May 22, 2022
Americas Tax Policy: This Week in Tax Policy for May 20
This week (May 23-27)
Congress: The Senate will convene for a pro forma session only on Monday, and will next convene for business on Tuesday morning, May 24, with two votes related to nominations at 2:30 p.m. The House is in a Committee Work Week next week, meaning no floor activity.
ECOFIN: There is a European Union Economic and Financial Affairs Council (ECOFIN) meeting next week, on May 24. The Pillar Two minimum tax directive is on the agenda, though it isn't clear whether a vote will be held.
CBO: The Congressional Budget Office will publish The Budget and Economic Outlook: 2022 to 2032 next week, on May 25. CBO's last budget and economic projections were published in July 2021. Biden administration officials have highlighted the deficit of $360 billion in the first seven months of FY2022, through April, which is a fraction of the $1.9 trillion shortfall during the same period in 2021. Tax receipts were nearly $864 billion in April, and the higher-than-expected receipts through the first seven months of the fiscal year — $3 trillion, or $843 billion more than during the same period a year ago — "may reflect stronger-than-expected income growth throughout 2021 and so far in 2022," CBO has said.
Last week (May 16-20)
FTC regulations: Treasury is considering further guidance to foreign tax credit regulations that could be a combination of new rules, clarifications to the existing regulations that Treasury issued in December, and other guidance from the IRS, to include examples to illustrate how the regulations are intended to apply to certain taxes, Jose Murillo, Deputy Assistant Secretary, International Tax Affairs, Office of Tax Policy said in a May 19 Bloomberg Tax article. At the Tax Council Policy Institute (TCPI) symposium May 20, Murillo said Treasury is considering addressing royalty withholding tax and cost recovery and perhaps, at some point, more guidance on disregarded distributions. On the royalty withholding tax, Treasury is not going to move away from the general rule that is toward the legal test of comparing the foreign law to domestic law, and our royalty sourcing rule is the place of use. To the extent the foreign jurisdiction has a different rule, then the reasonably similar standard will continue not to be met. Sympathetic cases are being made and Treasury is considering a safe harbor that to the extent, for example, there is a license in place and the license only includes the right to use IP in a particular jurisdiction and that is what happens, then Treasury could deem the attribution rule to be met in that fact pattern and the credit would be allowed. It is probably not possible that the safe harbor would provide benefits in all types of business models but would provide some relief. That would be a new rule and probably would come out as a proposed rule that provides an opportunity to comment. He said everyone is interested in the timeline: Treasury is still getting feedback, and it is probably a matter of months, not weeks, but this year. Murillo said the guidance would have to be a proposed regulation or a notice.
GILTI & BEPS: Also during the TCPI conference May 20, Treasury Asst. Sec. for Tax Policy Lily Batchelder was asked if current law GILTI is Pillar Two compliant or whether it would only be a qualified income inclusion (IIR) regime if the GILTI changes in the House-passed BBBA are enacted. She was also asked about the implications if those changes are not enacted. Batchelder said, "If GILTI is reformed as in the House-passed bill, it would be treated as equivalent to a qualified IIR. This is clear in the draft EU directive, and it is also clear in the October [Inclusive Framework] statement, which identifies a 15% rate applied on a jurisdiction-by-jurisdiction basis, as really the two key criteria. Conversely, the draft EU directive pretty clearly says that current law GILTI would not be treated as equivalent to a qualified IIR. And it's hard to see how it would be one under the OECD model rules. But if GILTI is not a qualified IIR, it would be a CFC tax regime under the model rules and GILTI taxes would be allocated out to CFCs and taken into account in determining the ETR of the certain CFC jurisdiction."
Batchelder did not make reference, however, to whether CFC taxes being taken into account would apply in calculating the local country ETR for a Qualified Domestic Top-up Tax (QDMTT). Another Treasury official, Michael Plowgian, said at a DC Bar tax conference several weeks ago that the impact on local country ETRs remains unclear in this QDMTT situation. Nevertheless, Batchelder's comments were notable as Inclusive Framework delegates have begun to debate both privately and publicly the appropriate treatment of such CFC taxes when calculating local country ETRs for purposes of the QDMTT.
On the issue of top-up taxes in other jurisdictions eroding the value of US tax credits, Batchelder said Treasury has done a lot of work with OECD clarifying how US general business credits (GBCs) would be treated and repeated previous comments that because of the way some credit investments are structured through partnerships and accounted for under the equity method — the low-income housing tax credit, renewable energy credits, and the New Markets Tax Credit in particular — the income or loss and the income tax consequences of those investments typically would be excluded from the effective tax rate calculation, so those credits generally should not be impacted by UTPRs. On other credits, like direct pay credits in the House reconciliation bill, Treasury has worked to ensure they would be treated like other refundable credits and therefore treated as income rather than a reduction in tax expense. The treatment of other nonrefundable credits is something that will require additional work, but she said Treasury has established a process within the OECD for that work to occur and is committed to working with Congress to ensure that taxpayers can benefit from important incentives like the R&D credit.
FDII: 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."
Reconciliation: In the latest check-in on prospects for a post-BBBA reconciliation bill, Politico reported Senator Joe Manchin (D-WV), the Senator seen as the key to whether a package moves forward, as saying he sees no deadlines aside from September 30, which is when budget reconciliation instructions expire. Sen. Manchin has expressed an openness to a climate-focused bill with tax and deficit reduction elements and suggested it is fair to say not much is happening with the effort. Some Democrats were cited as skeptical. Still, "If we get the right piece of legislation that's able to fight inflation, give us energy independence. And we're able to do it in the cleanest fashion possible with a reduction in emissions? That's a win-win for everybody. So I don't know how you put a time limit on that if you can do it right," Manchin said. The report coincided with the second recent meeting of late between Senator Manchin and Majority Leader Chuck Schumer (D-NY) over how inflation can be addressed. The meeting also follows President Biden last week, on May 10, laying out some recommendations to fight inflation that could be viewed as a slimmed-down BBB and saying a package should be paid for with tax increases on the wealthy and corporations.
Global tax: The May 17 New York Times reported, regarding implementation of the OECD-led global tax agreement in the EU, 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."
Also on the BEPS 2.0 project, Bloomberg reported May 18 of uncertainty in Congress: "With the GOP predicted to win at least one of the two congressional chambers in the November elections, it leaves the agreement on tenterhooks in the US. Globally, only a portion of the deal may survive, with the risk of renewed battles over moves by foreign nations to collect more from US corporate giants. The 15% minimum rate, known as Pillar Two, is included in a broader bill incorporating President Joe Biden's long-term economic agenda. But, just months away from a full-campaign mode that will shut down most legislative work, there's no sign the White House is engaging with two Democratic senators who've been reticent on the package — Joe Manchin of West Virginia and Arizona's Kyrsten Sinema. Pillar One would reshape the rules for how corporate profits are allocated across borders, a plan that would require the revision of many global tax treaties. In the US, that's particularly fraught, because it could require at least 67 senators to vote in favor of treaty changes — a highly unlikely outcome in that ultra-partisan chamber."
The Regulated Financial Services Exclusion under Amount A of Pillar One had a public comment deadline of May 20.
An EY Alert, "OECD releases public consultation document on Regulated Financial Services Exclusion under Amount A for Pillar One," is available here.
TCPI: EY Global Tax Policy Leader Barbara Angus was presented May 19 with TCPI's 2022 Pillar of Excellence Award in recognition of her substantial and meaningful contributions to the tax community and efforts to formulate sound tax policy. She is the twelfth recipient of the award. House Ways & Means Committee Ranking Member Kevin Brady (R-TX) participated in the presentation and highlighted her contributions, as the Chief Tax Counsel at the Committee, to the 2017 Tax Cuts & Jobs Act (TCJA).
Competitiveness: An ambitious timeline has been set for the House-Senate conference committee on competitiveness legislation. Consistent with House Majority Leader Steny Hoyer's (D-MD) reported comments calling for resolving issues by the end of May and votes by the end of June, Punchbowl said in a more detailed report that leaders want legislative items "closed out" by May 25, ahead of the Memorial Day recess, and to file the finished conference report by June 21, the Tuesday of the last week the Senate is in session before the Fourth of July. House Speaker Nancy Pelosi (D-CA) said May 19, at her weekly press conference, "We're confident that we can pass the bill, and hopefully we can do so in time to celebrate our Independence on Fourth of July." It has been well-reported that members are at odds over whether to include a tax title, but the Punchbowl report said tax committee leaders are tasked with one of the toughest policy disputes of the conference: reconciling trade issues between the bills including Trade Adjustment Assistance to affected workers, which is a Democratic priority included only in the House bill. House Ways and Means Committee Chairman Richard Neal (D-MA), Senate Finance Committee Chairman Ron Wyden (D-OR), Banking Committee Chairman Sherrod Brown (D-OH), and Senator Mark Warner (D-VA) met to discuss the issue May 18. Senator Warner was a key figure in the run-up to the 2021 infrastructure bill that President Biden is seeking to model with the 2022 competitiveness bill — referring to them as the Bipartisan Infrastructure Law and Bipartisan Innovation Act respectively — and is a well-regarded negotiator generally. He is a proponent of tech innovation, including a FABS Act investment tax credit for semiconductor plants also pushed by Wyden. A spreadsheet of outstanding issues was posted by Punchbowl.
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 Democratic 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 Manchin 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.)