July 14, 2023
What to expect in Washington (July 14)
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."
International tax — 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.
Child Tax Credit — The 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 business tax provisions without an expansion of the CTC.
Health care - Finance Committee Chair Wyden and Ranking Member Crapo have announced that the Committee will mark up legislative proposals to modernize and enhance federal prescription drug programs on Wednesday, July 26 (2 p.m.). "The committee package will focus on addressing pharmacy benefit manager practices that have grown increasingly complex and opaque in recent years at the expense of patients and taxpayers," according to a release.
On Thursday (July 13), the House Energy and Commerce Health Subcommittee sent to the full committee 17 bills on a range of health care topics. Much of the hearing debate focused on Pandemic and All-Hazards Preparedness Act (PAHPA) reauthorization. Democrats raised concerns that Republicans were advancing a partisan PAHPA reauthorization that lacks funding increases and improvements to public health data, without addressing the medical supply chain and ongoing drug shortage crisis. Republicans, meanwhile, expressed a desire to address drug supply chain issues separately.
Congress — The House and Senate floor are dominated by consideration of the National Defense Authorization Act (NDAA). The House has been considering the measure in tranches of amendments, including on controversial social issues. The Senate is out until Tuesday, July 18, when the chamber will conduct a nomination vote followed by a procedural vote on the NDAA.