Washington Tax Insight August 2020
Politics and Congressional Activity
Despite spending the last several weeks working on the next phase of COVID-19 relief legislation, Congressional leaders and the Administration have failed to reach agreement and the negotiations appear to be stalled this week. The House and Senate are both technically still in session, but many members have returned to their home districts subject to a call to return should a deal be reached. Both chambers are scheduled to return to work on September 8th, when they will face a number of issues to be addressed before the November elections, including most importantly, funding the federal government by October 1st for FY 2021.
The House is scheduled to vote on several spending bills with the goal being to approve 10 of them prior to the August recess, while the Senate schedule on completing consideration of spending bills is unclear. Without agreement by the end of September, Congress will face the prospect of a federal government shutdown or the need to approve temporary funding extensions for any parts of the federal government not yet covered for FY21. Since this is an election year, any temporary funding bills could have expiration dates that fall after the November elections.
Other issues that Congress is working on include the National Defense Authorization Act, which is currently in conference negotiations and the Great American Outdoors Act, which has been approved by both the House and Senate and signed by the President. There are a number of issues that could be considered by Congress this fall including policing reform and infrastructure, but resolution of current issues related to COVID-19 legislation and the spending bills will come first and may crowd out other agenda items prior to the elections.
Presidential Election Update
Presumptive Democratic nominee Joe Biden is expected to name his running mate this week. The Democratic convention is scheduled for August 17-20th and will be held virtually for the convention delegates. The Republican convention has now also been called off as an in-person event and will take place virtually from August 24-27th. There will be three Presidential debates on September 29th, October 15th, and October 22nd. The Vice Presidential debate will be held on October 7th. Election Day is November 3rd with absentee voting expected to increase significantly across the country for this election.
House and Ways & Means Committee
Rep. John Lewis (D-GA), who was a senior Democrat on the Ways & Means Committee and an icon of the Civil Rights Movement in the 1960s, passed away at the age of 80 after serving on the tax-writing panel for decades. He chaired the Oversight Subcommittee and was next in line in seniority behind the current Chair, Richard Neal (D-MA).
The House approved legislation that would expand eligibility for the Affordable Care Act’s health insurance premium tax credits. Senate Republicans are unlikely to pass the bill, and the White House has threatened to veto it.
Government Response to COVID-19, the Coronavirus Pandemic
In response to the COVID-19 pandemic, government officials in Washington DC have taken a number of actions related to the economic effects of the crisis including legislation, regulatory action, and government agency action. As summarized in past True Alerts (Tax Issues Addressed by COVID-19 Emergency Legislation; Congressional Action on the COVID-19 Pandemic: The CARES Act), Congress has passed several major pieces of legislation to provide economic relief to the US economy and US taxpayers.
In May, the Democratic-controlled House approved the Health and Economic Recovery Omnibus Emergency Solutions Act (“HEROES Act”), which was intended to lay down markers on the issues the House Democrats believe should be addressed in the 4th Phase Bill.
On July 27th, Senate Republicans issued their proposals for a 4th Phase Relief bill. The proposals were released in sections, although they will be unified as a single bill called the “Health, Economic Assistance, Liability Protection and Schools (HEALS) Act.” This proposal included the following tax proposals:
- Incentives for businesses to hire and retain employees plus an additional round of economic recovery payments for individuals;
- An expansion of the Paycheck Protection Program (PPP), including a second round of PPP loans with restrictions, but without a fix to clarify that certain business expenses related to PPP loan forgiveness are deductible;
- New tax incentives to promote domestic production of personal protective equipment (PPE) and encourage repatriation of intangible property relating to medical PPE; and
- A temporary increase (to 100 percent) in the deduction for business meals until January 1, 2021.
The business incentives relate to the Employee Retention Tax Credit, the Work Opportunity Tax Credit, and a new refundable credit for certain business expenses incurred to protect employees from COVID-19. The bill also includes liability protections for health care workers, business owners, and employees; new spending for schools and coronavirus testing; greater flexibility for state and local governments to use funds already allocated in the CARES Act; and a pathway for ensuring the solvency of the Social Security and Medicare trust funds.
House and Senate leaders had been meeting daily with representatives of the Administration, including Chief of Staff Meadows and Treasury Secretary Mnuchin, until this past weekend to negotiate the differences between the HEROES Act and the HEALS Act, but both sides have currently indicated that an impasse exists. As a result, President Trump has now issued several executive orders on a variety of issues including a payroll tax deferral, payment of unemployment benefits, student loan debt forgiveness, and a moratorium on evictions, but there are questions about whether these executive orders are legal and can be enforced. The expectation is that the negotiations will resume this week, but it is clear that there are significant challenges to be faced in reaching agreement with the parties far apart on several of the key issues.
Treasury and the IRS
Tax Cuts & Jobs Act (TCJA) Guidance
GILTI/High Tax Exception/§954(b)(4): Treasury and the IRS on July 20th released the final regulations on the global intangible low-taxed income (GILTI) high-tax exception, which allow taxpayers to exclude certain high-taxed income of a controlled foreign corporation from their GILTI computation on an elective basis. The GILTI rules, which were enacted as part of the TCJA’s anti-base erosion regime, generally require a US shareholder of a controlled foreign corporation to include its GILTI in gross income. GILTI is determined based on complex calculations and deductions, and the TCJA provides that gross income excluded from foreign base company income or insurance income by reason of the high-tax exception under §954(b)(4) is not taken into account in calculating “tested income” for purposes of determining GILTI.
This guidance does not finalize the parts of the 2019 proposed regulations under §951, §956, §958, and §1502, which will be issued separately. The new regulations will take effect on September 21, 2020. Taxpayers can choose to apply the final rules to tax years beginning after December 31, 2017.
A separate set of proposed regulations, also released on July 20th, addresses the interaction of the subpart F high-tax exception with the GILTI high-tax exclusion. The proposed rules provide a single election to exclude high-taxed income under §954(b)(4) and set out related information reporting provisions for foreign corporations. The single election is modeled on the final GILTI regulations that were issued, and they aim to simplify the determination of high-taxed income. Comments are due by September 21, 2020.
GILTI/FDII Regulations/§250: Treasury and the IRS released on July 9th the final regulations under §250, related to deductions for Foreign-Derived Intangible Income (FDII) and GILTI, which were enacted in the TCJA. You can find a summary of the new rules in the following True Alert: IRS Finalizes Guidance on Sec. 250 Deduction for FDII & GILTI.
Final and proposed §163(j) regulations: On July 28th, the much-anticipated final regulations were released as well as a new set of proposed regulations under §163(j) related to the limitation on business interest expense deductions, which was enacted in the TCJA and amended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The IRS also issued FAQs on the aggregation rules for determining a taxpayer’s gross receipts in order to qualify for the small business exception. TPC will provide more details about this new § 163(j) guidance in a True Alert later this month.
Carried Interest per § 1061: Proposed regulations were released related to the treatment of partnership interests held in connection with the performance of services under §1061, which generally requires that partnership interests must be held for three or more years in order to receive capital gain treatment.
Additional Guidance under Review:
OIRA has announced that two TCJA guidance projects have been submitted for review by the Treasury Department:
- Final regulations addressing the deduction limitation for dividends received from certain foreign corporations and amounts eligible for the §954 look-through exception; and
- Proposed regulations coordinating the application of §245A and the GILTI rules under §951A.
COVID-19 Crisis Guidance & Related Issues
Paid sick and family leave: The IRS issued Notice 2020-54, which provides guidance to employers on the requirement to report the amount of qualified sick leave and family leave wages paid to employees under the Families First Coronavirus Relief Act (FFCRA) on Form W-2 or in a statement that accompanies the form. The guidance provides employers with model language adaptable for use in the Form W-2 instructions for employees. The notice also provides employees who are also self-employed with information necessary for properly claiming qualified sick leave-equivalent of qualified family leave-equivalent credits.
Also, the IRS issued temporary and proposed regulations on the recapture of excess employment tax credits under the FFCRA and the CARES Act. The rules provide that any amount of credits for qualified leave that is “erroneously refunded or credited to an employer shall be treated as underpayments of the taxes imposed by section 3111(a) or section 3221(a), as applicable, by the employer and may be administratively assessed and collected in the same manner as the taxes.”
NOL Guidance for Consolidated Groups under the CARES Act: The IRS issued proposed and temporary regulations that provide guidance about the absorption of a consolidated group’s net operating loss (NOL) carryovers and carrybacks, including rules for “split-waiver” elections. Split-waiver elections allow consolidated groups an option to waive a portion of a consolidated group’s NOL carryback to the extent that it is attributed to a newly acquired member and would be carried back to the seller’s pre-acquisition return. These temporary regulations allow companies to make split-waiver elections for NOL carrybacks permitted by the newly enacted rules under the CARES Act, which extended the carryback period for taxable years beginning after 2017 and before 2021, and also provide a framework for making these elections after future law changes. Comments are due by August 31, 2020.
The proposed regulations revise, consolidate, and “re-propose certain sections of proposed regulations issued in prior notices of proposed rulemaking relating to the absorption of consolidated net operating loss carryovers and carrybacks.” The rules also update regulations applicable to consolidated groups that include both life insurance companies and other companies to reflect statutory changes.
The IRS also added new FAQs regarding filing extension relief for Forms 1139 and 1045. The IRS clarified that Notice 2020-26 applies to consolidated groups.
Taxpayer Reliance on FAQs: The National Taxpayer Advocate’s blog addressed the issue of whether taxpayers should be allowed to rely on FAQs that are posted to the IRS website with nearly 500 FAQs having been posted to date in response to the COVID-19 pandemic. The NTA supports taxpayer reliance on the posted FAQs and stated that they should be considered IRS information in regard to avoiding accuracy related penalties should the IRS challenge a position during audit.
Transfer Pricing Agreements: An IRS agency official stated publicly that the IRS is taking a “wait-and-see” approach with respect to corporations that may need to renegotiate Advanced Pricing Agreements (APAs ) for their international income allocation due to the COVID-19 pandemic. The IRS is willing to talk to treaty partners about existing APAs, but their advice to businesses is to monitor the situation for now and then consider talking to the IRS.
Mid-Year Amendments to Safe Harbor 401(k) plans: The IRS issued Notice 2020-52, which provides temporary relief and other guidance to plan sponsors who want to reduce or suspend contributions to their safe harbor 401(k) plans. In recognition of the financial challenges from the COVID-19 pandemic, the Notice provides temporary relief related to certain mid-year amendments that reduce or suspend safe harbor contributions and guidance related to the reduction or suspension of contributions affecting only highly compensated employees.
Compliance Relief for Qualified Low-Income Housing: The IRS issued Notice 2020-53, which offers temporary relief from certain requirements under §42 for qualified low-income housing projects and qualified residential rental projects under §142(d) and §147(d).
Tax-Exempt Hospitals: Notice 2020-56 extends to December 31, 2020, the deadline for tax-exempt hospitals to comply with any Community Health Needs Assessments requirements that otherwise would have to be performed on or after April 1, 2020, and before December 31, 2020.
Other Issues and Guidance
Partnership Forms: The IRS issued new variants of draft Form 1065 for partnerships to use to report income in the 2021 tax year (for the 2022 filing season). The redesign is intended to provide “greater clarity for partners on how to compute their US income tax liability with respect to items of international tax relevance, including claiming deductions and credits.” The IRS states that: “The standard format of the new partnership schedules is designed to better align the information that partnerships provide on the schedules with the tax forms used by partners, allowing partners to more easily prepare their tax returns and the IRS to more efficiently verify taxpayer compliance.” Written comments on the new forms are due by September 14, 2020.
The IRS plans to propose similar changes to Form 1120-S (US Income Tax Return for an S Corporation) and Form 8865 (Return of US Persons with Respect to Certain Foreign Partnerships.)
Fee Rules for Tax Preparer ID Numbers: The IRS has issued final regulations on a fee change for paid tax return preparers obtaining or renewing mandatory ID numbers. The final rules set an annual fee of $21 for application or renewal, plus additional processing charges for third party vendors.
IRS Data Book: The IRS published the 2019 IRS Data Book, which summarizes tax filings, revenue collections, taxpayer services, enforcement activities, and agency operations. The IRS addressed the agency’s response to the COVID-19 pandemic.
Annual Dirty Dozen Tax Scams: The IRS issued a list of its annual “Dirty Dozen” tax scams with a focus on aggressive schemes related to COVID-relief, including the Economic Impact Payments. The IRS plans to release a similar list of enforcement and compliance priorities this year.
Crypto Currency Broker Rules: Treasury is working on proposed regulations dealing with the reporting requirements of cryptocurrency brokers under §6045, which requires brokers to file information returns with the IRS showing the gross proceeds from sales of certain securities and commodities. Treasury is aware that taxpayers and brokers are waiting for clarification as to whether §6045 applies to cryptocurrency, and a representative of the IRS has said that they may address classification issues, specifically whether crypto-currency should be classified as a security or commodity. The timeline for the release of these regulations, however, is unclear because the events of 2020 have affected the 2019-2020 IRS Priority Guidance Plan and resulted in this project being delayed.
National Taxpayer Advocate Plans for 2021: The National Taxpayer Advocate issued a report outlining its goals and activities planned for the 2021 fiscal year. The report includes several concerns about business-related tax incentives enacted in response to the COVID-19 pandemic, including the Employee Retention Tax Credit (ERTC), NOLs, and the PPP.
Limits on Depreciation Deductions for Passenger Vehicles: The IRS issued Revenue Procedure 2020-37, which provides guidance on passenger vehicle depreciation deductions reflecting inflation adjustments under §280F(d)(7).
OECD – Adoption of a Global Minimum Tax & Digital Taxation
Multilateral tax negotiations, which have been ongoing at the Organization for Economic Cooperation and Development (OECD) with the goal of producing a global agreement on the taxation of multinational corporations, including those that provide digital services, have been impacted by the COVID-19 pandemic. The 2020 timeline has been modified, but the deadline of producing an agreement continues to be the end of 2020.
The OECD has issued a report to the G20 Finance Ministers on its international tax compliance efforts under the BEPS project, including the taxation of digital commerce. The report predicts completion of “a detailed blueprint of Pillar One in October,” which would then be followed by a public consultation and a final round of negotiations. Pillar One focuses on multinational enterprises that conduct business in locations where they do not have a physical presence and would give countries a reallocation approach that would give taxing rights to jurisdictions where companies have customers but no physical presence. Pillar Two involves the introduction of a new global minimum tax. Recent comments by the OECD chief tax officer state that the intention continues to be to complete work on both Pillars by the end of the year.
The US has taken the position that the Pillar One approach should be optional, which is in conflict with several EU countries and has put into doubt whether agreement can be reached. The two Pillars operate independently, however, so agreement could be reached on Pillar Two, since there appears to be more consensus on that issue.
OECD – Other Issues
The OECD published final model reporting rules for sharing and gig economy platforms. The rules, which were approved by the OECD/G20 Inclusive Framework on BEPS, provide a new optional global tax reporting framework under which digital platforms would be required to collect information on the income realized by sellers offering accommodation, transport, and other personal services through their platforms. The model rules are designed to promote standardization of reporting between jurisdictions and help platforms comply with reporting obligations, but there is no requirement for jurisdictions to adopt the rules.
The Platform for Collaboration on Tax (PCT), which is a joint initiative of the IMF, OECD, UN, and the World Bank, is seeking feedback from the public on a draft toolkit designed to help developing countries build capacity in tax treaty negotiations. The PCT Secretariat is asking for comments on the discussion draft of the Draft Toolkit by September 10, 2020, with plans to release the final toolkit in early 2021.
The European Commission published its new tax package for fair and simple taxation to help EU member states secure tax revenues in the post-COVID environment. The three parts of the package are the Action Plan for fair and simple taxation supporting the recovery, a proposal to amend EU directive 2011/16 on administrative cooperation in the field of taxation in the EU (DAC) to include the exchange of information from online platforms (referred to as DAC 7), and a communication on tax good governance “in the EU and beyond.” The Commission also announced that it intends to explore whether tax legislation could be introduced using the ordinary legislative procedure, requiring a qualified majority instead of unanimity. The Action Plan is part of a more comprehensive and ambitious EU Tax Agenda which also includes a fundamental reform of the corporate tax system to fit the modern economy with increased digitalization, and measures against tax evasion and avoidance.
The EU’s General Court overturned the European Commission’s 2016 finding that tax breaks that Ireland granted to Apple gave it a competitive advantage, thereby nullifying the order that Apple repay Ireland $14.8 billion. The dispute centered on tax deals the company reached with Ireland in 1991 and 2007. In the Commission’s view, those deals allowed the company to allocate nearly all its sales profits to so-called head offices that existed only on paper and therefore could not have generated profits. The Commission in 2016 found that this treatment of Apple was illegal under state aid rules since it gave the company a “significant advantage” over other businesses subject to the same national tax rules. Both Apple and Ireland challenged the decision in court. EU Competition Commissioner Vestager said in a statement that the EU would “carefully study the judgment and reflect on possible next steps,” but she did not indicate whether the decision would be appealed to the European Court of Justice.
The UN Committee of Experts on International Cooperation in Tax Matters agreed to consider adding new provisions addressing the taxation of the digital economy to the UN Model Double Taxation Convention between Developed and Developing Countries. The Committee also adopted new and revised chapters for the United Nations Practical Manual on Transfer Pricing for Developing Countries and approved changes to the UN model tax treaty’s commentary.