May 6, 2022
What to expect in Washington (May 6)
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 that 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.
Meanwhile, Treasury Secretary Janet Yellen said May 4 she believes that Congress could still approve elements of the global minimum tax deal secured last year and expects the EU will approve the minimum tax plan this spring, the Wall Street Journal reported.
New this morning: The OECD is seeking public comments on the Regulated Financial Services Exclusion under Amount A of Pillar One.
Expired 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, such as in the competitiveness bill, that it is clearly important to many members, but 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 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.
Corporate book AMT – Prospects for a reconciliation bill remain up in the air, in part because of controversy over tax rate increases. Senator Elizabeth Warren (D-MA) said May 4 she believes one non-rate increase tax change, the 15% corporate book minimum tax that was included in the House-passed Build Back Better Act (BBBA), is going to happen. “I’ve got 50 Democrats in favor of a minimum book tax,” she said at the Center for American Progress. “And the President of the United States is on board.”
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.
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.