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June 7, 2023

What to expect in Washington (June 7)

A Wall Street Journal article discussed an economic package House Republican tax-writers are expected to soon unveil addressing (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, which remain mired in a partisan standoff over a child tax credit (CTC) expansion sought by Democrats. "Many lawmakers want to reverse a 2021 law that changed the threshold for when third-party payment processors such as Venmo and PayPal must send annual reports summarizing those transactions to business owners and the Internal Revenue Service … to $600 … " the article said of other potential add-ons. "Republicans could also use the bill to advance retaliatory taxes against countries implementing a 15% global minimum tax under a deal that the Biden administration negotiated in 2021. Rep. Jason Smith (R., Mo.) unveiled such a bill recently, saying Congress needs to have a say as countries implement that agreement."

The Bloomberg Daily Tax Report said this morning, "House Republicans — searching for ways to pay for the cuts in their upcoming tax bill — are debating taking another shot at the Inflation Reduction Act's energy tax credits. Coming off debt limit negotiations, where the GOP demanded government spending cuts, some Ways and Means Committee members said there's a potential need for offsets." The report said, "After Ways and Means Chair Jason Smith (R-Mo.) presented his tax plan to House Freedom Caucus members Monday night, Rep. Ken Buck (R-Colo.) expressed concern. 'We are going to be $300 billion in the red from the tax plan,' Buck said."

The TCJA cliffs on 174 and bonus depreciation were the focus of a June 6 House Small Business Economic Growth, Tax and Capital Access Subcommittee hearing. Subcommittee Chairman Dan Meuser (R-PA) said the provisions "allow small businesses to make significant investments they otherwise wouldn't be able to make" and should be reinstated. Business owners described the benefits of the provisions.

Taiwan — On Thursday, June 8, the Senate Foreign Relations (SFR) Committee is scheduled to vote on the Taiwan Tax Agreement Act of 2023 (S. 1457), which isn't a treaty but would authorize the Biden administration to negotiate and conclude a tax agreement with Taiwan. The bill includes findings and provides, "The President is authorized to negotiate and enter into a tax agreement relative to Taiwan through the American Institute in Taiwan (AIT)," with notice provided to SFR and the House and Senate tax-writing committees (the AIT functionally serves as the US embassy in Taiwan). The approach is rooted in the fact that the United States doesn't take a position on Taiwan's sovereignty and thus can't pursue a traditional tax treaty, despite concerns over double taxation.

The fact that S. 1457 isn't a treaty raises the question of whether congressional backing is necessary, and the bill might be thought of as similar to a non-binding congressional resolution (and therefore political safer to vote for). A Bloomberg article from March 29 said Taiwanese officials are pushing for an agreement and the Administration is looking at creative ways to approach the type of economic agreements between the U.S. and Taiwan that are "typically cut between intermediaries that are a half-step away from government," a role often played by the AIT. "In January, the U.S. sent a formal trade delegation to the [AIT] to kick off bilateral trade negotiations … Lawmakers want the administration to include a tax agreement as part of those talks, according to a GOP aide," the article said. "That means that, like other U.S.-Taiwan agreements, it wouldn't require ratification by the Senate. Still, the Taiwanese are seeking support from Congress."

The Bloomberg article coincided with a House Ways & Means Committee hearing during which, under questioning from Rep. Suzan DelBene (D-WA) about the lack of a US-Taiwan tax treaty, Treasury Secretary Janet Yellen said, "We recognize that there's a problem there and are looking at potential ways to address it."

It has been reported that the SFR and tax-writing committees are in a jurisdictional tussle over the matter given that it is not being handled by a formal treaty. A bipartisan "Four Corners" group of congressional tax-writing committee leadership on May 10 released a statement saying, "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." 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) said, "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."

Global tax — There were competing editorial/opinion pieces in major newspapers June 6. In a Washington Post op-ed, "Implement the global minimum tax and don't undermine it," Rebecca Kysar, former counselor to the assistant secretary for tax policy at Treasury, and former NEC official David Kamin said Chairman Smith and other Republican tax-writers are wrong to oppose Pillar Two of the OECD-led global tax agreement and to propose legislation designed to punish individuals or companies from countries that enforce the global minimum tax, making points that included:

  • TCJA supporters (Republicans) argued that a much lower corporate tax rate would dissuade companies from shifting profits abroad, but a better way is ending the "race to the bottom" with a minimum rate of 15% tax on corporate earnings around the world.
  • The undertaxed profits rule (UTPR), which is the focus of the Ways & Means GOP bill, is necessary to ensure tax havens can't undermine the agreement and the U.S. tax base by continuing to offer extremely low tax rates and attracting profits from other countries.
  • The OECD deal builds on the global intangible low-taxed income (GILTI) regime, which "was set at a rate that was too low and allows gamesmanship across countries that needs to be addressed."
  • With roughly $350 billion per year in individual income and estate tax cuts expiring at the end of 2025, "It's a political reality that leaders will be searching for ways to pay for any extension, and implementing the global minimum tax deal can help."

"The Republican bill aims to short-circuit all of this by discouraging other countries from pressing ahead with the OECD plan. The enforcement mechanism would be a retaliatory surtax, starting at 5% and rising to 20%, on corporate and capital income earned in the U.S. by companies and wealthy individuals from countries that impose versions of the pillar-one and pillar-two taxes on U.S. firms," said the top editorial in the June 6 Wall Street Journal. "A tax war could be as bad as the problem it's trying to solve, but the bill won't become law given a Democratic Senate and President Biden's veto pen — and it doesn't need to pass to work. The point is to warn other governments that Ms. Yellen wasn't speaking on behalf of America's tax writers when she approved the OECD deal."

Health - On June 6, the House Committee on Education and the Workforce advanced four bills, including two bills related to health insurance coverage: H.R. 2813, Self-Insurance Protection Act and H.R. 2868, the Association Health Plans Act. Lawmakers voted along party lines to advance the two health care bills, with Republicans voting in favor and Democrats voting against. During the discussion, Republican committee members spoke favorably about the bills increasing coverage options for employers, while Democrats raised concerns about the type of coverage patients would have access to.

Congress — The House Ways and Means Committee has scheduled a legislative markup for today (June 7) for bills including:

  • Extension of Airport and Airway Trust Fund Excise Taxes through the end of FY 2028 (H.R. 3796)
  • Telehealth Expansion Act of 2023 (H.R. 1843)
  • Chronic Disease Flexible Coverage Act (H.R. 3800)
  • Paperwork Burden Reduction Act (H.R. 3797)
  • Employer Reporting Improvement Act (H.R. 3801)
  • Small Business Flexibility Act (H.R. 3798)
  • Custom Health Option and Individual Care Expense Arrangement Act (H.R. 3799)

The Senate Committee on Finance has scheduled a small business roundtable for today (June 7) titled "Tackling Tax Complexity: the Small Business Perspective." The staff of the Joint Committee on Taxation has prepared a document describing present law and data relating to selected Federal income tax provisions that affect small businesses, "Present Law and Background Regarding The Federal Income Taxation Of Small Businesses."


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