December 1, 2023
What to expect in Washington (December 1)
New this morning on the energy tax front: 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 under which critical minerals and associated materials may be allocated to a particular set of battery cells, which would then have to be physically tracked to batteries and new clean vehicles using a serial number or other identification system. 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."
Taiwan tax — 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 Jason Smith (R-MO) 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 brief 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 is noncontroversial.
That is essentially the situation for other outstanding tax issues — waiting on a legislative vehicle — though the partisan dynamics between addressing business tax provisions and expanding the Child Tax Credit (CTC) have not yet been sorted out. The Taiwan issue, rooted at least in part in the interest of boosting semiconductor chip production, is bipartisan and the markup showed a level of comity among Republicans and Democrats at Ways & Means. The Committee leaders began the markup with bipartisan praise of a retiring member, Rep. Dan Kildee (D-MI). "Anyone who's met Dan knows he's a fighter who cares about his people and his community," the Chairman said. "And let me also say, that I might need to stop doing these announcements every week if you all keep retiring."
Tax — 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 the broader Republican conference.
Appropriations — There has been a major shift in the dynamics for government funding that must be extended when the current two-step continuing resolution (CR) expires for some appropriations January 19 and the remainder February 2. The leader of the Freedom Caucus bloc of members — who resisted the Fiscal Responsibility Act (FRA) and pushed former Speaker Kevin McCarthy (R-CA) away from the deal to keep FY2024 appropriations to FY2023 levels — said the group is done pushing for drastic spending cuts to return to the FY2022 discretionary spending level of $1.471 trillion, reportedly wary that intransigence could open the House to being jammed with Senate spending bills that exceed the FY2023 level of $1.59 trillion.
Politico Playbook November 30: "Instead, the thinking is, by sticking to the number written into the bipartisan deal, the House will have more credibility to keep the Senate from spending more than what was negotiated, which senators from both parties want to do."
Freedom Caucus Chairman Rep. Scott Perry (R-PA) said November 29, "Now, it's still too much for many of us, but [what] was agreed to around Memorial Day was this FRA number of $1.59 trillion. No more gimmicks. Most of the House voted for it, most of the Senate voted for it. That's where we have to be. Don't be adding stuff onto it. Let's write the appropriations bills, get the spending bills right, set that as the number. Then, when we do that, let's start conferencing."
On year-end matters, Politico reported that House Transportation & Infrastructure Committee leaders of both parties are readying a short-term extension of Federal Aviation Administration (FAA) authorization and taxes past December 31 and through March 8, in recognition that even if Senate Commerce marks up a bill next week there won't be time for a House-Senate conference committee to finish. Rep. Rick Larsen (D-WA), the top Democrat on the Committee, also "threw cold water on the idea of the Senate possibly attaching its version of the bill to the National Defense Authorization Act because NDAA negotiators do not want to delay their defense bill over the unrelated FAA bill." The NDAA and FAA bills have been eyed as potential legislative vehicles for tax and health provisions.
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. A similar bill, H.R. 6498, was introduced in the House November 29. 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 of TCJA individual provisions' expiration.
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.