Washington Tax Insight April 2021
Politics and Congressional Activity
Congress has returned from its spring recess, and there are a number of issues on the agenda that will be competing for consideration including drug pricing, climate change, education, health care, and immigration. First and foremost, however, will be the new American Jobs Plan that was released by the Biden Administration as the first of two parts of significant legislation to address many of the issues President Biden campaigned on last year. There will be pressure on Democratic leadership in Congress to move as many of the key priorities as possible in advance of the mid-term elections in 2022.
The American Jobs Plan
On March 31, 2021, the Biden Administration released their American Jobs Plan, which is a tax and spending proposal designed to address infrastructure issues and job creation. It addresses a variety of issues including spending for roads and bridges, the electric grid, broadband capacity, and water systems; the promotion of clean energy; the expansion of affordable housing; incentives for domestic manufacturing; and home and community based care for children, the elderly, and individuals with disabilities. The $2 trillion package would be offset by the Biden Administration’s Made in America Tax Plan, which was released concurrently with the American Jobs Plan. The Made in America Tax Plan provides for corporate-related tax increases, including raising the corporate tax rate to 28% (from the current law 21%) and repealing or restricting certain current-law tax incentives.
Although the Administration would like to have Republican support for this package, Senate Minority Leader McConnell (R-KY) has already come out in opposition to it, focusing on the corporate tax increases included. It is expected that Democratic leadership in Congress will likely decide to use the budget reconciliation process once again to advance this legislation if they are unable to attract bipartisan support for it. With very slim margins in both the House and Senate, however, Democrats may have a challenge getting the legislation through on even a simple majority vote. The Administration would like to see approval of this legislation by summer, and House Speaker Pelosi (D-CA) has set a target for approval in the House of July 4th.
The President announced that he will release additional legislation in the coming weeks called the “American Families Plan,” which will address economic issues facing low- and middle-income families. It will likely include additional tax revenue offsets that will reverse or modify some of the tax cuts included in the 2017 Tax Cuts and Jobs Act (TCJA).
Key business issues in the Made in America Tax Plan include:
- Increase the corporate tax rate to 28%
- Impose a 15% minimum tax on the book income of the “very largest corporations” (undefined in the proposal)
- Changes to the global intangible low-taxed income (GILTI) regime including an increase in the effective tax rate to 21% and a requirement that it be calculated on a country-by-country basis
- Eliminate the deduction for foreign-derived intangible income (FDII)
- Repeal the Base Erosion and Anti-Abuse Tax (BEAT) and replace it with another regime (as yet undefined)
- Proposals designed to address offshoring and inversions
The Biden Administration
FY 2022 Budget Plan: President Biden released his Fiscal Year 2022 budget request, which is intended to help shape Congressional negotiations on the budget and appropriations bills. The document released on April 9th, which has been called a “skinny budget,” lays out top-line spending numbers for federal departments and agencies for FY 2022. A formal budget is expected to be released in May including a more detailed description of the Treasury tax proposals. The nominee for Director of the Office of Management and Budget, Neera Tanden, withdrew her nomination after facing opposition in the Senate, and no replacement nominee has yet been named. Shalanda Young, who was nominated to be the Deputy Director, has now been confirmed by the Senate.
House of Representatives/Ways & Means Committee
Ways & Means Committee: The Committee held a “Members’ Day hearing” that gave House lawmakers an opportunity to discuss their legislative priorities regarding a potential infrastructure bill. Republicans boycotted the hearing deciding instead to schedule their own virtual roundtable to discuss the issues.
Republican Energy Package: Republicans on the House Energy and Commerce Committee released a broad clean energy and climate package in response to Democratic legislation that was introduced a week earlier targeted at climate, broadband, and infrastructure.
Senate/Senate Finance Committee
SFC Hearing on Domestic Manufacturing Incentives: The SFC held a hearing on tax policy affecting domestic manufacturing and a variety of legislative proposals designed to encourage domestic production and supply chains. The Joint Committee on Taxation (JCT) issued a background report (JCX-15-21) for the hearing. The hearing covered a wide range of issues including the deductibility of research expenditures and tax incentives for the US semiconductor industry. It also addressed the unfavorable change to the business interest expense deduction that is scheduled to go into effect in 2022 as a result of a provision in the TCJA.
SFC Hearing on International Tax Policy: The SFC held a hearing on international tax policy that was designed to begin a potential rewrite of the foreign income rules included in the TCJA. Chair Wyden (D-OR) confirmed that he is working with Senators Warner (D-VA) and Brown (D-OH) on a new “framework for international taxation that reverses the Trump-era handouts to multinationals.” The witnesses at the hearing included Kimberly Clausing, the newly appointed Deputy Assistant Secretary for Tax Analysis at the Treasury Department. The JCT issued a background report for the hearing (JCX-16-21) on selected topics in international taxation including issues from the TCJA and tax issues arising from cross-border digital commerce.
Senate International Legislation: Several Senators introduced legislation titled “No Tax Breaks for Outsourcing Act,” which would repeal and revise parts of the TCJA and other international tax rules. A companion bill was introduced in the House by Rep. Doggett (D-TX), who is a senior member of the Ways & Means Committee. Senator Whitehouse (D-RI) and Rep. Doggett also reintroduced the Stop Tax Haven Abuse Act, which has been introduced in the past several years.
Other Senate Hearings: The Senate Budget Committee held a hearing on the tax burdens of wealthy individuals and large corporations.
COVID-19 Relief Legislation
Paycheck Protection Program Extension: Congress has approved and the President has signed the PPP Extension Act of 2021, which extends the application deadline for PPP loans through May 31, 2021. It also provides an additional 30 days (through June 30) for the Small Business Administration to process applications that are still pending. Also, the SBA released updated guidance reflecting changes to the PPP that were enacted in the December 2020 COVID-relief bill with an immediate effective date from the issuance date (March 18, 2021).
SALT deductions cap: Treasury Secretary Yellen has pledged to work with Congress to revise the $10,000 cap on state and local (SALT) deductions that has been a key focus of several members of Congress since its enactment in the TCJA. During a hearing at the House Financial Services Committee, she commented that the SALT limitation had caused disparate treatment for taxpayers, and that she was willing to consider several options that had been put forward to address the issue.
Treasury and the IRS
Treasury Personnel and Policy Updates
President Biden announced that he would nominate Lily Batchelder as the Assistant Secretary for Tax Policy. Ms. Batchelder is a well-known tax policy expert who is leaving a post as a tax law professor at New York University after serving on Capitol Hill as Chief Tax Counsel to the Senate Finance Committee and then as Deputy Director of the White House National Economic Council and Deputy Assistant to former President Obama.
He also announced that he would nominate Jonathan Davidson as the Assistant Secretary for Legislative Affairs. Mr. Davidson has worked for several years on Capitol Hill serving as Chief of Staff and Chief Counsel to a number of Senators, who were members of the SFC. Both nominees must be confirmed by the Senate.
The Treasury Department has reconfigured the Office of Tax Policy, which will be led by Batchelder, by creating three new deputy assistant secretaries – one for domestic business tax, one for international tax issues, and another for multilateral tax. The first was assigned to Tom West, the second to Jose Murillo, and the third to Ital Grinberg. The creation of the role filled by Grinberg indicates that the Biden Administration is prioritizing its work with the OECD on the project to rewrite global tax rules to address concerns about the taxation of technology companies. Murillo is expected to focus on Treasury guidance and regulations in the international area. Murillo and Grinberg have both served at Treasury in the past.
The IRS will continue to be led by Commissioner Rettig, but a number of changes have been made in other positions including Chief Counsel, National Taxpayer Advocate, Chief of the IRS Independent Office of Appeals, and Chief of Staff to the Commissioner.
The Senate has confirmed Biden’s pick for Treasury Deputy Secretary, Adewale O. Adeyemo. During his confirmation hearing, he pledged to work on economic hardship and wealth disparity, boosting US investment in technology and combating anticompetitive international trade practices.
The Senate also confirmed Katherine Tai as the US Trade Representative. Ms. Tai was previously Chief Trade Counsel to the House Ways & Means Committee.
COVID-19 Crisis Guidance & Related Issues
Guidance on the Employee Retention Credit: The IRS issued Notice 2021-23, which provides guidance on changes made to the Employee Retention Credit (ERC) effective for the first six months of 2021. The new guidance covers changes to the ERC made by the Consolidated Appropriations Act, 2021, that was enacted in December 2020. Eligible employers in 2021 can claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC available is $7000 per employee per calendar quarter, for a total of $14,000 for the first two calendar quarters of 2021. The Notice states that in the near future the IRS will issue additional guidance for eligible employers covering wages paid in the last half of 2021.
Other Issues and Guidance
IRS/2021 Filing Season: The IRS announced in IR-2021-59 that it was extending the individual tax filing and payment deadline for the 2020 tax year from April 15th to May 17th without penalties or interest regardless of the amount owed. Penalties and interest will start to accrue on any unpaid balances on May 17th. The extension applies to individuals including those who pay self-employment tax. Individuals who need more time can file for an extension until October 15, 2021, by filing Form 4868, but that does not extend the time for payment beyond May 17th. The relief granted in this announcement does not apply to estimated tax payments for 2021 that are due on April 15th. Many states have also extended their filing and payment dates to match the federal extension.
The IRS Commissioner stated publicly that the IRS will automatically process refunds for individuals who filed their tax returns prior to the enactment of the American Rescue Plan Act (ARPA), which made the first $10,000 of 2020 unemployment income tax-free for individuals under an income threshold.
The IRS also announced in Notice 2021-21 that it is automatically extending until May 17, 2021 (from April 15th) the deadlines for individual taxpayers to make contributions to certain tax-preferred savings accounts for 2020, including IRAs, health savings accounts, and Archer Medical Savings Accounts, and to file certain refund claims for tax year 2017 federal income tax returns.
Upcoming Guidance: At a recent tax conference, officials of the IRS and Treasury stated that guidance is being considered on a number of topics including:
- Tax accounting method changes related to §§448, 263A, 460, and 471
- Revenue recognition rules related to §451(b) and (c)
- Tax-free treatment of Special Purpose Acquisition Companies (SPACs) and the continuity of business enterprise requirement
- Private letter rulings on tax-free spinoffs by updating and superseding Revenue Procedure 2018-53
- Additional guidance on dividends-received deduction issues under §245A, specifically related to how it interacts with other parts of the Internal Revenue Code
- Proposed rules on how companies source cloud computing transactions (released in July of 2020) under §861
Invalid Claims for Domestic Production Activities Deduction/§199: The IRS issued an announcement IR-2021-45 regarding amended returns and claims for the Domestic Production Activities Deduction (DPAD), which was repealed as part of the TCJA for taxable years after December 31, 2017. In the release, the IRS noted that they had received a “wave” of questionable amended returns and claims for the tax benefits that are not properly supported by those claiming the deduction. In 2018, LB&I announced a campaign to risk assess claims or amended returns, and they continue to audit returns for this issue even though it has been repealed. In July 2020, the IRS issued a General Legal Advice Memorandum addressing examples of meritless §199 online software activity, and the IRS continues to litigate these issues. The IRS release states that taxpayers and their advisors should ensure that they have documentation to support their position and should expect that the IRS may impose appropriate penalties unless taxpayers establish that they have reasonable cause, noting that a study does not necessarily provide reasonable cause.
Empowerment Zones Guidance: The IRS issued Rev. Proc. 2021-18, which extends the time for economically distressed areas to receive tax incentives and grants. IRS guidance under §1391 extends federal tax relief for empowerment zones designated by state and local governments until 2025. The program was originally due to expire in 2020 but was extended by Congress. Empowerment zones receive tax breaks and grants designed to reduce unemployment and stimulate economic growth. Rev. Proc. 2021-18 provides that unless a state or local government declines to extend the empowerment zone designated termination date, all empowerment zones will be deemed to be extended from December 31, 2020, to December 31, 2025.
Partnership Audit Program: The IRS plans to begin auditing large partnerships later in 2021 as part of the new Large Partnership Compliance Program using data analytics to select tax returns for audit. They have on-boarded 50 new employees within the Large Business and International Division who will focus on pass-through entities.
Crypto Currency/”Operation Hidden Treasure”: The IRS Fraud Enforcement Office has undertaken an effort called “Operation Hidden Treasure” that is tracing cryptocurrency transactions to find taxpayers who are not including cryptocurrency-related income on their tax returns. Employees of the office have been participating in virtual training with the European Union Agency for Law Enforcement Cooperation (“Europol”), and they have been working with private contractors to identify key indicators of fraudulent activity.
Post-Altera Guidance: The IRS is working on regulatory guidance on stock-based compensation, which has been a key issue in recent litigation including the Altera case. The US Court of Appeals for the Ninth Circuit in 2019 upheld 2003 Treasury regulations that required Intel-owned Altera Corporation to include stock-based compensation in the costs shared with its foreign subsidiary for tax purposes when the company shifted the anticipated benefits of intangible property produced through those costs over to the subsidiary. In 2020, the Supreme Court declined to review the decision.
IRS Practice Unit on the Transition Tax (§965): The IRS issued a Practice Unit that outlined an overview of the §965 transition tax. It explained who is subject to the rules, and which taxpayers may make certain elections. §965 requires US shareholders, as defined in §951(b), to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the US. Examples with diagrams are included.
High-Income Audits: A recent audit report from the Treasury Inspector General for Tax Administration (TIGTA) and a report issued by the National Bureau of Economic Research have highlighted the issue of noncompliance among high-income taxpayers and the low audit rate by the IRS of these taxpayers. The Commissioner was questioned on this issue at a Ways & Means hearing, and Chair Neal stated that the Committee would hold a hearing later this year.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The OECD continues to have a target date of mid-summer for reaching a consensus on new global tax rules. Pascal Saint-Amans, who is the director of the OECD’s Center for Tax Policy, recently indicated that they have begun to focus on the implementation period for the reforms suggesting that once an agreement is reached this summer, they would be looking at the following 18 months for implementation.
The US has been a key player in the OECD negotiations from the beginning, but under the prior Administration, they became a party that created significant challenges to progress on reaching a global consensus. With the new Administration, however, and new personnel at the Treasury Department, including the appointment of Ital Grinberg in a new position designed to focus on multilateral tax issues, there is renewed hope that agreement can be reached in the near future.
The US has dropped its insistence on a “safe harbor” with respect to Pillar One, which is viewed as a positive development that will help advance negotiations, but the reality is that there are still several other substantive issues related to both Pillars One and Two that must be agreed upon. For the US, anything that is agreed to must still ultimately get the approval of Congress and could require treaty approvals in the Senate.
The new US Trade Representative, Katherine Tai, has announced that the US is dropping its investigations into the digital services taxes that were under consideration in Brazil, the Czech Republic, the European Union, and Indonesia because the tax regimes have not been adopted or implemented. Investigations of six other jurisdictions, including Austria, India, Italy, Spain, Turkey, and the UK, will proceed while broader international tax negotiations continue at the OECD. The USTR is proceeding with its public notice and comment process on possible trade actions to preserve procedural options before the conclusion of the statutory one-year period for completing the investigations. USTR Tai said that the US remains committed to reaching an international consensus through the OECD process, but until a consensus is reach, “we will maintain our options under the Section 301 process, including, if necessary, the imposition of tariffs.”
The EU has stated publicly that it plans to continue planning for a digital tax from January 1, 2023, even if OECD talks succeed in reaching a global consensus. Margrethe Vestager, who is the EC Competition Commissioner, said that even if an OECD agreement is reached, it will take time before it is ratified and implemented.
The European Commission has identified a number of new tax rules that the European Union could implement without the unanimous consent of member countries based on Article 116 of the EU treaty, which allows the unanimity requirement that usually applies to tax rules to be waived in the case of distortions to competition in the single market. Rules proposed under this article can be adopted if enough countries agree in a qualified majority vote, which weights members based on population size. Although no specific rules were cited, the EC stated that Article 116 could be used to address “tax rules that artificially attract investors or favor certain companies or sectors over others, thereby facilitating aggressive tax planning and undermining the principle of fair taxation.”
Miscellaneous Global Issues
The US and four other countries, including Canada, the UK, the Netherlands, and Australia, are involved in a joint tax enforcement group (called the Joint Chiefs of Global Tax Enforcement or J5) working to track down tax crime, and they have now identified fintech firms that will be part of their investigations. A recent J5 statement said that while many fintech firms are following compliance rules and partnering with governments and law enforcement to stop financial crime, tax avoiders and money launderers continue to use the industry to commit crimes.
The UK is considering a proposal that would require multinational companies to give more details on their cross-border tax arrangements. The proposal was disclosed as part of the UK consultation document and provides that companies would be required to provide more documentation on how they value internal transactions in order to articulate and support the transfer pricing positions taken in their tax returns. The government is proposing to adopt the OECD minimum transfer pricing documentation standards that were part of the OECD 2015 BEPS project.
The OECD issued a report titled “Ending the Shell Game: Cracking down on the Professionals who enable Tax and White Collar Crimes,” which is designed to get nations to do more to identify and prevent tax evasion and white collar crimes by professional intermediaries who enable tax evasion and other financial crimes. The report was presented to the OECD Global Anti-Corruption and Integrity Forum.