March 26, 2023
Americas Tax Policy: This Week in Tax Policy for March 24
This week (March 27-31)
The Senate will continue consideration of S.316, a bill to repeal the authorizations for use of military force against Iraq. The House is in session and is expected to consider the Lower Energy Costs Act (H.R. 1), the Republican energy bill focused on increasing the production and export of American energy and reducing regulatory burdens.
Last week (March 20-24)
CHIPS ITC: The Treasury Department March 21 released proposed regulations (REG-120653-22) on the IRC Section 48D Advanced Manufacturing Investment Credit (CHIPS ITC), established by the CHIPS Act of 2022, that define key terms and provide information on how to claim the credit. The credit is generally equal to 25% of an eligible taxpayer's qualified investment in a facility with the primary purpose of manufacturing semiconductors or semiconductor manufacturing equipment, for qualified property that began construction after enactment of the CHIPS Act (August 9, 2022) and was placed in service after December 31, 2022. Qualified property includes any building or its structural components satisfying certain requirements unless the building or a portion of it is used for offices, administrative services, or other functions unrelated to manufacturing, Treasury said.
The Wall Street Journal reported, "The proposed rules don't set a percentage of a project's revenue or production that qualifies as a primary purpose. That means the Internal Revenue Service, during audits of companies claiming the credit, can look at each project and assess its primary purpose, a senior Treasury official said." The WSJ report also said, "Companies can get the credit even if they don't owe income taxes, and they could receive net payments from the government. The Treasury Department is planning future rules about how the mechanics of these refundable tax credits will work; several such tax breaks also appear in the separate healthcare and climate law known as the Inflation Reduction Act."
IRA energy credits: Press reports cited a Treasury Department official as saying guidance on domestic sourcing requirements for the Inflation Reduction Act's (IRA) Section 30D electric vehicle (EV) tax credit will be released next week, consistent with year-end 2022 FAQs and a White Paper that said proposed guidance on the critical mineral and battery component requirements would likely be released in March 2023. Senator Joe Manchin (D-WV) was a main proponent of the domestic sourcing requirements and took issue with the fact that the credit wouldn't be based upon them until release of the regulations. For the $3,750 critical minerals portion of the EV credit, the vehicle's battery must contain a threshold percentage (40% initially, growing to 80%) of critical minerals extracted or processed in the United States or in a country with which the United States has a free trade agreement (or recycled in North America). To receive the $3,750 battery components portion, the percentage of the battery's components manufactured or assembled in North America would have to meet threshold amounts (50% initially, growing to 100%). "We can't trade dependence on foreign oil for dependence on foreign batteries and our forthcoming guidance will strengthen our supply chain," Treasury Assistant Secretary for Tax Policy Lily Batchelder said in Politico.
On a related note, Bloomberg Government reported, "The Biden administration is preparing to decide how much American-made equipment must be used in renewable projects in order to get an extra tax credit under the new climate law, addressing a key dispute between energy developers and solar panel manufacturers … At issue is a so-called domestic content bonus — worth up to 10% in extra tax credits — designed to help lure clean energy manufacturing back to the US. Under the Inflation Reduction Act, renewable projects generally qualify if they contain at least 40% of US fabricated products."
USTR hearing: During the House Ways and Means Committee's March 24 "Hearing on the Biden Administration's 2023 Trade Policy Agenda with United States Trade Representative, Ambassador Tai," Rep. Ron Estes (R-KS) said, "Digital Services Taxes (DSTs) and the OECD process with Pillar One: As we have talked for the last couple years about the Digital Services Taxes that were being implemented by various countries, how much of an impact and a burden that was going to place on, particularly, American companies. I was very supportive of the OECD's effort with Pillar One … to help make sure that we address that and get a consistent playing field across all of the developed world and the world of the OECD community. But I'm concerned now that we have … paused with Pillar One in order to look at Pillar Two and the Pillar Two discussion's taking all of the time and energy and distraction away from that … As we get closer and closer to December of this year, when the 301 suspension expires, are you looking at reactivating that, moving that forward, because it has taken so long to go through and bring closure to Pillar One?"
Tai said USTR has worked closely with the Treasury Department. She confessed she is not aware of the latest developments with the OECD work but affirmed the 301 statute is one of the most important statutes and those DSTs are suspended pending successful conclusion of the OECD-led process.
Similarly, Rep. Kevin Hern (R-OK) said he is concerned with the Administration unilaterally disarming the 301 investigations while other countries are still charging DSTs. He said 30 of 38 OECD nations already have in place, or plan to have in place, a DST if Pillar One talks fail. France has already expressed the need to press ahead with their DST given the implementation challenges of Pillar 1 and he is afraid other nations are also growing impatient, Hern said. He asked, "What is USTR's Plan B if Pillar 1 talks fail — if they haven't already failed so far? Will you reinstate Section 301 investigations on those 30 countries' DSTs?" Tai said 301 investigations are suspended, so that means they can be unsuspended. More generally, Rep. Hern criticized the Administration for not pursuing Trade Promotion Authority (TPA) for trade agreements.
Global tax: Bloomberg Tax reported Michael Plowgian, deputy assistant secretary for international tax affairs at Treasury, as saying at a Tax Executives Institute conference that the US believes the OECD should agree to Pillar Two global minimum tax rules that treat clean-energy credits in the 2022 tax-and-climate law that can be transferred, or sold, as refundable credits, which are treated favorably relative to non-refundable credits. If a credit is treated as a refundable credit in the hands of the buyer of the credit, the value of the credit would be treated as income, rather than a reduction in tax. "But a number of other countries involved in the global tax agreement that imposed the 15% global minimum tax 'think about it differently,' Plowgian said. As a result, it will be an 'uphill battle' for the US to get that kind of treatment, though it continues to be a subject of discussion."
Plowgian was cited in Tax Notes as saying delegates are continuing work on the rules for the QDMTT safe harbor. Companies qualifying for the safe harbor would pay whatever QDMTT top-up tax they owe in a country and not have to be concerned about Income Inclusion Rules or Undertaxed Profit Rules imposed by other countries. "There's still work to be done, but my expectation is that a QDMTT safe harbor will hew more closely to rules for an IIR and a UTPR rather than allowing some of the flexibility that we see in QDMTTs more generally," Plowgian said. He added that negotiations on a permanent safe harbor in the global anti-base-erosion (GLOBE) rules been so challenging that the provision seems unlikely at present: "I would characterize the discussions in the inclusive framework as essentially being that if delegates thought that there was a simpler rule that they could rely on to get to the right answer, they would have just made that [the rule rather than a safe harbor] under the GLOBE rules."
Estate tax: Senators Elizabeth Warren (D-MA), Bernie Sanders (I-VT), Chris Van Hollen (D-MD), and Sheldon Whitehouse (D-RI) called on Treasury to use "existing authority to limit the ultra-wealthy's abuse of trusts to avoid paying taxes." In a letter, they called for action on grantor retained annuity trusts ("GRATs") including revoking some revenue rulings, requiring GRATs to have a minimum remainder interest value equal to or greater than 25% of the contributed assets (from the Biden FY 2023 Budget), reissuing family limited partnership regulations, clarifying that Intentionally Defective Grantor Trusts are not entitled to stepped-up basis, and issuing clarifying regulations on certain valuation rules for estate and gift tax purposes.
Budget: Punchbowl reported Speaker Kevin McCarthy (R-CA) as saying at the House Republican retreat in Orlando that he would try to combine a debt limit bill with provisions in H.R. 1, the Republican energy proposal, and that he would seek work requirements for government programs, possibly to include Medicaid. "[I]f we had H.R. 1, and we had energy prices lower, there'd be lower inflation. So banks would be safer. Americans would have more money in their pocket, there'll be more jobs and the world would be safer," Speaker McCarthy said. "If we put in work requirements, it would help people get back to work, so that would deal with the supply chain. More people would be working, more revenue would come in … "
Roll Call reported House Budget Committee Chairman Jodey Arrington (R-TX) as saying at the retreat that the House GOP budget resolution will propose to cap spending at fiscal 2022 levels over the next 10 years, which would produce $3 trillion in savings over the decade, and that the goal of a balanced budget has slipped. The report said Rep. Arrington plans to use an alternative to the Congressional Budget Office baseline that caps topline spending increases at 1% annually, rather than assuming discretionary spending will grow 2.1% each year. "Arrington will further deviate from the CBO baseline in assuming the tax cuts from Republicans' 2017 law that are set to expire in 2025 are made permanent," it said. Bloomberg subsequently reported Chairman Arrington as saying House Republicans are working on a written offer on the debt limit that will likely come out before the budget resolution, which he previously said is expected the second week in May. Speaker McCarthy has made the "deal sheet" a priority "so Republicans can make their first offer in the debt-ceiling negotiations, Arrington said," according to the report.
Health: With the Public Health Emergency (PHE) set to expire on May 11, 2023, Washington Council Ernst & Young (WCEY) published a resource to help US health care leaders as well as employers think through the possible implications of this shift: "The PHE is ending: What it means for COVID-19 waivers, funding & other flexibilities." The guide includes an overview of existing COVID-19 waivers, emergency funding and other flexibilities — and the regulatory or congressional actions needed to extend or make permanent those flexibilities.
Key areas covered in this analysis include: