May 8, 2022
Americas Tax Policy: This Week in Tax Policy for May 6
This week (May 9-13)
Congress: The Senate is in session, and the House is back in session. The first meeting of the Bipartisan Innovation Act conference committee will be May 12, Punchbowl reported. Other priorities include figuring out a path forward for Ukraine funding and, for Democrats at least, COVID funding. Nothing has changed on COVID and Ukraine funding, according to a May 5 Punchbowl report: Senate Democrats are still deciding whether to attach a $10 billion-plus COVID funding package to a Ukraine funding bill and Republicans are still expressing opposition to doing so. Senate Republican Leader Mitch McConnell (R-KY) said "there is broad bipartisan support for a robust aid package" for Ukraine, but "we cannot allow this bill to be a vessel for extraneous matters." Senate Majority Leader Chuck Schumer (D-NY) said the Senate will vote on Wednesday, May 11, on S. 4132, to permit a woman to determine whether to continue or end her pregnancy and permit health care providers to provide abortion services. There are no hearings scheduled in the tax-writing committees.
Last week (May 2-6)
Reconciliation: Regarding Senator Joe Manchin's (D-WV) apparent two-track effort for a budget reconciliation bill with tax changes and a bipartisan energy bill, Politico reported May 1: "The man in the center of it all says the blunt force of a party-line filibuster sidestep 'is for taxes' and that he's 'committed to an energy-climate bill that makes sense for the United States of America.' So does Manchin want a bipartisan energy bill and a Democratic-only tax bill that includes some climate spending? 'I'm keeping all options open.'" Senator Sheldon Whitehouse (D-RI), an advocate of climate change legislation, is skeptical that Republicans will sign on to a deal. "There's literally nothing happening in the bipartisan effort. One Republican senator showed up at one meeting," he said. BGOV reported that, as talks continue, Manchin "and other lawmakers are weighing a border adjustment tax that would slap a levy on imports of carbon-intensive goods from countries with weaker climate policies as they work on a potential bipartisan energy and climate package … [It] would place tariffs on fossil fuels and products such as cement and steel to prod countries that are moving too slowly to cut their greenhouse gas emissions … 'This is not a carbon tax,'" Senator Bill Cassidy (R-LA) said. On a related note, a story in the Wall Street Journal, "Republican Party, Big Business Drift Apart," addressed the corporate tax rate, saying, "the rift extends into policy areas where business and Republican[s] long forged alliances. A handful of Republicans have said they are open to the possibility of higher corporate tax rates, which were cut to 21% under a landmark, Trump-backed bill in 2017. 'I would not rule that out,' Sen. Josh Hawley (R., Mo.) told the Journal. Sen. Marco Rubio (R., Fla.) also has said he doesn't see the current corporate tax rate as sacrosanct and has proposed curbs on corporate stock buybacks."
Expiring provisions: During a D.C. Bar legislative panel May 4, a senior Democratic House Ways and Means aide said, regarding near-term action on the IRC Section 174 R&D expensing-versus-amortization issue, that it is clearly important to many members, though, in terms of acting on it in the near-term such as in the competitiveness bill, there is a "stark comparison" to be made if the lapsed Child Tax Credit expansion is not addressed. "The political deal needs to be right," he said. A senior Democratic Senate Finance Committee aide likewise said there are numerous members reluctant to vote for business tax relief without the CTC tax relief for individuals. The House aide said there was a fairly large extenders package at the end of 2020, and it is conceivable something like that could happen again. Republican staff were critical of the Administration's handling of the OECD global tax agreement, which members have made well-known through letters, and said the lack of consultation with Congress is alarming given that they are pressing members to approve legislation without information about the revenue and other effects that they have asked for.
Competitiveness: A motion to instruct conferees to the America COMPETES/USICA competitiveness bills conference by Senator Maggie Hassan (D-NH) that called for preserving R&D expensing, rather than the IRC Section 174 five-year amortization that took effect this year, and an expansion of the R&D tax credit for small businesses, was agreed to 90-5 May 4 (Nays: Senators Booker, Lee, Sanders, Warren, Markey). It was one of 28 motions up for consideration by the Senate, as a necessary step to go to conference. The vote showed the strong support for modifying the TCJA R&D expensing change, but the motion is nonbinding — similar to votes taken in a budget vote-a-rama — and doesn't address whether and how the change would be paid for.
Global tax: Addressing how tax credits might be treated under the global tax agreement, Asst. Sec. for Tax Policy Lily Batchelder said at the D.C. Bar tax conference May 5, Treasury has been "working with the OECD to clarify the treatment of general business credits under the minimum tax in the commentary to the model rules and in recent OECD public statements" and "are confident that the value of many of our general business credits is preserved under the OECD rules." She said they "have established a process with the OECD for working towards additional clarifications. So, for example, we have heard concerns about the potential impact of other countries' UTPRs for some taxpayers that invest in projects that give rise to the low-income housing tax credit, renewable energy credits, and the New Markets Tax Credit. But because of the way those investments are structured and accounted for, the income or loss and the income tax consequences of those investments typically will be excluded from the effective tax rate calculation, so those credits generally should not be impacted by UTPRs."
Michael Plowgian, a counselor in the Treasury Office of Tax Policy, said Treasury is committed to working with Congress to keep the benefits of important tax incentives like the R&D credit and find ways to address that in the most efficient way possible, without providing any specifics. He said Treasury insisted that the commentary makes it clear that direct payments are treated as refundable. Similar to Batchelder's comment about accounting, he said credits that arise from holding investments accounted for under the equity method of accounting are not taken into account in determining the ETR of a taxpayer.
Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said he hopes there will be an agreement by the fall on the "subject to tax rules," for which there is a debate regarding the precise scope. With regard to Pillar One, we are "in the middle of the negotiation, there is an extremely ambitious timeline, we'll see whether it can be met but everyone is working to meet that deadline. Everyone is working to develop a political agreement on the different technical modules of Pillar 1 so that we can then have a Multilateral Convention, which will have to be ratified by the parliaments of countries, including US Congress." The alternative would be digital services taxes, other unilateral measures, and no tax certainty.
There were also comments focusing on the treatment of GILTI taxes under the Model Rules if GILTI is not a compliant Income Inclusion Rule (IIR), and in particular other countries' Qualified Domestic Minimum Top Up Tax (QDMTT) regimes, and the treatment of certain US general business tax credit investments that are accounted for under the equity method. Focusing on the interaction of CFC taxes and their interaction with QDMTT regimes, Plowgian was asked to comment on the assumption that CFC regimes produce covered taxes that factor into, and thus take priority in determining an entity's ETR for purposes of applying a QDMTT. Plowgian suggested it wasn't clear that the CFC taxes would come first in priority relating to QDMTTs. He added that there's more work that needs to be done on the QDMTT rules, and that the QDMTT is not necessarily viewed from a technical perspective as being part of the GLoBE rules; rather, he said, it interacts with these rules. This issue is significant in the context of GILTI, and whether it is viewed as a noncompliant IIR and thus a CFC regime. If CFC regime taxes "take priority" as covered taxes in calculating the ETR for QDMTT purposes, US MNEs could reduce or eliminate the impact of those regimes.
Financial services exclusion: OECD announced May 6 it is seeking public comments on the Regulated Financial Services Exclusion under Amount A of Pillar One. Comments are due by May 20.
Furman op-ed: In a Wall Street Journal opinion piece, former Obama administration official Jason Furman offered a retrospective of changes in US international taxation in recent years and said the OECD/Inclusive Framework on BEPS global tax agreement strengthens the argument for "building on and fixing" the TCJA's international tax reforms. The undertaxed payments/profits rule (UTPR) to allow any country to enforce the agreement against companies headquartered in countries without minimum tax laws is an enforcement mechanism, and even without it, "the absence of an agreement would risk replacing the recent spirit of cooperation with messy tax and trade wars." The piece concluded, "The global minimum tax agreement signals the dawn of a new era of international economic cooperation. It will be good for the countries involved and may even be popular. It is pragmatic and, if anything, relatively minimal in only establishing a 15% rate floor."
Tax-exempts: On May 4, the Senate Finance Subcommittee on Taxation and IRS Oversight held a hearing, "Laws and Enforcement Governing the Political Activities of Tax-Exempt Entities." Chairman Sheldon Whitehouse (D-RI) said in an opening statement, "The dark money flowing through 501(c)(4)s got darker over the years. As soon as the IRS sought to review the explosion of these political groups after Citizens United, dark-money interests whipped up a scandal claiming the IRS was unfairly targeting conservative groups for scrutiny. Let me set the record straight — this is false." The hearing largely focused on the disclosure and enforcement of donations received by (c)(4) organizations, although one witness argued that attention should instead focus on (c)(3) organizations and their get out the vote and voter registration efforts which have traditionally had a strong tilt to the left. There was a clear divide between Republicans and Democrats on the subcommittee on whether or not the names of donors from (c)(4) organizations should be disclosed to the IRS, rooted in the tension between the effect disclosure could have on enforcement efforts, the importance of protecting taxpayer privacy, and the effect on free speech.