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February 3, 2023

What to expect in Washington (February 3)

The OECD released on February 2 a long-awaited package of additional administrative guidance under Pillar Two, addressing issues like:

  • The treatment of non-refundable tax credits that flow through a tax transparent entity and arise from an equity method investment, the low-Income housing tax credit (LIHTC) and many renewable energy tax credits
  • Allocation of taxes arising under the US global intangible low-taxed income (GILTI) regime and other blended CFC regimes
  • The design elements for qualified domestic minimum top-up taxes (QDMTTs) that will be used to assess whether a domestic minimum tax meets the requirements for qualified status
  • Specific rules on the QDMTT

The guidance sets out minimum standards for the QDMTT and makes clear that the tax base and the rate for QDMTTs can differ from 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 from 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 of QDMTTs.

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, individual, pass-through, estate tax, and other provisions under the Tax Cuts & Jobs Act (TCJA) 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 legislative action on tax and most other non-deadline items before then, given divided government for the next two years — the House controlled by Republicans and the Senate by Democrats — 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 requisite changes to US international tax rules could not be enacted.

New House Ways and Means Committee Chairman Jason Smith (R-MO) doesn't sound eager to help the US comply with the global agreement. "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."

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 — House Speaker Kevin McCarthy (R-CA) 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," Speaker McCarthy 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.


Contact Information
For additional information concerning this Alert, please contact:
Washington Council Ernst & Young
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