Washington Tax Insight April 2022
Politics and Congressional Activity
Congress began a two-week recess on April 8th with a list of issues they would like to address prior to that date. The Senate voted to confirm Judge Ketanji Brown Jackson to the Supreme Court on April 7th. Leadership continues to work on a COVID-19 supplemental spending bill, and the House approved a bill to replenish the Restaurant Revitalization Fund. Congress is also working to complete negotiations on the American COMPETES Act, which is aimed at increasing US competitiveness and boosting manufacturing, particularly in the semiconductor industry.
Administration Budget for FY 2023 and the Treasury Greenbook
The President submitted his FY 2023 budget to Congress on March 28th, and the Treasury Department released a “Greenbook” detailing the tax policy provisions included in the budget. The tax policy proposals included the following highlights:
Reform Business and International Taxation
- Raise the corporate income tax rate to 28 percent
- Adopt the Undertaxed Profits Rule (from the OECD global tax reform project)
- Provide tax incentives for locating jobs and business activity in the US and remove tax deductions for shipping jobs overseas
Modify Fossil Fuel Taxation
- Eliminate fossil fuel incentives
Strengthen Taxation of High-Income Taxpayers
- Increase the top marginal income tax rate for high earners
- Reform the taxation of capital income
- Impose a minimum income tax on the wealthiest taxpayers (Billionaire’s Minimum Tax)
Modify Estate and Gift Taxation
- Modify income, estate and gift tax rules for certain grantor trusts
- Limit duration of generation-skipping transfer tax exemption
- Tax carried (profits) interests as ordinary income
- Repeal deferral of gain from like-kind exchanges
- Require 100 percent recapture of depreciation deductions as ordinary income for certain depreciable real property
- Limit a partner’s deduction in certain syndicated conservation easement transactions
- Limit use of donor advised funds to avoid private foundation payout requirement
A complete discussion of the tax policy proposals included in the Administration budget and the interaction with the OECD global tax reform project will be included in a future True Insight. It is expected that the Ways & Means Committee and the Senate Finance Committee will both hold hearings in the coming weeks on the budget tax policy proposals.
The Build Back Better Act (BBBA)
The BBBA is now being considered by the Senate, and while action has stalled, there are recent reports that a smaller version of the legislation may be able to advance in the coming months. Senator Manchin (D-WV) who has raised issues preventing approval of the bill has indicated he is open to negotiating again, and there are issues of agreement within the Democratic caucus on issues such as prescription drug reform and climate spending.
Movement on this legislation will be necessary soon, however, with the Memorial Day recess a possible deadline for Senate action. Despite the fact that discussion continues on finding a way forward, challenges remain. For more information about the provisions affecting individual taxpayers that were included in the House-approved bill, please see this True Insight. For a detailed summary of the provisions affecting businesses and in the international area, please see this True Insight, and for information on the clean energy and infrastructure provisions, please see this True Insight. For a discussion of the SFC draft for the BBBA, please see this True Insight.
COVID-19 Relief Legislation
Congressional leadership continue to work to reach a bipartisan agreement on a $10 billion COVID-19 funding package, which was dropped from the omnibus spending bill earlier this year. The funding is intended to cover vaccines, testing, and treatments. The Senate was unable to schedule a vote on this legislation prior to the recess due to disagreements about whether amendments would be allowed, including a pandemic-related immigration amendment.
House & Ways & Means Committee
Bipartisan retirement legislation: The House approved by a vote of 414-5 bipartisan retirement security legislation (SECURE Act 2.0) aimed at making it easier for businesses to offer tax-qualified retirement savings plan to their employees and for individuals to participate in retirement plans and increase their tax-preferred savings. The bill would modify retirement savings policy in several ways including expanding automatic enrollment of employees into retirement plans and allowing higher catch-up contribution limits for tax-advantaged retirement plans for employees nearing 65. The legislation now will be considered in the Senate where it also has bipartisan support, but where there are also additional proposals which Senators will want to incorporate into the legislation. An SFC markup of the bill has not yet been scheduled.
Marijuana Legislation: The House approved the Marijuana Opportunity Reinvestment and Expungement (MORE) Act by a vote of 220-204. The bill would remove marijuana from the list of scheduled substances under the Controlled Substances Act and eliminate criminal penalties for an individual who manufactures, distributes, or possesses marijuana. It would impose an excise tax on cannabis products produced in or imported into the US and an occupational tax on cannabis production facilities and export warehouses. Funds produced from the taxes would go into a trust fund that would support various programs and services for individuals and businesses in communities impacted by the war on drugs. It is unclear whether this legislation will have enough support in the Senate to be approved in 2022.
Hearing on the IRS: The Ways & Means Committee held a hearing with testimony from IRS Commissioner Rettig on the status of the filing season for tax year 2021. The Commissioner told the Committee that the IRS is in a position to resolve its backlog of unprocessed tax returns by the end of 2022.
Senate & Senate Finance Committee
Tax Treaty with Chile: The Senate Foreign Relations Committee approved a long-delayed tax treaty between the US and Chile. The treaty will be considered in the full Senate once there is agreement to approve it under unanimous consent or it is scheduled for a floor vote, and a two-thirds majority vote will be needed for approval. The Chilean government also has to move the treaty through its parliament. The Chile tax treaty is one of several that were negotiated and signed before the 2017 Tax Cuts and Jobs Act (TCJA) was enacted, but were held up after enactment because of concerns that their language could be interpreted as overriding the TCJA’s base erosion and anti-abuse tax (BEAT). Treaties with Poland and Hungary have also been delayed. The Chile tax treaty as approved includes “BEAT reservation” language to make it clear that the treaty does not override the BEAT rules.
Tax Sanctions for Russia: SFC Chair Wyden (D-OR) issued a press release stating that the Committee is working on a set of tax policies designed to punish Russia for its attack on Ukraine, followed by the release of draft legislationThe intention is to “take away every special tax benefit for all sanctioned individuals” and authorize the Treasury Secretary to identify other individuals, companies, and governments supporting the invasion that should face tax sanctions. He also indicated that he would like to restrict GILTI and FTCs for income earned in Russia or other jurisdictions that are materially supporting the invasion.
SFC Hearing on the FY 2023 Budget Proposal: The SFC plans to hold a hearing on the President’s FY 2023 budget request with Commissioner Rettig to discuss this year’s tax-filing season. It is expected that an additional hearing will be held on the budget with Treasury Secretary Yellen.
Senate Budget Committee hearing on corporate profits: The Senate Budget Committee has scheduled a hearing called “Corporate Profits are soaring as Prices Rise: Are Corporate Greed and Profiteering Fueling Inflation?” The hearing will cover new legislation introduced by Chair Bernie Sanders (I-VT) on a corporate windfall profits tax.
Crypto-mining companies target of SFC: Chair Wyden is requesting information from crypto-mining companies and their potential use of the Opportunity Zone program for their businesses. He has sent letters to several companies asking them to respond to questions about crypto-mining projects that they are invested in.
Hearing on Charitable Giving: The SFC held a hearing on legislative proposals to encourage charitable giving and police abusive transactions, including donor advised funds and syndicated conservation easements. A bipartisan bill sponsored by Senator Grassley (R-IA) and Senator King (I-ME) would focus on donor advised funds in order to ensure that tax-deductible contributions to a foundation or a donor advised fund “reach their ultimate charitable destination within a reasonable period of time.” Another bipartisan bill sponsored by Senator Daines (R-MT) and Senator Stabenow (D-MI) is intended to curb some fraudulent arrangements by limiting the tax deduction for qualified conservation contributions made by certain passthrough entities if the amount of the contribution is more than 2.5 times the sum of each owner’s relevant basis in the passthrough entity.
Federal Reserve Chairman Powell: The Senate Banking Committee approved Jerome Powell in a 32-1 vote for a second term as Federal Reserve Chairman.
Administration Cryptocurrency Executive Order: President Biden issued an executive order calling for several agencies to study the risks and opportunities associated with cryptocurrencies and for “an evolution and alignment of the United States government approach to digital assets.” Specifically, he called on agencies including the Treasury Department, the Federal Trade Commission, the SEC, the Commodity Futures Trading Commission, federal banking agencies, and the Consumer Financial Protection Bureau to submit policy recommendations focused on consumer protection and risks to financial stability. The order called for the creation of a comprehensive strategy to address cryptocurrency risks and a coordinated action plan for mitigating the digital-asset-related illicit finance and national security risks.
New Administration Plan to Combat Criminal Fraud and Identity Theft in Pandemic Relief Programs: In the President’s State of the Union address, he announced an Administration-wide effort to prevent, deter, and punish identity theft and other forms of pandemic fraud. One of the efforts includes the DOJ COVID-19 Fraud Enforcement Task Force which will expand its efforts in this area. Also, the SBA has formed an internal group of top executives to monitor and manage fraud in loans handed out by the Paycheck Protection Program and the Economic Injury Disaster Loan program.
Joint Committee on Taxation Blue Book: The JCT released a “Blue Book” (JCS-1-22) providing a general explanation of provisions in the eight tax bills that were signed into law in the 116th Congress in 2019 and 2020. This legislation includes pandemic-related legislation such as the CARES Act. The explanations in the Blue Book were prepared in consultation with the staffs of the Ways & Means Committee and the Senate Finance Committee. For each provision in a given law, the Blue Book provides a description of the law in effect immediately prior to enactment, an explanation of the provision, and its effective date.
Treasury and the IRS
Taxpayer Experience Office: The IRS announced that it is establishing the first-ever Taxpayer Experience Office, which will focus on “all aspects of taxpayer transactions with the IRS across the service, compliance and other programs areas, working in conjunction with all IRS business units and coordinating closely with the Taxpayer Advocate Service.”
Issues and Guidance
Opposition to Final Foreign Tax Credit Regulations: As summarized in the January issue of Washington Tax Insight, the IRS issued final regulations on the foreign tax credit (FTC) and the foreign-derived intangible income (FDII) regime. For a detailed discussion of key issues addressed in these regulations, see this True Insight.
As noted in the March issue of Washington Tax Insight, there has been growing opposition to the new guidance with requests that the regulations either be withdrawn or delayed. A representative of the IRS Office of Chief Counsel recently stated at a tax conference that the agency is looking into ways to address the issue companies are facing under the new rules, while noting that the IRS cannot release private letter rulings on the application of FTC statutes including Sections 901 and 903. Comments from the National Foreign Trade Council and the US Council on International Business have stated that US companies could suffer double taxation and distorted financial statements as a result of the new guidance.
Virtual Currency Transactions on Form 1040 for 2021: The IRS issued a press release reminding taxpayers that they must check a box on Form 1040 (and Form 1040-SR, Form 1040-NR) on virtual currency transactions for the tax year 2021. All taxpayers must answer this question by checking a box stating “yes” or “no”: At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? IR-2022-61 provides details about the types of common transactions that require a “yes” answer as well as additional information needed if a taxpayer disposed of any virtual currency that was held as a capital asset or if a taxpayer received any virtual currency as compensation for services.
Tax treatment of 2020 unemployment compensation: The IRS issued a news release providing an update to a Fact Sheet that contains answers to FAQs regarding the tax treatment of 2020 unemployment compensation, taking into account relief provided by the American Rescue Plan Act of 2021 (ARPA).
Economic Impact Payments: The IRS issued a news release providing an update to a Fact Sheet that contains answers to FAQs regarding the third round of Economic Impact Payments as enacted by ARPA.
IRS increasing hiring to focus on partnership audits: The IRS is planning to hire additional partnership and transfer pricing experts in order to increase the number of partnership audits being conducted.
Disclosure of Tax Information: The IRS issued Revenue Ruling 2022-07 addressing the disclosure of tax information under certain exceptions to the general non-disclosure rule of Section 6103(a). The new ruling supersedes Revenue Ruling 2004-53, and it explains the rules related to redisclosure of tax information obtained under the exception.
APA Program: The IRS issued its annual report on its Advance Pricing Agreement (APA) program. The report noted that the IRS received 145 new APA applications in 2021, which was 24 more than in 2020, and that they executed 124 APAs with 461 pending at the close of 2021.
Interest Rates related to employee benefit plans: The IRS issued Notice 2022-14 providing guidance on various interest rates relevant to employee benefit plans under the Code.
Updated Tables for Depreciation/Cars: The IRS issued Revenue Procedure 2022-17, providing updated tables for use in determining limitations on, and reductions to, depreciation deductions with respect to passenger automobiles under Section 280F of the Code.
Opinion Letters on certain retirement accounts: The IRS issued Announcement 2022-6 that stated that effective March 14, 2022, and until further notice, the IRS is suspending its Prototype IRA Opinion Letter Program and will no longer accept applications for opinion letters relating to traditional individual retirement accounts (IRAs), Roth IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, or simplified employee pensions (SEPs). The IRS stated that the pause will give the agency time to update the program, issue newly revised model forms and Listings of Required Modifications (LRMs), and to develop more guidance related to the enactment of the Setting Every Community Up for Retirement Enhancement Act (SECURE).
Section 911 residence requirements: The IRS issue Revenue Procedure 2022-18 waiving the residence requirements needed to qualify for benefits under Section 911 for the 2021 taxable year with respect to certain individual taxpayers who departed from Iraq, Burma, Chad, Afghanistan, or Ethiopia in 2021.
Business Activity Requirement in Spinoff rules: The IRS is actively working on rules about the active trade or business requirement for tax-free spinoffs according to an IRS official in the Office of Chief Counsel. Under Section 355 of the Code, companies can spin off a subsidiary into a new company without tax consequences, but both the parent and the spun-off company must be engaged in an active trade or business, and the transaction cannot be a device for distributing profits to shareholders. The IRS Priority Guidance Plan for 2021-2022 lists projects under Section 355 including the active trade or business requirement and the prohibition on device for the distribution of earnings and profits. The IRS is focusing on the active trade or business rules first, and then the device prohibition.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
On December 20, 2021, the OECD issued its Global Anti-Base Erosion (GloBE) Model Rules under its Pillar Two proposal to impose a 15% minimum tax on a jurisdictional basis. The goal is for Pillar Two to be brought into law in 2022 and to be effective in 2023. On March 14, 2022, the OECD released Commentary and illustrative examples to the Pillar Two Model Rules. The OECD stated that the commentary is intended to provide corporations and jurisdictions with “detailed and comprehensive technical guidance on the operation and intended outcomes under the rules and clarifies the meaning of certain terms. It also illustrates the application of the rules to various fact patterns.”
The OECD also launched a public consultation on the GloBE Implementation Framework on March 14, 2022. Stakeholder input is requested on various issues related to the administration, operation, compliance, and rule coordination of the Model Rules with comments due by April 11, 2022. A public consultation meeting will be held virtually at the end of April.
On February 4, 2022, the OECD released its initial “Draft Rules for Nexus and Revenue Sourcing under Pillar One Amount A.” The proposed plan introduces a new taxing right over a portion of the profit of large and highly profitable enterprise for jurisdictions in which goods or services are supplied or consumers are located. Comments were due February 18th, and the request for comments stressed that stakeholder input is critical to balance accuracy and operational realities in the final rule.
On February 18, 2022, the OECD issued a new set of proposed rules for “Tax Base Determinations under Amount A of Pillar One.” Comments were due by March 4th. This draft guidance is intended to establish the profit or loss of an in-scope MNE that will be used for the Amount A calculations to reallocate a portion of its profits to market jurisdictions.
United States: SFC Republicans continue to correspond with Treasury Secretary Yellen raising several concerns about the commitments the US has made with respect to negotiations on the OECD project and their position that Treasury has failed to engage meaningfully with SFC Republicans. The latest letter, dated March 31, 2022, was signed by all 14 SFC Republicans and follows receipt of a Treasury letter dated March 29th from Treasury Assistant Secretary for Legislative Affairs, Jonathan Davidson. Additional letters from the SFC Republicans were sent on December 22, 2021, and February 16, 2022. The latest letter states that the briefings provided by Treasury staff took place after the negotiations had taken place, and that Treasury has not provided a thorough analysis and data to evaluate the effects of the agreement. The letter reminds Treasury the implementation of the agreement will require Congressional action, including Senate approval of a multilateral tax treaty.
European Union: European finance ministers have failed to reach a unanimous agreement on a minimum tax in the EU due to objections from Poland, Sweden, Malta, and Estonia despite broad support for the concept and a revision that would have made it effective on December 31, 2023, rather than January 1, 2023. The next meeting is in early April, and the French finance minister has said that he is confident they will reach a unanimous agreement.
OECD – Miscellaneous
Treaty Shopping: The OECD published its latest peer review report on how many jurisdictions have applied rules designed to curb treaty shopping, which is a method of tax avoidance that exploits differences between tax treaties. Under the BEPS Action 6 minimum standard on treaty shopping, members of the OECD/G20 Inclusive Framework on BEPS have committed to strengthen their tax treaties by implementing anti-abuse measures. The report reflects the outcome of the 4th peer review of the implementation of the BEPS Action 6 minimum standard on treaty shopping. The report concludes that significant progress has been made in preventing treaty shopping among countries that have ratified the multilateral treaty instrument, but that countries who have not done the ratification have not made useful progress in adopting minimum standards for dealing with treaty shopping.
Cryptocurrency Reporting Framework: The OECD released a draft framework that would standardize how global tax authorities share tax information related to crypto-assets by creating a standard set of regulations. The draft includes model technical rules and a commentary, and it includes amendments to the common reporting standard (CRS) which provides a template for countries to collect and exchange their residents’ financial data. Public comments on the draft rules are due by April 29th, and the OECD plans to present a final report to the G20 in October. The new model rules are called “CARF” and include these four components: (1) setting a scope of covered crypto assets, (2) subjecting intermediaries to report on data collection, (3) defining transactions subject to reporting, and (4) creating due diligence procedures to identify taxpayers.
New Carbon Fee: Draft legislation on a new carbon levy called the Carbon Border Adjustment Mechanism (CBAM) has been approved by the EU finance ministers and will be voted on soon by the European Parliament. Issues related to the border fee’s economic efficiency, environmental integrity, and compatibility with World Trade Organizations rules must be worked out before the vote. The proposal for the carbon levy would make individual countries responsible for selling payment certifications for the fee, while the European Commission would manage a central system for the charges.