July 21, 2023
What to expect in Washington (July 21)
At the July 19 Ways & Means Tax Subcommittee hearing, "Biden's Global Tax Surrender Harms American Workers and Our Economy," Republican members challenged Michael Plowgian, Deputy Assistant Treasury Secretary for International Tax Affairs, to defend the OECD-led BEPS 2.0 global minimum tax project, US support for the project, and how the government has negotiated various aspects of the global minimum tax rules. Members also criticized the Biden Administration for not regularly consulting with Congress and, specifically, the Committee, as the negotiations have moved forward. They questioned the constitutionality and global legal framework for allowing other nations a potential share of US taxes through the Undertaxed Profits Rule (UTPR) and why the US R&D credit isn't treated under the global system in the same way as refundable R&D credits provided by other countries.
Republicans took particular aim at the Joint Committee on Taxation analysis suggesting the United States stands to lose over $120 billion in tax revenues if the rest of the world adopts Pillar Two in 2025 as clear evidence that the Treasury has failed in negotiating a good deal for the United States. While Plowgian did not dispute the estimate, he did note several times that the JCT analysis provided a range of estimates based on several different scenarios, and that the US may actually see an increase in revenue through implementation of Pillar Two.
Rep. Jodey Arrington (R-TX) said Democrats had full control of the Congress and White House last year and were not able to increase GILTI and make the calculation country-by-country and criticized the general nature of the deal. "What you are doing is a backdoor coercive strategy to force Congress to raise taxes" or risk other countries taxing US companies, he said. Rep. Arrington expressed concern that the US tax base will be ceded to foreign nations to subsidize their policies; the US will also undermine its sovereignty; and, if a company reduces their liability lower than 15% through the use of US tax credits, they are penalized because of the top-up tax. "This thing is completely off the rails and upside down," he said.
Plowgian cited as policy wins by Treasury the fact that "US provisions, including accelerated depreciation, are specifically identified in the model rules as book tax differences that do not give rise to adjustments to the effective tax rate and do not give rise to top-up tax under Pillar Two … a GILTI coordination rule that reduces the burden for US businesses in allocating taxes paid under GILTI for purposes of Pillar Two," and the UTPR safe harbor. He acknowledged that, "Pillar One cannot be approved without congressional support," and consistently said that Congress was consulted and agreed to respond to further requests in writing. Plowgian said requests for Administration revenue estimates have been stymied by concerns that they wouldn't provide Congress a complete picture because aspects of Pillar One have not been finalized.
Democrats emphasized that the agreement would proceed, and US companies would be affected, with or without US approval. Subcommittee Ranking Member Mike Thompson (D-CA) asserted that the OECD is going to forge ahead, and the US cannot put its head in the sand and pretend this isn't happening. Asked by Rep. John Larson (D-CT) whether Pillar Two would go away as a result of inaction by the US, Plowgian said no: South Korea and Japan have already taken steps to implement Pillar Two; all EU states are obligated to implement Pillar Two this year under the EU directive; and the UK, Canada, Australia are all moving forward. An EY Tax Alert has details.
Congress — The Senate convened today for a pro forma session at 6:30 a.m. — Senator Merkley (D-OR) presided, and no business was conducted — and will next convene at 3:00 p.m. on Tuesday, July 25, with two votes at 5:30 p.m. in relation to S. 2226, the FY2024 National Defense Authorization Act. The House is also out until next week after passing the FAA reauthorization bill (H.R. 3935, the Securing Growth and Robust Leadership in American Aviation Act) by a 351-69 vote. The Senate Commerce Committee has yet to mark up its FAA bill. Issues for the legislation include, as the Wall Street Journal reported, "how best to fix a pilot supply crunch, expand access to a popular but overcrowded D.C.-area airport, and bolster protections for consumers at a time when surging travel demand is straining capacity."
Meanwhile, House business next week is expected to include consideration of the Agriculture and Veterans Affairs appropriations bills, which are less controversial than some of the other dozen annual spending bills but expected to expose demands among conservatives to cut spending even further than the FY2022 levels House GOP leaders agreed to adhere to (conservatives were unsatisfied with the debt limit agreement to keep spending at FY 2023 levels). In the opposite direction of the House, Senate Appropriations Committee Chair Patty Murray (D-WA) announced July 20 upon marking up three spending bills, "In order to take these concerns regarding our defense and nondefense needs seriously, and to ensure we deliver the strongest bills possible with the broadest bipartisan support possible — Vice Chair Collins and I agreed to add $13.7 billion in additional emergency appropriations, including $8 billion for defense, and $5.7 billion for non-defense."
The wide range of spending number targets and priority among conservatives to achieve deeper spending cuts has created expectations of an impasse that could result in a short-term funding patch through the end of the year, when a backstop enforcement mechanism enacted in the debt limit bill looms: if all 12 appropriations bills are not enacted by January 1, discretionary spending will operate at a maximum of 99% of current levels (with the technical sequester enforcement mechanism related to the funding reduction taking effect on April 30). Punchbowl News observed, "Come September when government funding runs dry, it will be Speaker Kevin McCarthy who wants to deeply cut spending, versus House Democrats, Senate Democrats, Senate Republicans and the White House, all of whom think the spending deal was far too skimpy on a variety of fronts — mostly on defense spending."
There won't be a lot of floor time between now and the September 30 expiration of current funding. After next week, the current Senate and House schedules have the Senate out for five straight weeks and the House out for six straight weeks.
Energy — The Department of Energy has published the "U.S. National Clean Hydrogen Strategy and Roadmap" for clean hydrogen investments in the 2021 Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Law (BIL), and 2022 Inflation Reduction Act (IRA).