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June 12, 2022

Americas Tax Policy: This Week in Tax Policy for June 10

This Week (June 13-17)

Congress: The House and Senate are in session, with the next recess week not until after June 24.

State tax: On Tuesday, June 14 (10 a.m.), the Finance Committee will hold a hearing , “Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales.” Witnesses represent GAO, the Streamlined Sales Tax Governing Board, the Sales Tax Institute, and businesses.

Supply Chain: On Wednesday, June 15 (3 p.m.), the Senate Finance Subcommittee on International Trade, Customs, and Global Competitiveness will hold a hearing, “Supply Chain Resiliency: Alleviating Backlogs and Strengthening Long-Term Security,” which was rescheduled from May 25. Witnesses represent the Alliance for American Manufacturing, Trinity Logistics, the American Leadership Initiative, and America’s Frontier Fund.

Retirement: The Senate HELP Committee is scheduled to mark up on Tuesday, June 14 (10 a.m.), the RISE & SHINE Act intended to be incorporated into ‘SECURE 2.0’ retirement legislation. The bill would allow employers to offer emergency savings accounts and improve communications to retirement plan participants and transparency around lump-sum buyout offers for pension plan participants. It addresses topics covered in the House-passed retirement bill, including 403(b) multiple employer plans and increased access to plans for part-time workers.

Last Week (June 6-10)

Reconciliation: Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV) continue to meet over a possible slimmed-down reconciliation bill focused on energy, tax, and health provisions, but no deal has emerged. Senator Manchin told Politico June 9 he has “no clue” whether something will come together, after earlier in the week telling CNN that “the administration is having a hard time and the climate people are having a hard time coming to agreement” on energy and climate provisions. The August recess is considered a soft deadline, followed by the hard deadline of September 30 when reconciliation instructions expire. Health provisions create another soft deadline for a reconciliation bill because health premiums for 2023 are generally finalized at summer’s end, so Democrats are looking to extend the enhanced premium tax credits first included in the American Rescue Plan Act (ARPA) by then to avoid increase notices going out before the midterm elections. Ways and Means Committee Chairman Neal (D-MA) raised the issue during the June 8 hearing with Treasury Secretary Janet Yellen, and they both agreed that consumer costs will go up without action. Inflation is a top issue in Congress and on the minds of voters and Democrats have been united in messaging that it should be addressed with policies to reduce energy and health costs, which are main elements of the bill under discussion. “The clean-energy proposals that were in the House-passed Build Back Better Act would end up lowering utility costs for households,” Secretary Yellen said during the hearing. At the Senate Finance Committee hearing with Secretary Yellen June 7, Chairman Ron Wyden (D-OR) raised concerns about inflation and enumerated steps Democrats have taken, and are prepared to take, to tackle prescription drug prices, energy costs, and the cost of renting or owning a home.

But Republicans are hammering the White House on the issue, particularly over whether the $1.9 trillion March 2021 ARPA contributed to the nation’s inflation woes. The June 8 Ways & Means Committee hearing was dominated by relitigating the need for, and inflationary effects of, the ARPA. Ranking Member Kevin Brady (R-TX) criticized the law and Secretary Yellen’s downplaying of the bill’s inflation risks at the time, saying “now we face a looming economic recession and high inflation, for perhaps years.” Secretary Yellen said ARPA was “hugely successful” in confronting employment and other challenges and preventing a prolonged economic downturn but acknowledged that inflation is high. The success of any reconciliation bill seems dependent on casting it as inflation-fighting, and the ARPA criticism could make it difficult to defend more new spending.

Senator Manchin isn’t the only hurdle to a Senate bill. Roll Call reported June 6 that “even if legislation is written to accommodate Manchin, Arizona Democrat Kyrsten Sinema remains a crucial question mark… Sinema and Manchin were holdouts to earlier versions of the reconciliation measure. She came to generally support the Senate framework, but only after her objections trimmed the bill from $3.5 trillion to $2 trillion and tax rate increases were replaced with other revenue raisers. Sinema aides declined to comment. But sources speaking on condition of anonymity said the passage of time may not have increased Sinema’s fondness for the bill, and that she may have lingering concerns with some of the specific language.”

Inflation, more broadly: The Yellen budget hearings in Ways & Means and Finance demonstrated the broader inflation challenges Democrats face, which have been the subject of high-profile news stories that have suggested some disagreement within the Administration over how to handle the issue. A June 8 New York Times story discussed “how today’s rapid price increases, the fastest since the 1980s, pose a glaring political liability that looms over every major policy decision the White House makes — leaving Mr. Biden and his colleagues on the defensive as officials discover that there is no good way to talk to voters about inflation.” It said, “How to portray the Biden administration’s stimulus spending is far from the only challenge the White House faces. As price increases last, Democrats have grappled with how to discuss their plans to combat them.” The Wall Street Journal (WSJ) June 9 reported, “Frustration has been mounting within the White House as Mr. Biden’s approval ratings remain stuck around 40%, gasoline prices hit record levels and advisers disagree over whether they misjudged inflation and helped fuel it with their own policies... After spending months engaged in intense negotiations with Congress over his domestic agenda—talks that ultimately collapsed when Mr. Manchin said he couldn’t support Mr. Biden’s broad proposal—the White House has taken a more cautious approach. Many Democrats now say they would take any deal produced by the latest talks with Mr. Manchin, a significant move away from what lawmakers from different factions of the party said in November.”

FTC regulations: Secretary Yellen also said at the June 7 Finance Committee hearing she would be willing to work with Congress regarding concerns about the January 2022 foreign tax credit (FTC) regulations but doesn’t think the effective date of the regulations will be delayed, as companies have requested. Under questioning from Senator Rob Portman (R-OH), who said a one-year delay has been suggested, Secretary Yellen said the regulations are very important to protect critical interests of the US and the fundamental principle is the US should allow a credit for foreign taxes only where the foreign taxing jurisdiction has the primary right to tax the income. Senator Portman said Treasury is poised to make changes to the cost recovery and royalty withholding parts of the rules, but not creditability regarding withholding taxes on services. Changes to the regulations could apply retroactively, Yellen said.

During the June 8 Ways & Means hearing, Rep. Brad Schneider (D-IL) said, “I was glad to hear that the Treasury is considering issues we raised – a safe harbor on the royalties issue and additional guidance on the cost recovery provisions. And in light of the forthcoming guidance, which I applaud Treasury for providing, I do believe there’s a case to be made for a modest delay in the effective date for certain of the coming FTC changes.”

A group of CFOs wrote to Sec. Yellen June 6 regarding the foreign tax credit regulations, saying: “foreign withholding taxes for many service payments and royalties are not creditable under the Final Regulations. The inability to claim a tax credit for these withholding taxes provides a tax incentive for U.S. companies to provide services and develop patents and other intellectual property in a foreign country rather than in the United States to avoid double taxation. This could result in the loss of valuable U.S. jobs...” 

Global tax: Secretary Yellen also faced questions regarding the OECD BEPS 2.0 project on new taxing rights and a global minimum tax (Pillar One and Pillar Two, respectively) and she confirmed ratification of a multilateral agreement to implement Pillar One will require congressional approval. Asked by Senator Pat Toomey (R-PA) at the June 7 Finance hearing about the magnitude and implementation of Pillar One of the OECD-led agreement, Secretary Yellen said it will have a small revenue impact, positive or negative, depending on details still being worked out. She said of a multilateral agreement to implement Pillar One, “the ratification requires Congress’s approval, I think there’s no doubt about it, but the form that that needs to take is still to be determined.” Politico observed: “It is unclear whether Yellen was referring Tuesday to rewriting treaties — which would require a two-thirds approval in the Senate — or something short of that, which would probably need 60 votes. Lawmakers could potentially override treaties with legislation. The specifics of Pillar One are still being negotiated, and it’s unclear when the administration will be ready to submit a plan to Congress. ‘We look forward to consulting with Congress as to the appropriate process to obtain such approval once the multilateral convention is ready for signature,’ a Treasury official said…”

Secretary Yellen said during the Ways & Means Committee hearing that she is confident the EU will adopt the Pillar Two minimum tax directive, which has thus far been blocked by Poland. “I’m very encouraged that most major economies are moving forward in adopting it. The European Union, I believe will adopt it soon,” she said of the global tax agreement generally. “We’ve talked with Poland, and I’m very hopeful that Poland will soon decide that it’s in their interest to agree to this. I’ve tried to explain to their senior leadership that it is not only in the U.S. interests, but also in Poland’s interests to reduce the prevalence of tax shelters around the world, and it will help them compete better.”

A June 7 New York Times story, “A Tax Deal, in Trouble,” said, “legislators in both the U.S. and Europe are now struggling to pass the laws needed to make good on the promises embedded in the [global] deal. And no tax changes are likely to pass on their own, without the more politically popular spending programs also passing. In the U.S., the central problem is that Senate Democrats cannot agree on the spending proposals — on energy, drug prices and other issues — that would accompany the tax changes… Polish officials have expressed technical concerns, but officials elsewhere in Europe and in the U.S. believe that Poland is actually seeking leverage in a dispute with the E.U. over pandemic aid money. If both the United States and Europe cannot manage to comply with the agreement, the global deal is likely to unravel.”

An EY Alert, “OECD releases public consultation documents on tax certainty under Amount A for Pillar One,” is available here.

Cryptocurrency: Senators Cynthia Lummis (R-WY) and Kirsten Gillibrand (D-NY) June 7 introduced the Responsible Financial Innovation Act on cryptocurrency issues that, among other things, requires the IRS to adopt guidance or clarifications on long-standing issues in the digital asset industry, including disposition of forks and airdrops, merchant acceptance of digital assets, digital asset mining and staking, charitable contributions of digital assets and the legal characterization of payment stablecoins as indebtedness.

The Wall Street Journal: “Congressional aides said the bill has little chance of advancing this year through the Senate, which is controlled by Democrats. Similar legislation introduced by crypto-friendly lawmakers in the House has languished.”


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