December 3, 2023
Americas Tax Policy: This Week in Tax Policy for December 1
This week (December 4-8)
Congress: The House and Senate are in session. The Senate reconvenes Monday, December 4 at 3 p.m., with a procedural vote on a judicial nomination at 5:30 p.m. Majority Leader Chuck Schumer (D-NY) has said he may put the national security supplemental with funding for Israel, Ukraine, etc. on the floor as soon as this week, but a bipartisan deal on border security provisions that Republicans want included hasn't been reached. A National Defense Authorization Act (NDAA) conference agreement could be brought to the floor instead. The Senate Finance Committee is holding a hearing on drug shortages on Tuesday, December 5.
The House is back in on Monday, but votes don't start until Tuesday, December 5. House Ways & Means Committee hearings this week include:
Last week (November 27-December 1)
Tax bill prospects: Congress is in the home stretch before leaving Washington for the holidays and, unusually, doesn't face a year-end deadline on government funding, which was extended through a two-step continuing resolution (CR) through January 19 for some spending and February 2 for the remainder. Tax packages are typically appended to year-end appropriations bills, and it remains to be seen whether tax provisions — addressing 174 R&D, 163(j) interest deductibility, expensing, extenders, etc. — can be added to spending bills early in 2024, or other legislation between now and then. A Federal Aviation Administration (FAA) reauthorization and taxes measure (they currently expire December 31) already includes tax provisions, leading some members to speculate that it could carry a long-sought but still elusive tax package on TCJA pre-cliffs and extenders. However, a stop-gap FAA extension through March 8 now appears likely even with a Senate Commerce logjam over pilot training appearing to break, which may eventually lead to a five-year bill but not before the end of the year. A November 27 Roll Call story cited off-Hill sources as saying the National Defense Authorization Act (NDAA) is a bill to watch, with some speculating that it likely will be a "proverbial Christmas tree" that may include "tax policy provisions and health care extenders." The report cited the longtime push to address IRC Section 174 R&D amortization (as opposed to expensing) and other business tax provisions that likely hinges on some expansion of the Child Tax Credit.
There haven't been many concrete signals on a year-end tax bill brewing, but there has been some limited renewed optimism. A November 29 Tax Notes story cited Finance Committee members including Ranking Member Mike Crapo (R-ID) and Senators Sherrod Brown (D-OH) and John Thune (R-SD) as saying tax bill prospects have improved and talks have become more productive. Senator Brown was cited as saying there is optimism that wasn't present a month-and-a-half ago, but that time is a factor because of the 2024 filing season. "You can't wait much past December, maybe early January because of the tax season," Brown said. "We can't dramatically change tax law February 1 or something." The Taiwan tax issue that was the subject of a Ways & Means markup this week demonstrated the potential for bipartisan and bicameral tax cooperation and showed a level of comity among Committee members. "Hopefully it's a sign of more to come on bipartisan tax legislation in the future," Chairman Jason Smith (R-MO) said.
About 150 House Republicans not on the Ways & Means Committee and led by Rep. Rudy Yakym (R-IN) in a November 29 letter called on Speaker Mike Johnson (R-LA) to extend "immediate Research and Development expensing, full capital expensing, and a pro-growth interest deductibility rule," demonstrating that a tax bill is a priority for many in the broader Republican conference.
Taiwan tax bill: The House Ways & Means Committee November 30 unanimously approved 40-0 the United States-Taiwan Expedited Double-Tax Relief Act (H.R. 5988), after the Senate Foreign Relations bill to authorize the Administration to negotiate and enter into tax agreements to provide for bilateral tax relief with Taiwan was appended to the tax bill that has already been approved by the Senate Finance Committee. Subject to reciprocity requirements, the Ways & Means/Finance bill would reduce the general statutory 30% withholding tax on US source income received by Taiwanese residents, including the reduction of interest and royalties 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. Both Chairman Smith and Ranking Member Richard Neal (D-MA) highlighted reciprocity requirements under the bill. The bill's provisions are applicable only if reciprocal provisions apply to US persons with respect to income sourced in Taiwan. In a colloquy, Rep. Neal said, in making the determination that Taiwan has reciprocal tax benefits, his understanding is Treasury is expected to ensure that Taiwan does not impose tax on business income, such as a withholding tax on services income, on US taxpayers except for business income that is effectively connected to a permanent establishment of the US person in Taiwan. He asked for the Committee report to clarify this point. Chairman Smith said he agreed with Rep. Neal's assertion and would work to address the point in the report. Next steps are unclear but both Reps. Smith and Neal have made comments suggesting the bill is ready for the House floor and could receive a vote soon. Senate Foreign Relations Committee Chairman Ben Cardin (D-MD), who is also on the Finance Committee, has suggested Senators are looking for any suitable legislative vehicle to move the Taiwan proposal, which he views as noncontroversial.
Foreign entity of concern: On December 1, IRS released IRC Section 30D foreign entity of concern (FEOC) regulations, regarding the excluded entity provisions with respect to the clean vehicle credit as amended by the Inflation Reduction Act of 2022. Beginning in 2024, an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a FEOC, and, beginning in 2025, an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a FEOC. Concurrently with the release of the proposed regulations, the Department of Energy (DOE) released proposed guidance on interpretations of terms used in the definition of "foreign entity of concern." Treasury said in announcing the regulations, "Under the proposal, FEOC-compliance for battery components would be determined at the time of manufacture or assembly, and FEOC-compliance for critical minerals would be determined by reviewing all phases of applicable critical mineral extraction, processing, and recycling." Critical minerals generally also must be traced, but the proposed regulations ask for comments on a temporary transition rule. Another proposed transition rule, through 2026, would give the auto industry time to develop tracing standards for low-value materials. A story in the November 30 Wall Street Journal previewed the release of the regulations, saying of foreign entity of concern, "Defining the vague phrase has emerged as a challenge for the Biden administration. How it addresses the term in the proposed rules, expected Friday, could help determine how much Americans will pay for many EVs in the coming years," and that "disqualifying vehicle batteries with even minor contributions from [such countries] could mean that few, if any, EVs would be eligible for the $7,500 credit, potentially slowing the transition away from gasoline-powered cars."
Billionaire's tax: Senate Finance Committee Chairman Ron Wyden (D-OR) November 29 reintroduced the Billionaire's Income Tax proposal under which: tradable assets like stocks owned by billionaires would be marked to market each year; and a "deferral recapture amount" akin to interest on tax-deferred assets while the individual held that asset would be imposed "when a billionaire sells a non-tradable asset (like real estate or a business interest)," in addition to their usual tax. The previous incarnation of the bill was floated briefly in the October 2021 Build Back Better negotiations that were a precursor to the narrower IRA, taking the mark to market approach Wyden has long espoused in various proposals. Chairman Wyden had announced November 9 that a billionaire tax avoidance bill was in the works, around the time Democrats were defending preserving the IRA's IRS funding boost to increase enforcement on the wealthy after House Republicans proposed clawing back some of the funding to pay for an Israel-only national security supplemental bill. Since then, President Biden has called for a billionaire's tax to be enacted. The effort to highlight what Democrats view as insufficient taxation of wealthy individuals effectively opens a Democratic tax argument ahead of the 2024 elections, which will decide who is in power for the 2025 fiscal cliff when TCJA individual provisions expire. In a clean energy-focused speech in Colorado November 29, President Biden said, "the next big battle's going to be whether the very wealthiest among us begin, and the biggest corporations begin, to start paying their fair share … The Speaker, Donald Trump, and the MAGA Republicans here in Congress committed to protecting their outrageous tax cuts for those at the very top. And they're going to continue to oppose investing in all of those programs that help people, whether it's in education, healthcare, whatever." The President said billionaires pay an average tax rate of 8% and, "That's why I'm proposing a billionaire minimum tax … and it would raise $440 billion over the next 10 years, just paying 25% instead of eight." President Biden first proposed such a tax in the FY2024 Budget, a billionaire's tax to impose a 25% minimum tax on total income, inclusive of unrealized capital gains, for taxpayers with wealth of greater than $100 million. A bill reflecting the President's proposal, H.R. 6498, was introduced in the House November 29 by Rep. Don Beyer (D-VA) and others.
Global tax: The United Nations November 22 voted to open an international tax cooperation project that supporters hope could rival the OECD-led two-pillared global tax agreement. The "Promotion of inclusive and effective international tax cooperation at the United Nations" would stress that efforts in international tax cooperation should be universal in approach and scope and fully consider the different needs and capacities of all States, in particular developing countries. "Unfortunately, the resolution is likely to duplicate and undermine existing intergovernmental negotiations on international tax cooperation, including Pillar 1 of the Inclusive Framework's Two-Pillar Solution," an unnamed Treasury official said in a Politico report. "The UN resolution also fails to achieve the global consensus that is necessary to strengthen international tax cooperation for the benefit of developing countries and anyone else."
Reporting threshold relief: In Notice 2023-74 November 21, IRS again delayed the reduction to a $600 de minimis threshold for reporting transactions by third-party settlement organizations on Form 1099-K and announced plans for a $5,000 threshold for 2024 to phase in the requirement. An EY Tax Alert has details.
IRA guidance tracker: This table describes select IRS guidance related to the Inflation Reduction Act.