February 5, 2023
Americas Tax Policy: This Week in Tax Policy for February 3
This Week (February 6-10)
Congress: The House and Senate are in session. House business next week, which resumes at 2 p.m. on Monday (votes postponed until 6:30 p.m.), includes consideration of H.R. 185, to terminate the CDC requirement for proof of COVID-19 vaccination for foreign travelers. The Senate will next convene at 3 p.m. on Tuesday, February 7, with a vote at 5:30 p.m. on the motion to invoke cloture on a US Circuit Judge for the Fourth Circuit nomination.
Ways & Means: The House Ways and Means Committee is planning a "Field Hearing on the State of the American Economy: Appalachia" for Monday, February 6 (11 a.m.) at Allegheny Wood Products in Petersburg, WV. The Committee is holding an additional hearing on unemployment fraud.
State of the Union: President Biden will deliver his State of the Union address on Tuesday, February 7.
ABA: The ABA is holding its 2023 Midyear Tax Meeting February 9-11 in San Diego.
Last Week (January 30-February 3)
The big picture: Uncertainty over how lawmakers will address the federal debt limit that was hit on January 19 continues to be a primary focus in Washington. Lawmakers likely have until about mid-year to address the issue. President Biden and House Speaker Kevin McCarthy (R-CA) did meet to discuss the debt limit on February 1 and, while there were no breakthroughs, both viewed the meeting as positive. Republicans are demanding accompanying spending cuts and most Democrats say the issue is non-negotiable and have challenged Republicans to release their spending cut proposal. Lawmakers have otherwise been settling into the new Congress, including finalizing Senate committee memberships, scheduling the President's State of the Union Address (February 7), and looking ahead to the release of President's FY2024 Budget (March 9). The major news this week was long-awaited OECD additional administrative guidance under the Pillar Two global minimum tax regime, with the guidance aimed at ensuring a consistent and coordinated outcome under the Pillar Two rules and finalizing the Implementation Framework set out in October of 2021.
OECD Pillar Two guidance: The OECD guidance addressed, among other things, the treatment of non-refundable tax credits that flow through a tax transparent entity and that arise from an equity method investment, like the Low-Income Housing Tax Credit (LIHTC) and many renewable energy tax credits; allocation of taxes for computing local country effective tax rates arising under the US Global Intangible Low-Taxed Income (GILTI) and other blended CFC regimes; and the design elements for Qualified Domestic Minimum Top-up Taxes (QDMTTs) that will be used for assessment of whether a domestic minimum tax meets the requirements for qualified status, and specific rules relating to the QDMTT. The guidance sets out minimum standards for the QDMTT and makes clear that the tax base and the rate for QDMTTs can be different than under the rules governing IIRs. QDMTTs can deviate from the GloBE rules but generally must produce a tax rate that equals or exceeds the GloBE's 15% Minimum Rate. As expected, a QDMTT must exclude tax paid or accrued by domestic Constituent Entities with respect to the income of foreign Constituent Entities under its own CFC or taxable branch regimes. Therefore, GILTI and Subpart F taxes cannot be pushed down to impact the ETR in the case of QDMTTs. While GILTI and Subpart F, as blended CFC regimes, can be pushed down under a simplified and relatively favorable approach to impact the ETRs of US companies subject to Income Inclusion Rules, that push down relief is temporary.
Assistant Treasury Secretary for Tax Policy Lily Batchelder said, "We welcome this agreed guidance on key technical questions, which will deliver certainty for green energy tax incentives, support coordinated outcomes and provide additional clarity that stakeholders have asked for." A Treasury statement said certainty was also provided on "clear and administrable treatment of taxes paid under the existing U.S. GILTI global minimum tax regime" and that Pillar Two "was intentionally designed so that top-up tax imposed in accordance with those rules will be compatible with common tax treaty provisions."
The Wall Street Journal reported that the OECD "spelled out how the U.S. tax system will interact with the minimum taxes being implemented in the European Union, the U.K., South Korea and other countries. The rules offer a partial reprieve for U.S. companies through 2025 … The OECD said Thursday that it plans to reassess the situation before the end of 2025, a timeline that dovetails with the U.S. legislative calendar … The U.S. has two corporate minimum taxes, but the current U.S. tax regime doesn't fit neatly with the coordinated system that other countries are implementing. It raises the prospect that U.S. companies will face higher taxes than their foreign competitors — and that the money would go to foreign governments."
After 2025, Tax Cuts & Jobs Act (TCJA) individual, pass-through, estate tax, and other provisions expire, the GILTI and base erosion anti-abuse tax (BEAT) rates increase, and the foreign-derived intangible income (FDII) deduction rate decreases, setting up a "fiscal cliff"-type deadline that will compel action on tax issues and likely fuel deliberation of outstanding items beyond the scope of the TCJA, potentially including new starters. Prospects are lower for action on tax and most other non-deadline legislation before then given divided government — the House controlled by Republicans and the Senate by Democrats — for the next two years before a pivotal 2024 election with the White House and control of both chambers at stake. Even with Democrats in control of the House and Senate the previous two years, the Biden' administration's proposed changes to US international tax rules to better align with the Pillar Two rules could not be enacted.
Ways & Means: New House Ways and Means Committee Chairman Jason Smith (R-MO) expressed disdain for the new OECD guidance and its potential impact on US companies and US revenues. "This announcement confirms what has long been true: the OECD agreement is a bad deal for American workers and families, and it has no path forward in Congress. The Biden Administration cannot override Congress's sole tax-writing authority under the Constitution or turn that power over to foreign bureaucrats," he said in a statement. "The OECD guidance revokes important job-creating tax incentives passed by Congress and threatens to authorize foreign countries to pocket U.S. tax revenues. What's more, this guidance would fuel the corporate green welfare arms race created by the Biden Administration last year, which will cost American taxpayers hundreds of billions of dollars."
Senate Finance Committee: The Senate Finance Committee roster didn't change on the Democratic side, at 14 members, and Republicans have 13 members on the Committee now that the Senate is no longer a 50-50 split. Three new Republicans were added to replace members who retired in the last Congress: Thom Tillis (R-NC), who has a reputation as a bipartisan dealmaker, and two conservatives, Ron Johnson (R-WI) and Marsha Blackburn (R-TN).
US-Chile tax treaty: In a fairly rare example of a Majority Leader calling attention to a tax treaty on the Senate floor, Leader Chuck Schumer (D-NY) said February 2: "Right now, nations around the world are racing to source important materials like lithium — lithium is a key ingredient in everything from iPhones to EV batteries. Chile is one of the most important sources of these kinds of raw materials including lithium, and many US companies have spent years building business partnerships with Chile and grown their presence in that nation. But these companies face a terrible problem: because of current policy, American companies face double taxation due in Chile and are at a huge disadvantage compared to other nations … "
The Senate Foreign Relations Committee cleared the US-Chile tax treaty in the last Congress, though it wasn't brought before the full Senate, and, as Leader Schumer noted, must go through committee again. He said, "there are some who want to introduce last minute changes to the treaty, even though this was reported by voice vote out of committee last year" and those could delay or doom prospects for the treaty.
Debt limit: Speaker McCarthy signaled some optimism following a February 1 meeting with President Biden to discuss the debt limit. "So, for the president who said he wasn't going to negotiate with me, we talked for more than an hour, gave both perspectives. I thought they were respectful," he said on Fox News February 2. "There [are] times we have had big differences. But then he said, 'Let's continue the conversation.' So, I took that as a positive." Both McCarthy and Biden have praised one another on a personal basis since then. Still, there is no indication of how a package of as-yet unidentified spending cuts sought by Republicans can be made palatable to Democrats. At least one prominent Senator is encouraging bipartisan negotiations. Senator Joe Manchin (D-WV), who played a key role in the IRA negotiations, said of McCarthy in the New York Times, "We're going to have to bring a group of Democrats together that is willing to work and meet him halfway," adding that he has been in conversations with centrists in the House. "I think we all know that we're going to vote for the debt ceiling. It just depends how much punishment goes on as we go down that road, and how much blame can be laid upon somebody." The Hill newspaper said, "Manchin now envisions himself as a shuttle diplomat working to bridge the partisan divide between Senate Majority Leader Charles Schumer (D-N.Y.) and Speaker [McCarthy], whom Manchin describes as a friend. 'I've always had a good, friendly relationship with Kevin, and he's in a position now where if we try to work together we can do a lot of good for our country,' Manchin said."
President's Budget: This year's FY2024 Budget release on March 9 is expected to play a significant role in the fiscal debate between the Administration and House Republicans, who are calling for spending cuts — including as a condition of voting to address the debt limit — and placing an emphasis on adhering to the formal budget process. It is unclear what the Budget will look like and the degree to which it may be influenced by pressure on spending from House Republicans. The FY2022 Biden budget from 2021 was an expansive policy blueprint on tax, health, housing, caregiving, and many other issues that was whittled down to the still-massive Build Back Better Act (BBBA) in the House. The FY2023 Biden budget from 2022 presumed enactment of the BBBA, left those proposals out as negotiations continued, and presented new ones; then, a relatively narrow slice of the agenda was enacted as the Inflation Reduction Act (IRA).