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June 25, 2023

Americas Tax Policy: This Week in Tax Policy for June 23

This week (June 26 - 30)

Congress: The House and Senate are scheduled to be out of session for two weeks, returning the week of July 10. The Senate will next convene on Monday, July 10 at 3:00 p.m., with a vote at 5:30 p.m. on the Motion to Invoke Cloture on Executive Calendar #178 Xochitl Torres Small, a former House member, to be Deputy Secretary of Agriculture.

Consideration of the Taiwan Tax Agreement Act (S. 1457) that was held over from June 21 has been rescheduled for July 13. A Taiwan agreement not only faces concerns from Senator Paul, a member of the Committee, but is the subject of a jurisdictional tussle between Foreign Relations and the tax-writing committees, whose chairs and ranking members argue that Taiwan's unique status precludes it from the typical process of remedying double taxation through a treaty and Congress should amend the tax code to reduce the burden on U.S.-Taiwan cross-border investment.

This Week in Tax Policy will not be published while Congress is away, but other WCEY Alerts will be issued as events warrant.

Last week (June 19 - 23)

Treaties: The Senate June 22 approved the Resolution of Advice and Consent to Ratification for Treaties Cal. #1, Tax Convention with Chile (Treaty Doc. 112-8) on a 95-2 vote. Senators Rand Paul (R-KY) and Josh Hawley (R-MO) voted against the resolution. Reuters reported, "Final approval will send the treaty to the White House, where President Joe Biden planned to sign the papers necessary for ratification." Senate Majority Leader Chuck Schumer (D-NY) said on the floor just prior to the vote that while the treaty hasn't gotten a lot of attention, it is one of the more important recent items of business in the Senate. The treaty, which had been approved by the Foreign Relations Committee in the last Congress but not the full Senate, was cleared by the Committee June 1 to advance in the Senate after GOP concerns about potential double taxation relating to foreign tax credits were addressed with a declaration in the Text of the Resolution of Advice and Consent. In a June 21 floor speech on the Chile treaty, Foreign Relations Chairman Bob Menendez (D-NJ) expressed broader concerns, saying, "Treaties are a shared constitutional responsibility of the Senate and the Executive Branch. Nonetheless, as we worked last year to move the Chile Tax Treaty through the Senate, the Biden Administration withdrew from our tax treaty with Hungary without consulting with the Senate or providing advance notice, let alone approval. It is deeply disappointing that presidents of both parties have advanced these types of unilateral actions and omissions in the past. Let me be clear: such actions are completely inconsistent with our constitutional structure. I have asked the President to commit — at minimum — to meaningful consultations with the Senate Foreign Relations Committee prior to terminating any treaty. Without such a commitment, I will work to address this issue in future resolutions of advice and consent, as well as in legislation. And I will continue to work to make sure that the Senate protects our constitutional prerogatives on treaties." Politico Morning Tax said June 23 of the Chile tax vote, "The Senate action on the accord is encouraging to those now hoping to move some sort of tax agreement with Taiwan, a partner in the U.S. effort to develop its semiconductor manufacturing base." The Taiwan Tax Agreement Act (S. 1457) is set for Foreign Relations consideration on July 13.

TCJA and elections: 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 said, "If either party can claim both the White House and Congress in next fall's elections, there's a huge prize for the taking: Unchecked power to reshape taxes for millions of Americans. Much of the GOP's sweeping Trump-era tax breaks are set to expire in 2025, which will almost certainly push Congress to act on their future. So the 2024 campaign will determine whether Republicans can keep the cuts, Democrats can rewrite them — or, if neither party gets a clean sweep, whether a split government prompts a massive fiscal collision." The report said, "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."

A partisan debate about the tax system has been going on for years and will undoubtedly continue. A June 22 House Budget Committee hearing on "Reigniting American Growth and Prosperity: Incentivizing Economic Excellence Through Tax Policy" featured members and witnesses relitigating the benefits of the TCJA and tax policy decisions under the Biden administration and considering the oft-debated question of whether higher corporate taxes are passed on to consumers. Chairman Jodey Arrington (R-TX) said, "We need a productive, the most productive and most competitive tax rate. We can't have [other nations] have a lower tax rate on their businesses, their job creators than we do in the United States. And even today, after lowering the corporate rates, you combine the state taxes on businesses and federal taxes, we're paying more than … our competitor, and our adversary; that's a problem. So, let's work together and try to figure out how to get this right."

Global tax: In a referendum, Swiss voters June 18 approved changes to the Swiss constitution that would allow for enactment of 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."

An EY Tax Alert said, "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 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."

P2 JCT estimates: Meanwhile, the staff of the Joint Committee on Taxation 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: On An EY Tax Alert, "IRS issues proposed rules on direct-pay elections of applicable energy tax credits," is available here.

An EY Tax Alert, "IRS issues much-anticipated proposed rules on transferring renewable energy tax credits," is available here.

IRS: The IRS has issued proposed regulations (REG-124123-22) specifying the method for constructing the corporate bond yield curve used to (1) establish interest rates for calculating present value and making other calculations under defined benefit plans and (2) discount unpaid losses and estimated salvage recoverable for insurance companies. Comments may be submitted by August 22, 2023. A public hearing is scheduled for August 30.


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