May 14, 2023
Americas Tax Policy: This Week in Tax Policy for May 12
This week (May 15 - 19)
Congress: The Senate stands adjourned until May 15 at 3:00 p.m. Looking forward, the Senate is scheduled to be in recess the week of May 22. The House is set to be in recess the week of Memorial Day, May 29. The many congressional hearings scheduled for next week include:
Tuesday, May 16
Wednesday, May 17
Thursday, May 18
The G7 Hiroshima Summit will be held from May 19 to 21.
Last week (May 8 - 12)
Energy tax: Treasury and IRS May 12 released Notice 2023-38, saying they intend to propose regulations addressing the application of the rules to qualify for the domestic content bonus credit amounts under IRC Sections 45, 45Y, 48, and 48E. IRS said the rules include:
The notice also provides guidance on the application of the manufactured products adjusted percentage rule, including how to determine costs for this rule, and a safe harbor regarding the classification of certain components in representative types of qualified facilities, energy projects, or energy storage technologies.
BEPS 2.0: At the TCPI 24th Annual Tax Policy & Practice Symposium May 12, the new OECD Director of the CTPA Manal Corwin outlined a revised timetable for Pillar One. She said she now sees three steps in moving Pillar One to implementation:
In the United States, the MLC could be considered as a tax treaty, requiring a two-thirds vote of the Senate, or as a trade agreement, which would have to be approved by the House and the Senate. It's also expected that US tax law changes would also be required. She also said "pretty good progress" has been made on resolving remaining issues with Amount B. She also mentioned there would be consideration of whether model rules should accompany the MLC text once shared.
Previously, the OECD timeline was to release the MLC text and have a signing by the end of June, but her comments clearly reflected the fact that signing is not the first step. While all this is going on, work will continue on the "standstill" agreement on country DSTs and what the transition looks like during this whole process.
Corwin suggested that 40 countries have indicated their intent to adopt Pillar Two through their own domestic legislation and praised the collaborative process with stakeholders that has influenced the drafting of the rules. No specific technical issues or other implementation issues were discussed, but it is understood that the OECD continues to work through priorities for additional implementation guidance and some additional rules could be released by late summer, with another set of new guidance being released by year end. This next set of guidance will likely cover the rules for the qualified domestic minimum top-up tax safe harbor, and how transferable tax credits, like those enacted as part of the IRA, will be treated for purposes of the Model Rules. Former Deputy Assistant Treasury Secretary for International Tax Affairs, Bob Stack, now with Deloitte, interviewed Corwin and pointed out that the administrative guidance under Pillar Two is much like IRS regulations implementing the IRC, and yet this new role of issuing such guidance taken on by the OECD does not include any type of formal notice and comment process like that required by the U.S. Administrative Procedures Act. Corwin said that Pillar Two has been subject to multiple public consultation requests, and that the OECD has received thousands of pages of comments on various aspects of the Pillar Two Rules.
Corwin added that other tax projects before the OECD include addressing rules to minimize compliance costs and recommendations on increasing mobility of workers, crypto assets, and carbon mitigation.
Estes P2 letter: Rep. Ron Estes (R-KS) said in Tax Notes, on Pillar Two, "From my perspective, which is widely shared by my colleagues, Treasury negotiated pillar 2 in a manner intended to handcuff Congress's ability to exercise its constitutional taxwriting authority in the future. By consenting to the OECD process and failing to defend the current U.S. tax code and our existing multilateral tax treaties, Treasury thinks that Congress will be forced to go along with its plan to radically change our international tax regime; otherwise, U.S.-based MNEs would be hit with punitive taxes from foreign countries."
Debt limit: A second bipartisan "Big Four" debt limit meeting with President Biden at the White House planned for May 12 was postponed. A Fox News reporter tweeted that it's because staff talks are going well. The New York Times said, "The delay seems to suggest progress at a pivotal moment. Until now, both sides appeared dug in on their respective positions about what it would take to raise the nation's debt limit." Punchbowl reported that while there have been positive developments, "The Biden administration's negotiators and top leadership aides, who met for two hours on both Wednesday and Thursday, simply haven't made enough progress to kick a menu of policy options up to the principal level." The report also said, "Topics that have been discussed include permitting reform, spending caps and rescinding unspent Covid funds." House Republicans have maintained they acted through their Limit, Save, Grow Act and are blameless in the event of default, while Democrats haven't been willing to entertain deficit-reduction discussions until after the debt limit is addressed. The previous, May 9 meeting at the White House yielded no "new movement" on the issue according to Speaker Kevin McCarthy (R-CA), though the President said it was "productive." President Biden said he's willing to "take a hard look" at rescinding unspent COVID funds, which is one plank of the House bill, "because there's still — we don't need it all, but the question is what obligations were there, commitments made, the money not dispersed, etc. … It's on the table." But overall, the President continues to tout his budget's deficit reduction proposals that include tax increases on corporations and the wealthy, along with spending increases in various areas. "Speaker McCarthy offered a very different way forward. He's proposed deep cuts that I believe are going to hurt American families," he said. The House bill's effect on veterans' benefits was said to have provoked a sharp exchange in the meeting. President Biden said he is willing to have a discussion of budget cuts outside of the debt limit context, though he staunchly defended green energy credits. "I've said all along: Let's discuss what we need to cut, what we need to protect, what new revenue we can raise, and how to lower the deficit to put our fiscal house in order. But in the meantime, we need to take the threat of default off the table." That could boil the debate down to timing — whether or not a deficit reduction discussion is tied to the debt limit — and has prompted some observers to suggest both sides can define an agreement as they see fit. The Washington Post reported: "McCarthy's bill to raise the debt limit … would cut federal spending by $4.8 trillion over 10 years. The White House has rejected that proposal, pushing for spending increases. But theoretically the two parties could agree to somewhere in between their preferred spending targets. 'There is a solution staring lawmakers in the face,' said Brian Riedl, a policy analyst at the Manhattan Institute, a libertarian-leaning think tank. 'Just come up with something in the middle and call it a day.'"
Taiwan: A bipartisan "Four Corners" group of congressional tax-writing committee leadership May 10 released a statement on a bipartisan, bicameral effort to alleviate double taxation between the US and Taiwan. "Addressing cross-border economic burdens currently faced by American and Taiwanese businesses is urgent and requires the expertise of the tax-writing Committees in Congress," said the statement from Senate Finance Committee Chair Ron Wyden (D-OR), Ranking Member Mike Crapo (R-ID), House Ways & Means Committee Chair Jason Smith (R-MO), and Ranking Member Richard Neal (D-MA). "Taiwan's unique status precludes it from the typical process of remedying double taxation through a treaty; therefore, Congress should amend the tax code to reduce the burden on U.S.-Taiwan cross-border investment."
The statement follows a bipartisan group of Senators on May 5 introducing the Taiwan Tax Agreement Act of 2023, authorizing the Biden Administration to begin negotiations with Taiwan to conclude a tax agreement. The bill was introduced by Senate Foreign Relations Committee Chairman Robert Menendez (D-NJ), Ranking Member James Risch (R-ID) and members Sens. Chris Van Hollen (D-MD) and Mitt Romney (R-UT). In March 2023, a bipartisan Senate resolution was introduced similarly urging the Administration to initiate negotiations with Taiwan over an income tax agreement.
Politico reported, "The U.S., of course, does not take a position on Taiwan's sovereignty, given China's claims over the nation, and thus hasn't been able to forge an official tax treaty with Taiwan." Bloomberg Tax said, "Double taxation has stymied US efforts to encourage more Taiwanese investment in semiconductors and other high-tech goods because Taiwan says the costs are too high."
Rx/International: If members from both parties are on the same page on that issue, they were certainly not on the same page at the May 11 Senate Finance Committee hearing on "Cross-border Rx: Pharmaceutical Manufacturers and U.S. International Tax Policy." Chairman Wyden noted the differing takes and priorities between the parties on the international tax issues, remarking that Republicans must be participating in a different hearing given their lack of stated concern about pharmaceutical company profit shifting. Democratic members and some witnesses criticized perceived profit shifting by the pharmaceutical industry even after enactment of the 2017 TCJA's guardrails, while Republican members expressed concern about the effect of the OECD-led Pillar Two global minimum tax on US MNCs, particularly the undertaxed profits rule (UTPR) and treatment of US tax credits including the R&D tax credit.
The Democratic majority released a report finding that large pharmaceutical companies report a collective 75% of taxable income in foreign subsidiaries, including for some drugs that are household names in the US. Republicans, meanwhile, used the hearing to focus on Pillar Two and the UTPR. The UTPR allows a country to increase taxes on a multinational company if that company has a taxable presence in the UTPR country and another subsidiary or branch of the parent company pays less than the global minimum tax of 15% in another jurisdiction. The UTPR "backstop" rule has been a particular target of Congressional Republicans in recent hearings, including during the March 16 Finance hearing with Secretary Yellen, arguing that the UTPR could have the impact of diminishing the value of US tax incentives like the R&D tax credit.
JCT overview: The staff of the Joint Committee on Taxation has prepared an overview of the U.S. Federal tax system as in effect for 2023 (JCX-9-23).