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July 16, 2023

Americas Tax Policy: This Week in Tax Policy for July 14

This week (July 17-21)

Congress: The House is in session. The Senate is back on Tuesday, July 18, when the chamber will conduct a nomination vote followed by a procedural vote on the National Defense Authorization Act (NDAA). The House passed its version 219-210 on July 14.

In a July 9 Dear Colleague letter regarding the Senate agenda for the current work period, Majority Leader Chuck Schumer (D-NY) said, on government funding, a main task of the chamber "will be to deliver on the deal that President Biden and Congress agreed to in June to fund our government and protect key investments in infrastructure, U.S. competitiveness, Social Security, Medicare, Medicaid, our veterans and more." Further, "Senate Democrats will also continue our work with our Republican colleagues to advance legislation in a range of policy areas. This includes making progress on bipartisan bills" that:

  • lower the cost of insulin and prescription drugs,
  • combat the fentanyl crisis,
  • unlock permitting reform,
  • advance online safety and innovation,
  • promote community health,
  • hold bank executives accountable,
  • address rail safety,
  • modernize federal aviation programs,
  • institute common-sense farm policy,
  • safeguard cannabis banking,
  • help the US compete with foreign governments, and more.

Ways & Means: The House Ways & Means Tax Subcommittee has noticed a hearing, "Biden's Global Tax Surrender Harms American Workers and Our Economy," for Wednesday, July 19 (2 p.m.). Witnesses haven't been announced but Michael Plowgian, Deputy Assistant Secretary (International Tax Affairs), was expected to be invited to testify.

OECD: The next OECD Tax Talk is Wednesday, July 19 (15:00-16:00 CEST; Paris time).

Last week (July 10-14)

Global tax and Pillar One: On July 12, the OECD published a statement reflecting that the Inclusive Framework has made significant progress but has not reached a final agreement on Pillar One and the new taxing right under Amount A and that once a "small number of specific items are resolved" they will deliver a final Multilateral Convention (MLC), with a target for countries to sign the agreement by the end of the year. The Outcome Statement noted, on Amount A, that the Inclusive Framework has delivered text of an MLC (with a few unidentified open items), which will allow the Parties to the MLC to exercise a domestic taxing right (Amount A of Pillar One). The MLC will be opened in the second half of 2023 and a signing ceremony will be organized by year end, with the objective of enabling the MLC to enter into force in 2025. Importantly, most members of the Inclusive Framework agree to refrain from imposing newly enacted Digital Services Taxes (DSTs) or relevant similar measures, as defined in the MLC, on any company between January 1, 2024, and the earlier of December 31, 2024, or the entry into force of the MLC. Canada issued a statement that they will not delay implementing their DST. On Amount B of Pillar One — which provides a framework for the simplified and streamlined application of the arm's length principle to in-country baseline marketing and distribution activities with a particular focus on the needs of low-capacity countries — the Statement said the Inclusive Framework has achieved consensus on many aspects, but to ensure the appropriateness of all aspects of the work, the OECD is opening Amount B for further public consultation. The OECD plans to release that consultation document next week and will request comments by the end of August. The statement came at the conclusion of the 15th meeting of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and was to be delivered to G20 Finance Ministers and Central Bank Governors at their meeting in Gandhinagar, India on July 17-18. An EY Tax Alert has details.

The Wall Street Journal reported, "Meeting on Monday and Tuesday in Paris, tax officials from 143 jurisdictions had hoped to seal an agreement on a new way to divide the taxes levied on the profits of about 100 of the world's biggest companies. Such a deal — part of a series of changes to how, where and how much multinational companies are taxed around the world — would reallocate the taxation of some $200 billion in corporate profits across the world." Press reports before and since the statement's release have noted the challenges of Congress effectuating the agreement. "[L]egislators in the world's largest economy — the U.S. — are divided and wary, casting doubts on the prospect of a treaty's being ratified there even if the talks succeed," the WSJ said.

The proposed one-year delay in the moratorium on DSTs, which had been viewed as a year-end backstop on moving the project along, is among the most tangible developments to come from the statement. However, it has been widely noted that Canada is pushing back. Politico reported, "Deputy Prime Minister Chrystia Freeland said in a statement that our neighbor to the North would stick by its Jan. 1, 2024, implementation date for a DST if Pillar One of the deal, which would reallocate taxing rights, isn't in force by then. The DST delay by most other countries is significant because the OECD is still working on ironing out a political agreement on Pillar One. Without that accord, an all-out trade war could erupt as countries make grabs for the slices of the digital pie" they feel they are entitled to. "'Pillar One has been on a different path,' Barbara Angus of EY told Morning Tax. '[It] is in some ways a more complicated set of rules to put in place because it's being done through a multilateral convention.'"

Global tax and Pillar Two: A July 5 Washington Post story focused on uncertainty surrounding the implementation of the global minimum tax regime under Pillar Two for the United States and US-based companies. "Japan, South Korea, the European Union and other major economies have followed the pledge, adopting or preparing to adopt legislation that raises their tax rates. But in the United States, Congress hasn't made any real moves to adjust tax law to make sure no U.S. company pays less than 15 percent as required by the deal. The U.S. corporate tax rate is 21 percent, well above the 15 percent minimum. But without additional laws, some companies can find ways to reduce their tax burden below what's allowed under the terms of the agreement. Congress's inaction along with the structure of the agreement itself could bring many consequences: The largest American companies might find their already complicated tax returns will become far more complex. Corporate tax revenue paid to the United States might shrink, as American companies pay more to other countries. And in a strange new maneuver, foreign countries might even tax American companies to penalize them for not paying their fair share of taxes to the IRS."

How the US has engaged in the negotiations over Pillar Two, the lack of Congressional action to bring the US into compliance with the global minimum tax regime, and the potential impact of that regime on US tax incentives and US revenues will likely be the subject of a House Ways and Means Select Revenue Measures hearing scheduled for July 19. Michael Plowgian, the deputy secretary for international tax affairs and the Treasury's chief negotiator at the OECD on Pillar One and Pillar Two, is expected to testify. The OECD has been working on additional administrative guidance on Pillar Two that may be issued in the next few days and could address both the treatment under Pillar Two of transferable energy credits in the Inflation Reduction Act as well the impact of the undertaxed profits rule on the earnings of US MNEs that have effective tax rates below the 15% minimum rate, the latter being a topic of keen interest to the Committee.

Taiwan: The Senate Foreign Relations Committee July 13 approved the Taiwan Tax Agreement Act (S. 1457) that would authorize the President to negotiate and enter into a tax agreement relative to Taiwan through the American Institute in Taiwan (AIT, which functionally serves as the US embassy in Taiwan since the US takes no position on Taiwan's sovereignty and thus cannot pursue a traditional tax treaty). A press release from sponsors of the bill — Chairman Bob Menendez (D-NJ), Ranking Member Jim Risch (R-ID), and Senators Chris Van Hollen (D-MD) and Mitt Romney (R-UT) — said: "This bill facilitates investment between the United States and Taiwan in key strategic industries such as semiconductors. This will make it easier for businesses in the United States and Taiwan to avoid double taxation while also protecting against tax evasion. Given Taiwan's unique status, the United States and Taiwan cannot enter into a 'tax treaty,' but this bill comes as close as possible by laying the groundwork for an agreement with the key features of a tax treaty."

Next steps for the effort are unclear, as tax-writing committee leaders argue that Taiwan's unique status precludes it from the typical process of remedying double taxation through a treaty and that Congress should amend the tax code to reduce the burden on US-Taiwan cross-border investment. House Ways & Means Committee Chairman Jason Smith (R-MO), Ranking Member Richard E. Neal (D-MA), Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID) July 12 released a discussion draft to provide relief from double-taxation for workers and businesses engaged in U.S.-Taiwan cross-border investment. "Among other benefits, the bill would significantly reduce withholding taxes on dividends, interest, and royalties paid on these cross-border investments, mitigate barriers for smaller businesses to make those investments, reduce complexity for dual residents, and unlock opportunity for deepening our economic cooperation with Taiwan," a release said.

Under the discussion draft, instead of the general statutory 30% withholding tax on US source income received by nonresident aliens and foreign corporations, interest and royalties would be subject to a 10% withholding tax rate. Generally, dividends would be subject to a 15% withholding tax rate, or a 10% rate if paid to a recipient that owns at least 10% of the shares of stock in the corporation, subject to limitations.

Tax Notes reported Chairman Menendez as saying he believes he has support from the Biden administration for the bill and, regarding the differing approaches between the committees — he is a member of Finance, as well — "I'm looking forward to working together to see if we can have an amalgam of it." The Bloomberg Daily Tax Report cited Chairman Wyden as saying he is committed to working with Menendez. Chairman Menendez said, "My hope is that they're not inconsistent with each other … but ours is broader, because it also helps US businesses not face double taxation and it treats Taiwan in a way Taiwan wants to be treated through our bilateral relationships."

Cryptocurrency: Senate Finance Committee Chairman Wyden and Ranking Member Crapo July 11 asked for comments on "uncertainties surrounding the tax treatment of digital assets with an open letter seeking input from experts, stakeholders and interested parties." The senators sought input on:

  • Marking-to-Market for Traders and Dealers (IRC Section 475)
  • Trading Safe Harbor (IRC Section 864(b)(2))
  • Treatment of Loans of Digital Assets (IRC Section 1058)
  • Wash Sales (IRC Section 1091)
  • Constructive Sales (IRC Section 1259)
  • Timing and Source of Income Earned from Staking and Mining
  • Nonfunctional Currency (IRC Section 988(e))
  • FATCA and FBAR Reporting (IRC Sections 6038D, 1471–1474, 6050I, and 31 U.S.C. Section 5311 et seq.)
  • Valuation and Substantiation (IRC Section 170)

The Committee release said answers to questions will be collected on a rolling basis until September 8. A June Joint Committee on Taxation report said the tax code "does not treat all property the same" and "in some instances, different kinds of property are subject to different tax treatment." The report said such instances include those in which "financial assets, such as securities or commodities, are subject to a specified treatment," and often the status of digital assets is uncertain. President Biden's FY 2024 Budget proposed expanding wash sale rules to include digital assets.

Child Tax Credit: The July 13 Senate Finance Subcommittee on Taxation and IRS Oversight hearing, "Assessing 25 Years of the Child Tax Credit (1997–2022)," covered traditional arguments regarding expanding the CTC like the version in effect for 2021, including whether an expansion is necessary to lift children out of poverty or whether a greater federal benefit discourages work. Chairman Michael Bennet (D-CO) said the aspect of the credit that is the subject of the most debate is full refundability, and he asserted that 70% of those who received the refundable credit were working. Senator Ron Johnson (R-WI) expressed concern about complexity and how to design "benefit programs that don't make people dependent on government." He said the Subcommittee should look at federal benefit programs in total and how to simplify them. "How do you provide those types of benefits without encouraging dependency?" he asked, adding that he would like to understand the issue better. Senator Johnson encouraged, as he has with Social Security, roundtables to "start fixing these problems."

Punchbowl reported: "Let's be clear: the parties are still a ways' off from a grand compromise that could reexpand the credit. That's in no small part because Democrats and Republicans like the policy for fundamentally different reasons. The GOP worries that a fully refundable tax credit without work requirements could keep parents out of the workforce. Democrats say that string-less approach actually makes it easier for parents to work — particularly in minimum wage roles — by making child care more affordable and accessible."

A spokesman for Chairman Bennet said in Politico Morning Tax, "Sen. Bennet's subcommittee hearing [today] will highlight the bipartisan history of expanding the Child Tax Credit and the success of the 2021 Child Tax Credit expansion. This shows that there is a path forward to expanding the Child Tax Credit this year if we can come together to get it done." The ramifications are broader, as Democrats have long resisted a deal addressing expired and expiring business tax provisions without an expansion of the CTC.

CNOLs: The IRS July 10 issued final regulations (TD 9977) permitting consolidated groups that acquire members of another consolidated group to waive, on a tax-year-by-tax-year basis, all or a portion of the carryback period for consolidated net operating losses (CNOLs) attributable to an acquired member for pre-acquisition years during which the acquired member was a member of a former consolidated group. The final regulations apply to CNOLs arising in a tax year ending after July 2, 2020, but can be applied to any CNOLs arising in a tax year beginning after December 31, 2017. The final regulations mostly adopt the proposed regulations and remove the temporary regulations.


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