December 11, 2022
Americas Tax Policy: This Week in Tax Policy for December 9
This week (December 12-16)
Congress: The House and Senate are in session, facing a December 16 expiration of government funding.
The only hearing in the tax-writing committees next week is a Ways and Means Trade Subcommittee hearing on "Promoting Sustainable Environmental Practices Through Trade Policy" on Wednesday, December 14 (9:30 a.m.).
Last week (December 5-9)
Government funding: A bipartisan agreement on topline defense and non-defense discretionary spending numbers for an omnibus appropriations bill remains elusive with a week to go before current government funding runs out on December 16. A week-long continuing resolution (CR) through December 23 seems likely as negotiations continue. Democrats and some Republicans are holding out hope for an omnibus bill, which would boost defense and other spending. Politico December 7 reported Senate Appropriations Ranking Member Richard Shelby (R-AL) as saying, "When will we get to yes? Might be right before Christmas. Might be right after Christmas." Senator Shelby, who is retiring, previously said Republicans and Democrats are about $25 billion-$26 billion apart on topline spending numbers for a $1.7 trillion omnibus appropriations bill. The report said Democrats plan to offer their own plan on Monday. Bloomberg reported Senator Shelby as saying December 8 that deals on an omnibus typically come when a deadline is imminent: "We keep talking … serious negotiations are going on."
Some Republicans, however, are pushing for a CR into early 2023, rather than an omnibus appropriations bill that would fund the government through the fiscal year. These members believe revisiting government funding early in 2023 will give them more leverage with GOP control of the House, and there are some who want to use fiscal deadlines to force action on issues like border enforcement and IRS funding. Top House and Senate Republican leaders suggested this week that the chances of that approach, as opposed to a funding bill through the duration of the fiscal year, are increasing. If that is the case, it would dim prospects for a year-end tax package. House Republican Leader Kevin McCarthy (R-CA) December 5 called for a CR only into early 2023 when asked on Fox News whether Republicans acceding to an omnibus bill in 2022 would be a missed opportunity. "We're 28 days away from Republicans having the [House] gavel. We would be stronger in every negotiation. So, any Republican that's out there trying to work with [Democrats] is wrong." Asked if that includes Senate GOP Leader Mitch McConnell (R-KY), he said, "Yes. Why would you want to work on anything if we have the gavel inside Congress? … Wait until we're in charge." Senator McConnell said December 6, "We have not been able to agree on a topline yet and I think it's becoming increasingly likely that we may need to do a short-term CR into early next year. We're running out of time and that may end up being the only option left that we could agree to pursue." House Democrats continue to cite a year-long CR as a fallback option.
Tax: The approach to government funding will affect whether a tax package and other items can be appended to the bill. Politico Morning Tax December 6: "If lawmakers can't agree to a spending bill that is looking to cap out at $1.7 trillion, Congress will likely need to pass stopgap legislation before government funding runs out on Dec. 16. And if there's a continuing resolution, you can probably kiss goodbye any hopes of enacting tax provisions on everything from research and development expensing to family support." The report cited Senate Finance Committee Chairman Ron Wyden (D-OR) as suggesting a different level of urgency for tax changes on the table this year — which include relief from the tax code IRC Section 174 R&D amortization and IRC Section 163(j) TCJA cliffs and non-energy tax extenders, with energy tax extenders having been addressed in the IRA — compared to extenders packages from years past. "It is a very different conversation than the one we had years and years ago when you had all these tax extenders with a shelf life shorter than a carton of eggs," Wyden said.
Top members of the tax-writing committees including Ways & Means Committee Chairman Richard Neal (D-MA) and Senate Finance Committee member Michael Bennet (D-CO) have said the absence of a topline spending deal is impeding tax negotiations. Bloomberg Tax reported Chairman Neal as saying there's "no holdup" on negotiations over a tax package, members just need top-line numbers, and a year-end tax deal could resolve some issues for the GOP when they retake the majority. "I do think that the biggest package unlocks a lot of issues as they claim the majority in January," Neal said. "I would think they would want to get a lot of this done now, rather than revisiting." Senator Bennet tweeted December 7, "Before Congress goes home, we need to pass an expanded Child Tax Credit once again — the biggest tax cut for working people in American history." A December 8 Law360 story cited another Finance Committee member, Senator Sherrod Brown (D-OH), as saying during a news conference that Democrats will not support addressing relief from the Section 174 R&D amortization requirement and other corporate tax issues unless Republicans work with them on expanding the CTC. "That's the deal; it's on the table," Brown said. "We say to Republicans, 'Accept the deal, and we'll move forward.'" Politico referred to those holding the news conference as the "CTC Six," including Senators Brown, Bennet, and Cory Booker (D-NJ), and Reps. Rosa DeLauro (D-CT), Ritchie Torres (D-NY), and Suzan DelBene (D-WA). The Law360 report cited Ways & Means Ranking Republican Kevin Brady (R-TX) as repeating concerns about attaching a CTC expansion to a year-end package, saying Democrats should focus on bipartisan provisions: "Insistence on child tax credits may blow this up, including the traditional tax extenders."
House Republicans: While the House Republicans' steering committee met on December 7 to decide on committee chairmanships for their new majority, there was no decision on perhaps the most closely watched post, for chairman of the tax-writing Ways and Means Committee, as GOP leaders moved to postpone resolution of the most hotly contested races. The Ways and Means chairmanship, which is being sought by Reps. Vern Buchanan (R-FL), Jason Smith (R-MO) and Adrian Smith (R-NE), may not be determined until as late as January, after the January 3 House vote for the next Speaker. Punchbowl reported December 8, "The Steering Committee, which recommends who will serve on committees and wield gavels, was initially scheduled to consider the full slate of chairs this week. The GOP conference typically selects each committee's top lawmaker after Election Day so they can build up their staff and get ready for the next Congress. But as part of [Rep. Kevin] McCarthy's quest to try to win the votes of the majority of the House, he's put the election off to avoid angering lawmakers about who does — and doesn't — get gavels." The report said, "if Buchanan loses Ways and Means, he could end up retiring before Jan. 3, according to GOP lawmakers. That would mean House Republicans would hold 221 seats and McCarthy's path to the speaker's chair becomes even narrower. McCarthy allies are very concerned about Buchanan's potential retirement."
Senate Democrats: Senator Raphael Warnock (D-GA) won the December 6 runoff, meaning Democrats will hold a 51-49 advantage in the Senate next year and have majorities on committees. Senator Kyrsten Sinema (AZ) subsequently told CNN she is leaving the Democratic party and registering as an Independent. "Removing myself from the partisan structure — not only is it true to who I am and how I operate, I also think it'll provide a place of belonging for many folks across the state and the country, who also are tired of the partisanship," she said. The exact implications of the switch are unclear. The CNN report said, "While [Independent Senators] Sanders and King formally caucus with Democrats, Sinema declined to explicitly say that she would do the same. She did note, however, that she expects to keep her committee assignments — a signal that she doesn't plan to upend the Senate composition," because Senate Majority Leader Chuck Schumer (D-NY) controls the party's committee rosters. "When I come to work each day, it'll be the same," she said.
A December 7 Wall Street Journal story, prior to Senator Sinema's announcement, said the 51-49 majority for Democrats "enhances their power by allowing them to more easily advance President Biden's nominees while also providing slightly more flexibility on legislation." It said advantages include giving Democrats a majority on committees, as opposed to the even split under the current power-sharing agreement; more flexibility on crafting legislation; and insurance against possible resignations or deaths.
Global tax: The planned discussion of "the directive on ensuring a global minimum level of taxation for multinational groups in the Union" was pulled from the agenda of the December 6 EU ECOFIN meeting. Hungary has continued to oppose the directive. Tax Notes reported: "The Czech presidency of the EU Council has warned that there will be either a comprehensive agreement covering pillar 2, financial aid for Ukraine, and Hungary's recovery plan, or no agreement at all. … 'I see the new macro-financial support for Ukraine, Hungary's national recovery plan, and pillar 2 directive as one package. The approval of the package depends on the development of the measures that Hungary is taking to protect the EU budget,' Czech Finance Minister Zbynek Stanjura told reporters."
Meanwhile, as part of the ongoing work of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) to implement the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy, the OECD is seeking public comments on the main design elements of Amount B under Pillar One. A consultation document was released December 8 ahead of a technical webinar on Pillar One Amount B, which is targeting 2024 implementation. Unlike Amount A, which augments the arm's length principle with a more formulary approach for allocating "excess profits" into market jurisdictions for the largest global MNEs, Amount B is intended to streamline the process for all taxpayers in scope for pricing baseline marketing and distribution activities in accordance with the arm's length principle. The aim is to enhance certainty and reduce disputes. While the Amount A new taxing right will have to be implemented through a multilateral agreement that is expected to be completed in the middle of 2023, the Amount B approach will end up being built into the OECD transfer pricing guidelines. Speakers, including acting deputy director Achim Pross, emphasized that the intention in designing Amount B is to strike a balance between simplicity and certainty and that this is still a work in progress. Public input on the progress made so far is very welcome, as outlined in the consultation document. This includes commentary on scoping; pricing methodology; exceptions and the applicability of a methodology for physical goods being extended to digital business. This input is requested to be submitted by January 25. Also of note is Pross's mention of the intended release of an Amount A document on DSTs and other relevant unilateral measures before Christmas.
IRS: The Treasury Department and Internal Revenue Service December 6 issued proposed regulations identifying certain syndicated conservation easement (SCE) transactions as "listed transactions" — abusive tax transactions that must be reported to the IRS. "In these transactions, investors typically acquire an interest in a partnership that owns land and then claim an inflated charitable contribution deduction based on a grossly overvalued appraisal when the partnership donates a conservation easement on the land," a news release said. Material advisers and certain participants in these transactions must file disclosures with the IRS. The new guidance proposes to exclude qualified organizations from being treated as participants or parties to a prohibited tax shelter transaction subject to excise tax, but also requests comments on whether this exclusion should carry over to the final regulations. Comments are due by February 6 and a public hearing is scheduled for March 1, 2023.
CAMT: While he and others have called for rolling back the Inflation Reduction Act's (IRA) IRS funding boost, Rep. Jason Smith said revisiting the "book income" minimum tax would be his "last priority" should he win the chairmanship of the Ways and Means Committee. He said he's much more focused on issues that he considers more important to average Americans.
Treaties: Treasury December 7 announced the signing of a comprehensive income tax treaty between the United States and Croatia, the first of its kind between the two nations.
Interest deductibility: A December 5 post by The Tax Foundation that considers interest expense deduction limitation rules in other OECD countries said: "As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States enacted a new limitation on interest deductions for businesses. While it is common for countries across the Organization for Economic Cooperation and Development (OECD) to set limits for interest deductions, starting this year, the U.S. became an outlier by using earnings before interest and taxes (EBIT) as the limit's tax base. The change effectively tightens the limit for U.S. firms just as interest rates are rising, creating a tax increase for many firms. A better approach would be to reconsider the potential economic fallout of this change and re-establish EBITDA as the interest limit, consistent with international norms."
CBO: The Congressional Budget Office December 7 released "Options for Reducing the Deficit: 2023 to 2032," a periodic compendium of spending and revenue options to reduce the deficit, including increasing individual tax rates, eliminating or limiting itemized deductions, and changing the tax treatment of capital gains from sales of inherited assets.