Washington Tax Insight February 2020
Politics and Congressional Activity
2020 is an election year with both a Presidential election and Congressional elections this fall. Typically, in an election year, the window closes for significant legislation after the first quarter, and this year could follow that pattern especially once the Democratic primaries are in full swing. There are items on the agenda, however, and Congressional committees continue to work on issues such as data privacy, transportation reauthorization, prescription drug pricing, FY 21 funding, and taxes. Should Congress be unable to finish issues prior to the election, a lame duck session after the election could address some issues, including funding for the next fiscal year.
The Senate and House have both approved the US-Mexico-Canada Agreement (USMCA), and the President has signed it into law. This Agreement replaces the North American Free Trade Agreement (NAFTA). The Senate impeachment trial continues, preventing the Senate from considering legislation or other matters.
Tax Legislation in 2020
Generally, major tax legislation does not advance in a Presidential election year, but some votes on tax issues cannot be ruled out. Often, what happens is that any tax issues that are urgent or of great interest to Members of Congress are left until after the elections and dealt with in a lame duck session. The types of issues that might be dealt with this year include technical corrections to the Tax Cuts & Jobs Act (TCJA) and those extenders that are scheduled to expire at the end of 2020. Senate Foreign Relations Chair Risch (R-ID) would like to get more tax treaties approved in 2020 with three treaties still currently outstanding, including Hungary, Poland, and Chile. The focus primarily on major tax action could occur at the OECD and the discussions about a global minimum tax, which is discussed below. Historically, a major tax bill has often advanced in the first year of a presidential term, so it is expected that 2021 could see activity in Congress on tax issues.
House/Ways & Means Committee:
Ways & Means Committee Chair Neal (D-MA) has stated that he is willing to take legislation to the House Floor that would include some TCJA technical corrections in return for an expansion of the earned income tax credit (EITC) and the child tax credit, but thus far Republicans have said that these expansions are too expensive, citing the Joint Tax Committee (JCT) revenue estimate of $100 billion. The Committee Chief Tax Counsel Andrew Grossman also said at a recent Washington DC conference that Committee Democrats are willing to work with Committee Republicans on fixing technical errors to the TCJA, if the Republicans are willing to expand certain refundable low-income tax credits. One outstanding correction being discussed involves the so-called retail glitch that prevents retailers from immediately expensing the costs of building improvements. The JCT has identified more than 70 other technical corrections that should be considered.
House Speaker Pelosi (D-CA) and the chairs of several committees, including the Ways & Means Committee, released a Framework that outlines the broad goals for a forthcoming infrastructure spending bill. W&M Chair Neal (D-MA) stated that the plan does not include specifics about revenue sources so as to allow opportunity for bipartisan negotiations including with Treasury Secretary Mnuchin. There are a number of tax-related proposals in the bill related to: (1) reinstatement of the Superfund taxes; and (2) several infrastructure financing tools including bonds, tax credits and green energy proposals. The W&M Committee held a hearing on infrastructure funding issues on January 29th, and the Joint Tax Committee issued a report related to the hearing. The W&M Committee also held a hearing on January 28th on paid family and medical leave, although information on specific proposals was not released. Chair Neal (D-MA) also announced that the Committee will mark up legislation that would expand current-law tax incentives intended to promote energy efficiency, renewable energy, and a reduction in carbon emission, as well as implement new provisions to encourage the development and use of green energy technologies. Green energy legislation would likely pass in the Committee and in the full House but faces challenges in the Republican-controlled Senate.
The Administration is expected to release its proposed budget for FY 2021 on February 10th, which is one week after the statutory deadline. The State of the Union address is scheduled for February 4th. No information about possible tax proposals that might be included in the budget has been released.
President Trump announced that the White House will release within the next 90 days a middle-class tax relief proposal that would further build on the tax cuts included in the 2017 TCJA. The President discussed the “Tax Cuts 2.0” plan in an interview but offered no specifics nor did Treasury Secretary Mnuchin in similar comments. He suggested that the timing will align with the April 15th filing deadline, but also acknowledged that the proposal would not advance in Congress in 2020, serving instead as talking points for Republicans for the fall elections. National Economic Council Director Kudlow also has discussed the release of this type of proposal, and although he has not offered details, he did say that it is being developed in consultation with W&M Committee Ranking Republican Brady (R-TX).
Joint Tax Committee: The JCT released a list of temporary federal tax provisions that are currently scheduled to expire between 2020 and 2029. Of the more than 90 short-term deductions, credits, and incentives identified, 38 will expire in 2020, including tax incentives targeted at green energy property, fuels and vehicles. Another 27 provisions, which related mainly to individuals, estates, and passthrough entities, will sunset at the end of 2025.
The Wayfair Decision & State Laws
The Wayfair decision abolished the need for physical presence before states could require retailers to collect and remit sales and use tax, and as of the end of 2019, all but two states with a sales tax had implemented state legislation to deal with the decision. Nearly 40 states have adopted marketplace facilitator legislation as a companion to dealing with the Wayfair decision, but the implementing legislation has proven to be complicated for businesses. States now are likely to move from the educational phase to the compliance phase, but the lack of uniformity among the states is making things difficult for businesses, especially small business owners. Another interesting development is that states are starting to use the policy development of the Wayfair decision to apply to corporate income taxes also and have adopted an economic nexus standard in that case.
Treasury and the IRS
Tax Cuts & Jobs Act (TCJA) Guidance
The Treasury Department Acting Inspector General has confirmed that his office has opened an investigation into whether Qualified Opportunity Zone designations are being inappropriately awarded based on political rather than economic considerations. Press reports in recent months have suggested that undeserving Opportunity Zone designations have been awarded to projects funded by some prominent, wealthy investors. Those reports prompted Senator Booker (D-NJ), who has been a lead supporter of the program, and other members of Congress to send a letter to the Inspector General’s office asking for a review.
Senate Finance Committee Ranking Democrat Wyden (D-OR), along with other Democratic Senators, announced that they have launched an investigation into whether the Treasury Department drafted regulations implementing the TCJA’s international tax provisions in a way that provided “a windfall of tens, if not hundreds, of billions of dollars in additional tax cuts” to certain multinational corporations. The Senators sent a letter to Treasury Secretary Mnuchin noting the SFC’s “obligation to conduct oversight of the Trump administration’s implementation of the 2017 Republican tax law,” including “the extent to which closed-door lobbying influenced the process of drafting regulations and whether political appointees used an expansive understanding of their authority to provide additional billions in taxpayer giveaways to our nation’s wealthiest corporations.”
Treasury and the IRS have issued a significant amount of guidance on provisions of the TCJA, but there are a number of projects that remain outstanding. The IRS is expected to issue the first quarterly update to the 2019-2020 priority guidance plan soon. Some of the international provisions still awaiting further guidance include:
- Final regulations under Code sections 864(c)(8) and 1446(f) on gain or loss to foreign persons from the sale or exchange of an interest in a partnership engaged in a US trade or business
- Final regulations and other guidance under Code section 267A addressing hybrid transactions and hybrid entities
- Final regulations and other guidance on foreign tax credit issues under Code sections 901 and 960 and related provisions, including Code sections 78, 861, 904, and 905
- Regulations under Code sections 959 and 961 addressing previously taxed earnings and profits under subpart F
- Final regulations and other guidance under Code section 250 for the foreign-derived intangible income and global intangible low-taxed income deductions (GILTI)
- Final regulations and other guidance on Code section 951A’s GILTI provisions
- Final regulations and other guidance on the participation exemption in Code section 245A
- Regulations under several sections governing passive foreign investment companies (PFIC) including regulations addressing insurance income
Repatriation Tax Relief: The IRS issued an announcement that it had become aware of limited circumstances in which it may be appropriate to provide relief from double taxation resulting from application of the repatriation tax under Code section 965. The announcement gave some specific details but was “intentionally a little bit ambiguous” according to IRS Chief Counsel Michael J. Desmond. Code section 965 imposes a one-time tax of 15.5% for cash positions and 8% for other amount, on US shareholders’ share of a specified 10-percent-owned foreign corporation’s deferred earnings and profits. Final regulations were released in January 2019. Desmond said that the issues raised by taxpayers might not require significant changes to the regulations, but more limited relief might be possible. The announcement said that in unique circumstances, such as where a corporation paid an unusual dividend for business reasons, not because of the enactment of the TCJA, it may be appropriate to provide relief from double taxation. When the same earnings and profits of foreign corporations are taxed both as dividends and under Code section 965, double taxation could result. The IRS is open to considering relief from such double taxation where there is no significant reduction in the resulting tax by application of foreign tax credits, such that the taxpayer would be required to pay more tax than it would have if the dividend had not been paid.
Other Issues and Guidance
Sourcing Income from Sales of Personal Property: The IRS issued proposed regulations under Code sections 863 and 864 that would revise the rules for sourcing income from sales of inventory produced domestically and sold outside the US, or vice versa. The IRS explained that the guidance also includes “new rules for determining the source of income from sales of personal property (including inventory) by nonresidents that are attributable to an office or other fixed place of business that the nonresident maintains in the US.” There is also guidance on determining whether foreign source income is effectively connected with the conduct of a trade or business within the US.
Withholding for US Payments to Foreign Persons: The IRS issued final withholding and reporting rules for income payments from US sources to persons outside the US. The IRS explained that the regulations “provide guidance on certain due diligence and reporting rules applicable to persons making certain US source payments to foreign persons, and guidance on certain aspects of reporting by foreign financial institutions on US accounts.”
Applicability Dates for Built-In Gain/Loss: The IRS issued guidance that withdraws the proposed effective date in its previously proposed rules that provide guidance regarding the items of income and deduction for calculating built-in gains and losses under Code section 382. When these rules were proposed in September of 2019, they were to take effect for ownership changes occurring after the date the final regulations would be published in the Federal Register. This new guidance would delay the applicability of those proposed rules and provide transition relief for eligible taxpayers.
Alternative and Biodiesel Fuel Credits: The IRS issued Notice 2020-8 which provides guidance on how taxpayers can claim credits for biodiesel and renewable diesel mixtures, and alternative fuels under Code section 6426(c), 6426(d), and 6427(e). These credits, which had expired at the end of 2017, were retroactively reinstated in 2019 as part of the Further Consolidated Appropriations Act 2020, which included a package of tax extenders. The guidance covers claims for calendar years 2018 and 2019. The notice provides instructions for how a claimant may offset its Code section 4081 liability with the Code section 6426(e) alternative fuel mixture credit for 2018 and 2019 and provides instructions for how a claimant may make certain income tax claims for biodiesel, second generation biofuel, and alternative fuel.
Transfer to Partnerships with Related Foreign Partners: The IRS issued final regulations that provide guidance under Code section 721(c) for transfers of appreciated property by US persons to partnerships with foreign partners related to the transferor. The guidance explains that “when a US person transfers appreciated property to a partnership with a foreign partner related to the transferor, the regulations override the general nonrecognition rule unless the partnership adopts the remedial allocation method and certain other requirements are satisfied.” The IRS includes language citing ongoing concerns “that taxpayers may avail themselves of partnership to shift the tax liability, in whole or in part, with respect to earnings of a CFC attributable to subpart F income (within the meaning of section 952) or tested income (within the meaning of section 951A(c)(2)(A) and §1.951A-2(b)(1) to a related foreign partner that is not owned (within the meaning of section 958(a)) by a United States shareholder (within the meaning of section 951(b)).” Thus, the IRS is studying this issue including under what circumstances it may be appropriate to apply Code section 721(c) to a contribution of stock of a CFC to a partnership. Treasury and the IRS asked for comments on this issue.
Standard Mileage Rates for 2020: The IRS issued Notice 2020-5, which sets the optional 2020 standard mileage rates for use in computing the deductible costs of operating an automobile for business, charitable, medical, or moving expense purposes. The standard mileage rates for automobiles are: (1) 57.5 cents per mile driven for business use (down one half cent from the 2019 rate); (2) 17 cents per mile driven for medical or moving purposes (down 3 cents from the 2019 rate); and (3) 14 cents per mile driven in service of charitable organizations. Taxpayers continue to have the option of calculating the actual costs of using their vehicle rather than using these standard rates.
Restoration of Funds for AMT Credits: The IRS issued a news release stating that it will refund amounts affected by a determination by the Office of Management and Budget (OMB) to sequester certain funds since 2013 under Code section 168(k)(4). This determination has now been reversed. The IRS stated, “OMB determined that the refundable corporate minimum tax credit claimed under sections 53 and 168(k)(4) as in effect for taxable years beginning before January 1, 2018, is not subject to sequestration. The IRS has a complete list of all taxpayers affected so taxpayers do not need to take any action. Funds and applicable interest will be sent out during fiscal year 2020. Less than 1000 businesses were affected by the OMB determination. Funds due a company will be used to offset current tax liabilities first.”
IRS Form 1120-S and Form 1065: The IRS released new Instructions to IRS Form 1120-S, US Income Tax Return for an S Corporation. These changes conform to the new regulations that changed the qualified business income deduction, addressed qualified opportunity fund investments, and removed the AMT refundable credit. The IRS also released updated Instructions to Form 1065, Partner’s Share of Income, Deductions, Credits, etc., so that it complied with the new rules regarding the qualified business income deduction.
Guidance on Obtaining Private Tax Rulings: The IRS issued three revenue procedures that outline procedures for taxpayers that seek to obtain private letter rulings and technical advice memorandum covering tax issues, including international tax issues. This guidance is updated annually at the beginning of the year. Rev. Proc. 2020-1 contains revised procedures for letter rulings and information letters. Rev. Proc. 2020-2 contains procedures for technical advice memorandum. Rev. Proc. 2020-7 discusses international tax topics that the US government will not address by private ruling or memoranda.
LB&I Concept Practice Unit – FDAP income: The IRS released a Large Business and International Concept Practice Unit addressing payments of Fixed Determinable Annual Periodic (FDAP) income. The Unit focuses on the statistical sampling and projection procedures that IRS agents utilize when auditing a US withholding agent, focusing especially on one that has a large number of Forms 1042-S (regarding a foreign person’s US source income subject to withholding) or FDAP payments, whether or not those payments had been reported.
National Taxpayer Advocate Annual Report: The IRS National Taxpayer Advocate issued its annual report, including over 50 recommendations to Congress for legislative changes to improve taxpayer service and compliance. Some of the recommendations included are: (1) authorize the IRS to establish minimum competency standards for Federal tax return preparers; (2) adjust estimated tax payment deadlines to occur quarterly; and (3) require that at least one Appeals Officer and one Settlement Officer be located and permanently available in each state, the District of Columbia, and Puerto Rico.
Launch of the Gig Economy Tax Center: The IRS issued a news release announcing the launch of the Gig Economy Tax Center on IRS.gov, citing the various resources that will make it easier for taxpayers to find information about the tax implications for both the companies that provide the services and for the individuals who perform them. The IRS stated that many gig workers do not receive a W-2 or Form 1099 but are still expected to pay taxes on their income.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The OECD continues to work on a plan to tax digital commerce as part of the BEPS initiative along with a general discussion of global tax rules. The G20 leaders endorsed the plan developed by the Inclusive Framework on BEPS with the goal of a final report by the end of 2020.
The Inclusive Framework is scheduled to meet on January 29-30th for continuing discussions on Pillar 1 and Pillar 2, and an update will be delivered at the G20 finance ministers’ meeting in February.
The focus of discussion on Pillar 1 continues to be on the US proposal that the new global tax rules could be an optional safe harbor for companies. European officials, including the French Finance Minister Le Maire, are opposed to this idea and have said that it is a “deal-breaker” for them. Pascal Saint-Amans, who is the Head of the Center for Tax Policy and Administration at the OECD, has said that the US proposal will not be accepted politically by other negotiators, but he noted that it is still on the table and holding up the OECD progress on these issues.
In recent comments, Le Maire said that the US had “backed off” of its position of the new rules being an optional safe harbor, but this was later contradicted by Chip Harter, Treasury’s Deputy Assistant Secretary for International Tax Affairs, who said “The United States has not changed its position on this issue.” Harter stated that Le Maire’s announcement that the phrase “optional taxation” would not be included in the OECD plan is “reasonably precise,” but that the US still supports a “safe harbor.” He explained that Mnuchin believes that “if we offered the Pillar 1 package as a safe harbor that taxpayers could avail themselves of to get this greater administrability and certainty around the world in exchange for paying modestly more tax in the market jurisdictions, many would do so. And thus, a substantial portion of the goals of Pillar 1 could be achieved on that basis and it would make it much more feasible to get Congress to approve a multilateral agreement.” One of the stated concerns of the US negotiators is the possibility that countries will continue to impose unilateral digital taxes on companies even if global rules are agreed to, since OECD officials have acknowledged that they have no power to stop countries from doing so.
Individual Country Actions
France: France and the US continue to be at odds over the new French digital services tax with the US threatening tariffs. The French have agreed to repeal the tax once a global solution is reached at the OECD. French Finance Minister Le Maire has confirmed that President Trump and President Macron agreed to take both the tax and tariffs off the table in 2020, while a global deal is progressing thereby halting any escalation of the disagreement.
Canada: PM Trudeau included a digital tax as part of his re-election campaign in 2019, but now that he is in office, he appears willing to move slowly on advancing it.
SFC Chair Grassley (R-IA), and Ranking Democrat Wyden (D-OR) issued a joint statement supporting the reported agreement between Presidents Trump and Macron. The statement said that “if reports are accurate, we’re pleased that the United States and France have come to an agreement that would postpone a discriminatory tax on American technology companies until the multilateral process is completed. We urge other countries that have proposed digital services taxes to follow suit. The multilateral OECD process offers the greatest potential for long-term success in resolving complex tax issues created by digitalization. We will continue to support that effort.”
SFC Chair Grassley (R-IA) told reporters that he believes the continuing enactment of individual country digital taxes illustrates the need for a global solution suggesting that additional tariffs could result. W&M Committee Chair Neal (D-MA) met with the European Commissioner for Trade in Washington about the issue as did Ranking Republican Brady (R-TX).
The UK & Brexit
The United Kingdom was originally scheduled to leave the European Union on March 29, 2019 but was granted several extensions with the leaving date set for January 31, 2020. The Conservative Party secured a substantial majority in December 2019 elections, which led to the approval by Parliament of the withdrawal agreement that had been agreed to with the EU. This withdrawal agreement includes a transition period, during which the UK must abide by all EU rules but will also enjoy all benefits except for involvement in EU institutions, until the end of 2020. Discussion will be held between the UK and the EU on the future relationship, including trade agreements, that will apply after the transition period ends on December 31, 2020 (unless it is extended).
The European Parliament is gave its consent to the withdrawal agreement on January 29th, and the European Council followed on January 30th. The European Commission will adopt a comprehensive draft negotiating directive on February 3rd. For the rest of this year, the Court of European Union will continue to have jurisdiction over the UK, and the UK will remain in the EU customs union and single market with “all four freedoms” of goods, capital, services, and persons.
There has been some speculation on some key tax issues and how they will be resolved going forward. With respect to VAT, the ultimate outcome is uncertain, but there is an expectation that the UK system will deviate from the EU rules. This could produce increased administrative work for multinationals who would have to deal with additional filings, two sets of rules, and possible red tape at borders. One example that has been given is that because the UK would be treated as a non-EU country, companies would have to pay an import VAT when goods arrive at the UK border, rather than on their VAT returns.
Another issue deals with the potential loss of withholding tax exemptions. Currently, companies in the UK can benefit from an EU law that provides a withholding tax exemption for payments of interest, royalties or dividends among affiliated companies within the EU. It is unclear whether a deal will be reached to retain this exemption. Most of the UK’s tax treaties with EU countries reduce the withholding tax rate to zero, but that’s not the case for all of them, which means that UK companies receiving payments from affiliates in an EU country without this treaty provision could have to account for the withholding tax. Some commentators have suggested that the UK budget which is scheduled to be released on March 11th could give some idea of what changes may be coming.
The OECD released additional interpretative guidance on country-by-country reporting that clarified that countries do not need to automatically exchange local reports on multinational groups to meet Action 13 minimum standards developed by OECD and G20 countries in 2015 as a result of the BEPS plan. The OECD also posted a summary of country-by-country reporting notification requirements in Inclusive Framework countries.
A group of nine EU countries is close to reaching an agreement on a financial transactions tax under a procedure called “enhanced cooperation.” Agreement per that procedure means that the tax would become EU law but apply only to those countries that agree to it. The 9 countries include Germany, Belgium, France, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain. Austria originally was part of the group but has now said that they do not support the current proposal, and they plan to leave the group unless a new approach is adopted. France and Italy already have financial transaction taxes. The EU first introduced a financial transaction tax proposal 8 years ago with the goal of enhanced cooperation.
The US has recently reacted to reports that the EU is considering a carbon border tax, indicating that the US will take action if such taxes are enacted and are protectionist. The new EC president has made the issue of climate change and taxing climate imports a top priority.
Individual Country Tax Reform
France: On December 19, 2019, the French Parliament approved the Finance Act for 2020, which includes corporate tax measures that are designed to incorporate into French law certain EU-compliant measures related to the EU anti-tax-avoidance directive from 2016 and modified in 2017. They also postponed the scheduled reduction of the corporate income tax. Most of the measures apply for tax years beginning on or after January 1, 2020, and impact multinational companies that have French operations or subsidiaries.
Colombia: On December 27, 2019, the Colombian Executive Branch signed into law the tax reform passed by the Colombian Congress in December 2019 with an effective date of January 1, 2020. The law mirrors most of the provisions included in the 2018 tax reform that was ruled unconstitutional by the Colombian Constitutional Court.