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May 30, 2023

Americas Tax Policy: This Week in Tax Policy for May 29

This week (May 29 - June 2)

Congress: The House is out but members could be called back to vote on debt limit legislation. How soon a deal can be sealed is unclear, as is how long it would take to be processed in Congress. Once details are nailed down, it could take days before language is drafted. Some observed that House passage would be required mid-week next week for Senate procedural hurdles to be cleared for enactment by or over the June 3-4 weekend. Treasury Secretary Janet Yellen said in a May 26 letter to Speaker McCarthy, "Based on the most recent available data, we now estimate that Treasury will have insufficient resources to satisfy the government's obligations if Congress has not raised or suspended the debt limit by June 5." The Washington Post previously reported, "The Treasury Department has asked federal agencies whether they can make upcoming payments at a later date … as senior Biden officials search for fresh ways to conserve cash and prevent the U.S. government from facing an unprecedented default. With a deadline looming in less than two weeks, the White House is looking for ways to buy more time … "

Ways and Means Chairman Smith and other Committee Republicans plan to embark on a congressional delegation trip next week to Europe, including Paris and Germany, to discuss the OECD global tax agreement. The timing of the trip, however, depends on progress on the debt limit deliberations.

The Senate, which has been out this week, is scheduled to return on Tuesday, May 30, at 3:00 p.m. A vote is scheduled at 5:30 p.m. on confirmation of the nomination of Darrel James Papillion to be United States District Judge for the Eastern District of Louisiana. The Foreign Relations Committee has noticed a June 1 (at 10:30 a.m.) business meeting on matters including the US-Chile tax treaty.

Last week (May 22 - 26)

Debt limit: Negotiations between House Speaker Kevin McCarthy (R-CA) and his deputies and President Biden and their staffs appeared to be on a positive track heading into a crucial deadline weekend. However, efforts are complicated by whether the various factions of the parties — conservative Republicans and progressive Democrats especially — can provide sufficient support for any emerging deal, and how fast one can be processed through the two chambers. A new deadline for potential default, June 5, was provided by the Treasury Department. Regarding a main plank of the negotiations, government spending, Punchbowl reported that negotiators are discussing a mechanism to impose an automatic continuing resolution (CR) at agreed-upon spending caps if all 12 funding bills aren't passed by the end of the fiscal year, to accompany a debt limit increase lasting beyond the 2024 elections. An afternoon report said it's possible a deal wouldn't come together on Friday — Speaker McCarthy cited differences over spending and others said the two sides also can't agree on the length of potential spending caps — meaning work would continue into the weekend.

Tax has long been a thread of the negotiations. House Republicans passed a bill to roll back most Inflation Reduction Act (IRA) clean energy breaks, though that stands little chance of enactment. GOP negotiators wouldn't entertain Biden budget proposals including those to apply wash sale rules to cryptocurrency, repeal deferral of gain from Section 1031 like-kind exchanges and increase taxes on carried interest. However, reports suggest that chipping away at the IRA boost for IRS funding may be on the table. "It would impose caps on discretionary spending for two years, though those caps would apply differently to spending on the military than to other nondefense discretionary spending. Spending on the military would grow next year, as would spending on some veterans' care that falls under nondefense discretionary spending. The rest of nondefense discretionary spending would fall slightly — or roughly stay flat from — this year's levels," the New York Times reported. "The deal would also roll back $10 billion of the $80 billion Congress approved last year for an I.R.S. crackdown on high earners and corporations that evade taxes."

Republicans are pushing for work requirements for federal programs that are opposed by Democrats and that proposal is said to be a sticking point. Politico summarized other parameters of the negotiations as:

  • An agreement to lift the debt limit through 2024;
  • A procedure incentivize Congress to pass all 12 annual spending bills;
  • A plan to claw back unspent Covid money;
  • And two years of spending caps that fall between the GOP's demand for a return to FY2022 non-defense spending levels and Democrats' offer of a freeze at FY2023 levels.

It has long been observed that no faction in Congress would get everything they wanted from a debt limit deal, and some may be more dissatisfied than others. Senator Mike Lee (R-UT) tweeted May 25, "I will use every procedural tool at my disposal to impede a debt-ceiling deal that doesn't contain substantial spending and budgetary reforms. I fear things are moving in that direction. If they do, that proposal will not face smooth sailing in the Senate." The Washington Post reported, "In response to reports about the details of the agreement, leading conservative lawmakers and budget experts raised strong objections, arguing that McCarthy had failed to extract sufficient concessions from the Biden administration in exchange for raising the debt ceiling … Although the deal is expected to include key GOP priorities, such as partially clawing back new funding for the Internal Revenue Service, a growing chorus of conservatives has balked at how little the deal appears to cut government spending overall — especially because it would also give up their party's leverage on the debt ceiling until after the 2024 presidential election."

Pillar Two retaliatory proposal: House Ways and Means Committee Chairman Jason Smith (R-MO), joined by every Republican on the Committee, May 25 introduced legislation aimed at discouraging countries from adopting a key component of Pillar Two, the Undertaxed Profits Rule (UTPR), focusing on the potential impact on US multinational corporations that have an effective tax rate of less than 15% within the meaning of Pillar Two on their US profits because they've availed themselves of US tax incentives. The legislation would increase taxes on the US businesses of companies headquartered in countries that enact the UTPR, but it would also apply in the context of other taxes imposed on US businesses if those taxes meet a set of criteria deeming them to be either extraterritorial or discriminatory in nature.

Realistically, it is highly unlikely that the "Defending American Jobs and Investment Act" will be enacted in this Congress as it would require bipartisan support and the support of the Biden administration. Still, Committee Republicans hope the introduction of the bill will encourage the OECD and the Inclusive Framework participants in Pillar Two to reconsider introduction of UTPRs in their own domestic legislation. A number of countries are in the process of enacting both the Income Inclusion Rule and the Qualified Domestic Minimum Top-up Tax for effect in 2024 but have put off enactment of the UTPR as many countries have agreed it shouldn't take effect until 2025 at the earliest. South Korea, however, has enacted the UTPR to take effect next year. An EY Tax Alert is available here.

P2 concerns: In Politico Morning Tax May 23, Rep. Ron Estes (R-KS) reupped his concerns about Pillar Two of the OECD-led global tax agreement, after expressing his support for Pillar One during March hearings in the Committee. Estes said the 15% global minimum tax doesn't have sufficient support from either party to advance in Congress. "I think the right answer is: Let's put a moratorium onto Pillar Two and actually focus on getting Pillar One done, so that we can actually correct some of the problems with what's Pillar Two right now," Estes said. He also penned a letter in Tax Notes May 8 expressing concerns about Pillar Two, including with the undertaxed profits rule, which "allows other countries to impose an extraterritorial tax on U.S. companies if they determine that their U.S. profits are not taxed at 15 percent," and the treatment of US credits including the R&D credit.

The report also said the Committee plans action before mid-June on a tax/economic package that is expected to address (among other things) TCJA tax provisions including restoring R&D expensing in place of the IRC Section 174 R&D five-year amortization requirement, the prior-law calculation for the IRC Section 163(j) interest deduction limitation, and the bonus depreciation phasedown. The "Defending American Jobs and Investment Act" could be made part of the package.

Global tax: A Bloomberg Tax article by Kevin Flynn, EY Americas Vice Chair of Tax, discusses how businesses can position themselves to comply with the second phase of the global base erosion and profit shifting project, particularly its 15% global minimum tax. "Multinational enterprises are facing new and complex tax rules stemming from the OECD and G-20 countries' BEPS 2.0 project — particularly the project's Pillar Two 15% global minimum tax, which is set to apply to multinational groups with global revenue of more than €750 million ($829 million)," the article said. "Enforcing these rules will require unprecedented global cooperation between tax authorities, and implementation approaches likely will vary among jurisdictions adopting the rules, making compliance a challenge and creating the risk of controversy. Multinationals also will need to manage a substantial increase in data collection and tracking required to comply with these rules."

An EY Alert, "New Zealand to adopt the OECD GloBE (Pillar Two) rules," is available here.

Accounting standards: The International Accounting Standards Board (IASB) on May 23 announced accounting reporting rules for addressing the application of OECD Pillar Two. The Financial Accounting Standards Board (FASB) will likely put out its own guidance at some point. The amendments give companies temporary relief from accounting for deferred taxes arising from the OECD's international tax reform.

The amendments will introduce:

  • A temporary exception to the accounting for deferred taxes arising from jurisdictions implementing the global tax rules. This is mandatory and there is no specific timeline for how long it will apply.
  • Targeted disclosure requirements, particularly before legislation implementing the rules is in effect. When the rules are in effect, an entity is required to disclose separately its current tax expense or income in respect of the Pillar Two regime.

Companies can benefit from the temporary exception immediately but are required to provide the disclosures to investors for annual reporting periods beginning on or after January 1, 2023. In addition, the IASB confirmed that it is monitoring developments as jurisdictions implement the Pillar Two model rules and a 'future maintenance project' will determine whether to remove the temporary exception, or to make it permanent, after there is sufficient clarity about how jurisdictions have implemented the rules and the related effects on entities.


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