The Senate Finance Committee's March 16 hearing on the President's Budget with Treasury Secretary Janet Yellen featured discussions of the current banking crisis as well as Republican scrutiny of the OECD-led global tax agreement, which was a focus of her hearing before the House Ways and Means Committee last week. On other topics, Sec. Yellen said the Administration's plan for using the Inflation Reduction Act (IRA) $80 billion IRS funding increase will be released within weeks, and that Treasury finds unworkable the suggestion that it prioritize debt payments in the event that the debt limit is exceeded, maintaining that doing so amounts to default by another name.

Members of both parties expressed concern about Sec. Yellen's recent comments that future limited free trade agreements focused on battery minerals with the European Union and other allies wouldn't need approval from Congress. In an opening statement, Chairman Ron Wyden (D-OR) said he has "serious concerns about the approach the administration has taken to implementing the portion of the Inflation Reduction Act that deals with sourcing critical minerals. Free Trade Agreements cannot be unilaterally decided by the Executive Branch. They require consultation and consent from Congress. That includes any agreements on critical minerals." Senator James Lankford (R-OK) expressed similar concerns.

The recent banking crisis was prominently discussed at the hearing. Sec. Yellen said in an opening statement, "I can reassure the members of the Committee that our banking system remains sound, and that Americans can feel confident that their deposits will be there when they need them. This week's actions demonstrate our resolute commitment to ensure that depositors' savings remain safe."

Regarding the OECD's Pillar One and Pillar Two projects, Ranking Member Mike Crapo (R-ID) said in his opening statement: "For the last two years, Treasury has used the OECD negotiations to attempt to compel changes in U.S. law without regard for the effect on U.S. revenue, U.S. companies and U.S. workers. Not only has the Administration failed to put a stop to digital services taxes, but now foreign countries threaten to impose extraterritorial taxes on U.S. companies under the global minimum tax — at Treasury's invitation. The latest OECD guidance confirms the Administration has agreed to allow foreign countries to collect U.S. GILTI revenue, and worse, tax U.S. companies on their U.S. profits in violation of our tax treaties. The budget fails to consider these revenue impacts, which, if implemented, will result in billions of dollars of lost U.S. revenue."

During Q&A, Ranking Member Crapo said he is opposed to the OECD-led global tax agreement, and Treasury is pushing for Congress to approve the approach and giving support to countries around the world to tax US profits that would be directly in conflict with US tax treaties. Sec. Yellen said, "This is something that the OECD considered very carefully and there's no violation of our tax treaties." Senator Chuck Grassley (R-IA) said Republicans don't agree with that analysis regarding the violation of tax treaties. "Only Congress has the power to approve tax treaties," he said.

Senator Thom Tillis (R-NC) asked for a commitment for the Joint Committee on Taxation to receive the data and analysis Treasury used for joining in the OECD-led global tax agreement, at least for the portion that must come before Congress for consideration. Sec. Yellen said the analysis on Pillar Two has been done and JCT has looked at that and Treasury has provided estimates.

Senator Todd Young (R-IN) expressed concern about how Treasury has handled Pillar Two negotiations and whether enacting the regime globally would undermine the incentive to invest and grow jobs in the US. He said the Pillar Two undertaxed profits rule (UTPR) would "uniquely disadvantage American workers and job-creating businesses by providing our trading partners with the political blessing to tax the US activity of US companies." That would undercut American sovereignty and impact the legislative power of tax-writers to provide economic incentives like the R&D credit that "look to be wiped out under Pillar Two," he maintained.

Senator Steve Daines (R-MT) questioned allowing other countries to tax American companies on their US operations if they fall below the minimum tax threshold, even if it is because of utilizing the R&D credit. Sec. Yellen said the agreement does include a UTPR by which other countries can exercise their rights to impose taxes on profits of companies if those profits are not subject to a 15% minimum tax as defined by the Pillar Two rules. She added that the US could impose its own qualified domestic minimum top-up tax to ensure the revenues that would otherwise be collected by other countries under their UTPRs end up in the US Treasury. The Administration's FY 2024 budget released last week includes a proposal to do just that.

Senator Catherine Cortez Masto (D-NV) expressed concern about the limited application window for the bonus investment credit for renewable investments in low-income communities in the context of low-income solar tax credits. Sec. Yellen said Treasury is working "24/7" on the guidance and regulations that need to be written to implement the tax credits in the IRA and "we have no higher priority at Treasury." She also said Treasury is working with IRS to publish plain-language information regarding tax credits available to consumers. Senator Tom Carper (D-DE) said it is critical to have clear guidance regarding the IRA clean energy tax credits.

Materials from the hearing are available here.

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