May 18, 2022
What to expect in Washington (May 18)
The Wall Street Journal (WSJ) reported May 17, "The Internal Revenue Service is auditing the first batches of tax returns that include the deduction for foreign-derived intangible income (FDII)" and in a memo has "outlined how the government intends to calculate the deduction for companies" that "have U.S. profit they earned from foreign sales and deductions for payments under deferred share-based compensation plans, such as restricted stock units granted in earlier years that vested after 2017." The story said, "The technical legal question turns on how deductions for share-based compensation are considered when calculating FDII."
While "companies are arguing that those compensation deductions should not be fully counted against their income from post-2017 years when calculating FDII, because it was actually related to earlier years," the story said, "the government says the compensation deductions should all be allocated to the current year's income, to better align income and deductions. The result would shrink a company's income from foreign sales, shrink its FDII deduction and increase its tax bill."
Global tax — The May 17 New York Times reported, regarding the OECD-led global tax agreement, that Treasury Secretary Janet Yellen "pressed top Polish officials to let the process move ahead, making clear that the tax deal continues to be a priority of the United States." Poland hasn't backed the EU Pillar Two minimum tax directive and has expressed concern that the minimum tax could enter into force separately from Pillar One. Also, Poland has expressed "trepidation about the impact that raising its tax rate will have on its economy at a time when the country is absorbing waves of Ukrainian refugees." The NYT reported: "'We strongly believe it's in the interest of Poland to be part of this,'" Ms. Yellen said, explaining that there continue to be technical differences that need to be worked out. 'We're hopeful that they will come on board and be able to see their way clear in the not too distant future with the deal.'"
The May 17 WSJ reported: "Ms. Yellen said she was open to the possibility of linking the two portions of the deal. Pillar 1 of the deal is the reassignment of taxing authority, and pillar 2 is the global minimum tax. A Treasury official said the U.S. doesn't support a legal link between the two deals but is committed to both measures. 'They have wanted to link pillars 1 and 2 in some way, which we're open to discussing but don't think it is practical to have any type of strong link between them,' Ms. Yellen said."
An EY Alert, "OECD releases public consultation document on Regulated Financial Services Exclusion under Amount A for Pillar One," is available here.
Energy — The energy/consumer bill House Democrats are planning to bring up this week — the Consumer Fuel Price Gouging Prevention Act (H.R. 7688), to give the President the power to issue an Energy Emergency Declaration that would make it unlawful to increase gasoline and home energy fuel prices in an excessive or exploitative manner — is facing challenges to passage due to opposition from some Democrats, Punchbowl reported. "Democratic leaders said they were confident they could round up the votes for the measure this week," the report said, adding that it is "a pretty simple messaging bill."
Competitiveness - On the House-Senate competitiveness conference committee that got underway May 12, House Majority Leader Steny Hoyer (D-MD) said May 17 that the goal is to reach the "essence of an agreement moving forward" before the end of May and to pass a bill by the end of June, BGOV reported.
It is well established by now that one impediment to including in the conference agreement tax provisions like a delay in the 2017 TCJA's IRC Section 174 five-year amortization requirement to preserve R&D expensing that was in effect prior to this year is trepidation from members over addressing business tax relief without an extension of the expanded Child Tax Credit. Politico reported May 16 that it is "unrealistic to think lawmakers could pair the R&D provision with their long-sought expansion of the child credit" due to opposition from members like Senator Joe Manchin (D-WV) and the cost of doing so, but "perhaps lawmakers could twin that [R&D fix] with smaller expansions of family-friendly tax breaks, like the Earned Income Tax Credit." (Note, the CTC extension in the House-passed BBBA was about $185 billion, compared to $13 billion for the EITC.)
Congress — The Senate cleared a procedural vote related to the nearly $40 billion Ukraine funding bill Monday, 81-11. Senator Rand Paul (R-KY) has called for Inspector General-level oversight of how the money is spent, protracting consideration of the bill, which could pass later this week after another procedural vote to be held as soon as today.
A broad COVID funding measure for testing, vaccines, and therapeutics remains stalled in Congress, due in part to uncertainty over how GOP efforts to extend the Title 42 border policy can be resolved. Senate Majority Leader Chuck Schumer (D-NY) filed a procedural motion on the separate Small Business COVID Relief Act (S. 4008), which Roll Call said is a "$48 billion aid package for restaurants and other pandemic-ravaged businesses" that "faces steep hurdles, from Republicans concerned about lack of offsets to senators in both parties unaware of the measure."
Today, the House Ways & Means Oversight Subcommittee will hold a hearing on "Taxpayer Fairness Across the IRS." Chairman Bill Pascrell (D-NJ) yesterday highlighted a Government Accountability Office (GAO) report finding that IRS auditing rates have steadily plummeted over the last 10 years, disproportionally benefiting wealthy Americans.
Retirement — The Senate Finance Committee is planning for a June markup of a bipartisan retirement bill as part of the SECURE 2.0 effort, Bloomberg Tax reported May 17, citing an aide and a member. "'We're hoping during the next work period,' Sen. Ben Cardin (D-Md.) said Tuesday. 'So in June.'" The House approved a bill on March 29.
Elections — On May 17, the Pennsylvania primaries were held, including for the Senate race for the seat being vacated by Pat Toomey (R-PA). Lt. Gov. John Fetterman won the Democratic primary. The Republican primary is too close to call between Dr. Mehmet Oz and David McCormick, and an automatic recount may ensue if the difference between them is less than .5%.