June 21, 2023
What to expect in Washington (June 21)
The Senate will hold a procedural vote (Motion to invoke cloture) on the Tax Convention with Chile this afternoon, one of two votes at 2:15 p.m. It's unclear how quickly a vote on final passage could follow. Majority Leader Chuck Schumer (D-NY) said on the Senate floor yesterday, "A lot is at stake in our treaty with Chile, including America's global competitiveness and the future of our clean energy transition. This United States-Chile treaty is very similar to other treaties we have with more than 60 countries around the world, many of which support U.S. jobs and business growth. So, I hope this treaty passes the Senate very quickly. Chile is one corner of the so-called Lithium Triangle, home to the world's largest lithium reserves and currently the second largest lithium producer."
The Senate Foreign Relations Committee business meeting scheduled for today that was to include consideration of the Taiwan Tax Agreement Act (S. 1457) has been "held over," with the date and time for consideration TBD.
Tax - Two June 19 stories noted how pivotal the next election cycle is for tax policy. The Wall Street Journal said, "U.S.-based multinational companies face a slow-brewing tax squeeze over the next few years" with the global minimum-tax agreement implemented in some countries beginning in 2024, the undertaxed profits rule (UTPR) in 2025, and increases in TCJA international provisions (GILTI, FDII, and BEAT) taking effect in 2026. On the global tax agreement, "Congress is polarized and unlikely to act until after the 2024 election," because, despite Democratic support, they were unable to increase GILTI and make the calculation country-by-country even when they controlled both chambers of Congress; and "GOP leaders complain about being excluded from administration efforts and warn about eroding U.S. sovereignty." On the TCJA provisions, "Experts expect Congress to take a crack at extending expiring individual and business tax cuts in 2025, putting these international items on the agenda."
Those items represent a second wave of deadlines, with TCJA "pre-cliffs" relating to expensing of R&D costs, interest deduction limitations under IRC Section 163(j), and 100% expensing already taking hold and remaining stuck in a partisan impasse over the Child Tax Credit (CTC) expansion sought by Democrats. On that issue, Punchbowl June 20 reported on inklings for an eventual deal on the CTC, which Democrats want pushed closer to the law that was in effect for 2021. "I think Republicans want to consider it as part of a compromise for the Democrats," Rep. Don Bacon (R-Neb.) told Punchbowl. "We know that that's like one of their top issues. This may be a bargaining chip that we can use."
Politico had reported earlier June 21, "The ability to mold the country's tax structure may not ever become the primary focus of the presidential campaign or the battle for Congress. Yet both Democrats and Republicans are actively strategizing over how to handle the very real consequences of the tax cliff." Further, "Clear battle lines are already forming nearly two years in advance: Republican leaders say they would probably just try a straight extension of the expiring Trump tax cuts, particularly on income tax rates, though some have an appetite to expand or remodel them altogether. Democrats hate the cuts but are measured in how they talk about any repeal, aware that their rivals could easily attack such plans as a tax hike."
Global tax — Developments regarding the global tax agreement are attracting attention. Switzerland June 18 approved the 15% global minimum tax on businesses. "This ensures that Switzerland will not lose any tax revenue to foreign countries," Finance Minister Karin Keller-Sutter said. "It will on top also create legal certainty and a stable framework."
EY Alert: "With the approval in Switzerland of a constitutional amendment in a public vote on 18 June 2023, a majority (78.5%) of Swiss elective citizens as well as all 26 Cantons (result of the popular vote per Canton) cleared the way for the introduction of Pillar One and Pillar Two rules of the OECD/G20 Base Erosion and Profit Shifting (BEPS) 2.0 Project into Swiss domestic law. The constitutional amendment provides the legal basis for the implementation and the competence for the Swiss Parliament to introduce Pillar One and Pillar Two taxes in federal tax bills if deemed adequate. Due to the ambitious timeline set forth by the OECD, the constitutional amendment also contains a transitional provision for Pillar Two that gives authority to the Swiss Federal Council to introduce the Pillar Two rules by way of an ordinance until the Swiss Parliament enacts a federal tax bill." An EY Tax Alert has details.
An editorial in the June 20 WSJ said: "House Republicans recently warned governments around the world that Washington is far from united in supporting a new global corporate tax grab. Message received, as some lawmakers in the United Kingdom and elsewhere develop cold feet about the plan, despite U.S. Treasury Secretary Janet Yellen's high-tax evangelism. Priti Patel, a prominent member of the British parliament from the ruling Conservative Party, this weekend launched a revolt against her own Prime Minister's plan to adopt the global taxes. This is the proposal cooked up at the Organization for Economic Cooperation and Development to levy an excess-profits tax aimed at tech and pharma companies while also imposing a minimum effective corporate tax rate of 15% globally."
Meanwhile, the staff of the Joint Committee on Taxation has prepared an analysis of the potential revenue impact to the US Treasury of implementation of Pillar Two around the world that includes projections showing a range of revenue implications, from a revenue loss over 10 years of as much as $174.5 billion to a revenue gain of as much as $224.2 billion. The analysis was requested by House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance ranking member Mike Crapo (R-ID) and released June 20 by Sen. Crapo. It begins with the assumption that all countries that have announced they will legislate Pillar Two this year do so, then includes five different forecasting scenarios, including whether the rest of the world enacts Pillar Two and the US does not, and whether the rest of the world enacts Pillar Two and the US does as well. The analysis notes that "the range of revenue effects is significant and highlights the uncertain effect Pillar Two implementation may have on Federal tax receipts. In the lower bound, with US MNEs assumed to shift their low-tax profits to QDMTT jurisdictions, any residual US tax on those profits is eliminated by the corresponding foreign tax credits. In the upper bound, with US MNEs assumed to shift their low-tax profits to the United States, there is significant increase in Federal tax revenues. The range of potential effects is meant to highlight the level of uncertainty here and is not meant to represent a likely outcome."
The estimates were previewed by Rep. Ron Estes (R-KS), who last week cited JCT as saying global implementation of Pillar Two of the OECD-led global tax agreement would cost the US Treasury $120 billion in lost tax revenue, and, if the US is forced to change its tax code to comply with Pillar Two provisions, it would still cost more than $50 billion.
Energy tax - An EY Alert, "IRS issues proposed rules on direct-pay elections of applicable energy tax credits," is available here.
An EY Alert, "IRS issues much-anticipated proposed rules on transferring renewable energy tax credits," is available here.
Congress — Ways and Means Chairman Smith announced a special closed executive session on Thursday, June 22 at 8 a.m. for Committee members to review claims made by multiple IRS whistleblowers about the handling of a matter involving a high-profile individual and allegations of retaliation.
The House and Senate are scheduled to be out of session for two weeks after this week, returning the week of July 10.