Committee Hearing on Tuesday, April 5 (at 11:00 a.m.) entitled, "Corporate Profits are Soaring as Prices Rise: Are Corporate Greed and Profiteering Fueling Inflation?" Senator Bernie Sanders (I-VT) is chairman of the Committee.

Last week (March 28-April 1)

President's Budget: President Biden's FY2023 Budget released on March 28 doesn't have many implications for potentially blossoming reconciliation talks, and in fact assumes in the baseline enactment of the House-passed Build Back Better Act (BBBA), to stay out of the way of negotiations for any new version. The Budget otherwise continues to call for tax provisions that fell out of the House-passed BBBA due to opposition in Congress, and that probably can't be enacted due to such opposition, including:

  • Raising the corporate tax rate to 28%, and increasing the GILTI rate to 20%
  • Increasing the top marginal income tax rate (to 39. 6%) for high earners
  • Changing the taxation of capital income to tax capital gains of high earners at ordinary income rates
  • Taxing carried interests as ordinary income
  • Repealing deferral of gain from like-kind exchanges

There are some new starters in the Budget that would move some aspects of US international tax rules closer to the OECD Pillar Two global minimum tax regime, including replacing the base erosion and anti-abuse tax (BEAT) with part of the OECD Pillar Two rules, called the Undertaxed Profits Rule (UTPR), and enacting a Qualified Domestic Minimum Top Up Tax (QDMTT) that would apply to the US income of US companies if their effective tax rate under the OECD Model Rules falls below 15%. A US domestic minimum top-up tax would be part of the rules to protect US revenues from the imposition of the UTPR by other countries. However, while the Budget states that business tax credits that could have their value diminished through the imposition of foreign UTPRs will not suffer this fate, it's not clear from the budget how those tax credits would be preserved: "[T]he proposal would provide a mechanism to ensure U.S. taxpayers would continue to benefit from U.S. tax credits and other tax incentives that promote U.S. jobs and investment."

The Budget also proposes a "billionaire's tax," which would impose a 20% minimum tax on total income, inclusive of unrealized capital gains, for taxpayers with wealth of greater than $100 million. That $360 billion proposal has already been shot down for use anytime soon by Senator Joe Manchin (D-WV), who said of the unrealized income aspect in The Hill Newspaper, "You can't tax something that's not earned. Earned income is what we're based on … There's other ways to do it." The President did not include a wealth tax in the previous budget nor during the presidential campaign but did try to target untaxed wealth through changes to stepped up basis, which didn't pick up sufficient political traction during the development of the House-passed BBBA legislation. Treasury Secretary Yellen said in a February 2021 interview, "A wealth tax has been discussed but it is not something that President Biden has come out in favor of. I think it's something that has very difficult implementation problems."

An EY international tax Alert on the FY2023 budget is available here.

Global tax: In a second letter to Senate Finance Committee Republicans addressing their February 16 concerns related to the Pillar Two global tax negotiations, the Treasury Department said the FY2023 Budget's UTPR proposal is further evidence of the Administration's commitment to implementing the international tax agreement and protecting the US tax base. The proposal "would enforce the global minimum tax against foreign MNEs by denying U.S. tax deductions to low-taxed entities. It would do so to the extent an MNE is not paying an effective tax rate of at least 15 percent in each jurisdiction in which the MNE has profits," Treasury said March 29. "Furthermore, the Greenbook's UTPR proposal would apply a domestic minimum tax … that would ensure that if an in-scope U.S. company had an effective tax rate below 15 percent, the United States alone would collect the revenue on our own companies, thereby turning off any other country's UTPRs." The letter also stated that Treasury "appreciates concerns about the revenue effects of the agreement for the U.S. fisc. One important way that the agreement affects U.S. corporate tax policy is by reducing the competitiveness concerns associated with the U.S. corporate tax rate, the letter stated. Prior to the agreement, any country could choose a zero (or single digit) corporate tax rate, and many did. Now, with the 'bottom' tax rate raised to 15 percent, the differential between any U.S. rate and the lowest foreign rates will be smaller … "

Finance Ranking Member Mike Crapo (R-ID) wasn't satisfied with the letter, responding with other members, "After-the-fact briefings with committee and leadership staff do not constitute meaningful consultation … Treasury has also declined to provide a thorough analysis and the important data that would allow us to properly evaluate the effect of this agreement on the U.S. business community and U.S. revenue."

Treaties: The Senate Foreign Relations Committee approved a tax treaty between the US and Chile during a March 29 business meeting, according to a tweet from Ranking Member Jim Risch (R-ID): "I'm glad SFRC came together today to approve a tax treaty w/ #Chile. Tax treaties are an integral part of the U.S. tax landscape. They prevent double taxation for U.S. taxpayers, help eliminate uncertainty, fight fraud, & encourages U.S. businesses to explore new opportunities." The Committee posted a Resolution of Advice and Consent to Ratification document that included a reservation to account for enactment of the BEAT in the 2017 TCJA and a change to the Relief from Double Taxation article. The next step for the treaty is ratification by the full Senate, though there is no indication of when that will be. An EY Tax Alert has details.

Reconciliation: Senator Manchin has recently expressed a rekindled interest in an energy-focused reconciliation package, after previously saying he could back a bill that splits revenue, including from tax changes, between deficit reduction and spending on climate initiatives. It is possible activity on such a package could pick up later this spring or summer, and Senator Manchin has signaled that any such bill must be voted on prior to the August congressional recess. Senate Majority Leader Chuck Schumer (D-NY) said of reconciliation prospects March 29, "There are ongoing discussions between Senator Manchin and many senators, it's a high priority on our caucus to try and move forward on reconciliation. It's going to be hard. We know that. We'll try to get as much done as we can that gets 50 votes. That's where we're at. There's a ways to go." Concerns about leaving out social spending on priorities like childcare and universal pre-K are bubbling up again, however. Politico Playbook reported March 29 that a letter being circulated by Rep. Katherine Clark (D-MA), who serves in House Democratic leadership, and Senator Elizabeth Warren (D-MA) calls on the President to push a reconciliation bill "that lowers the cost of child care for families, expands access to pre-K, and invests in the early childhood workforce and infrastructure." Still, Manchin "is unlikely to sign off on any reconciliation bill that includes the care items," the story said.

Retirement: The House March 29 approved 414-5 the Securing a Strong Retirement Act (H.R. 2954), a Ways & Means-based bill that includes an expansion of auto-enrollment and an increase in the 'catch-up' contribution limit for individuals age 62-64, plus parts of the Education & Labor RISE Act (H.R. 5891) like a provision to help people locate lost pension accounts when they change jobs. Other provisions include enriching the startup credit for small businesses, boosting the Saver's Credit to provide a greater incentive for moderate-income workers to save, increasing the required minimum distribution age from 72 to 75 (phased in), and letting employers match workers' student loan repayments with retirement plan contributions. There is a bipartisan, bicameral push for this follow-on '2.0' version of the 2019 SECURE Act. Senate HELP Committee Chairman Patty Murray (D-WA) expects to release a proposal with Ranking Member Richard Burr (R-NC) soon. Senators Ben Cardin (D-MD) and Rob Portman (R-OH) sponsor a bill (S. 1770) similar to the House-passed bill and the Finance Committee also wants to contribute to the package.

Competitiveness: The Senate March 28 voted to amend the America COMPETES Act (H.R. 4521) with the text of the Senate-passed USICA (S. 1260) so the two chambers can go to conference and resolve differences between the bills. House Speaker Nancy Pelosi (D-CA) said March 31 that once the two chambers complete the process of moving to conference on the two bills, negotiators will look to areas where they can find complete agreement and, on other matters, determine whether differences are big or small. "We've been working on that for months. So, we're ready. We're ready. Everybody wants to be on the conference, so we'll just have to see what the size of that is." She said, "The COMPETES Act is about America being independent and self-sufficient." The House version includes trade and other provisions not supported by Republicans, and Politico noted those "are expected to be dropped during the conference committee, where the Senate will hold most of the leverage, since the final bill must pass with Republican votes in that chamber."


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