Washington Tax Insight February 2022
Politics and Congressional Activity
After a short January recess, Congress has returned to a long list of items to address, including some that have specific deadlines to meet. The current Continuing Resolution that is funding the federal government expires on February 18th, making it the highest priority item for Congress. Legislation addressing US trade and China competition is important to the White House with a Senate-approved version and a House-approved version that must now go to a conference committee to reconcile the differences. The White House would like this legislation to be completed prior to the State of the Union Address on March 1st. Congress failed to complete action on the Build Back Better Act (BBBA), which continues to be a high priority for Democrats, and some Democrats are using the March 1st date as a proposed deadline for completing action on the BBBA.
Senate Democratic leadership has failed thus far to achieve agreement on voting rights legislation, but there is bipartisan activity ongoing with respect to legislation to make changes to the Electoral College process. Finally, the Senate is preparing to consider the Administration’s nomination for a seat on the Supreme Court to replace Justice Stephen Breyer who announced his retirement. President Biden plans to send his nomination to Congress by February 18th.
With important mid-term elections in November, it will be challenging for Congress to complete action on many of these issues. In an election year, Congress typically takes a very long August recess so members can return home to their districts, but they also have recesses scheduled in February, April, and over the Memorial Day and 4th of July weekends as well as party issue conferences in March. Congressional leadership can shorten recess periods, but that would keep incumbents off the campaign trail in a year when Democrats will be fighting to maintain control of both the House and Senate.
Funding for Fiscal Year 2022
The House has approved a short-term continuing resolution (CR) that would extend government funding through March 11th. The Senate is expected to pass the measure this week of February 14 before sending it to President Biden to be signed into law, which would avert a government shutdown that otherwise would occur when the current stopgap appropriations measure funding government operations expires on February 18. This is the third short-term appropriations measure in fiscal year 2022, which began on October 1 of 2021.
The Build Back Better Act
On November 19th, the House approved the BBBA, H.R. 5376, by a vote of 220-213 along party lines. The BBBA is now being considered by the Senate, but action has stalled due to opposition from Senator Manchin (D-WV) to several parts of the bill. The $1.7 trillion bill includes a package of targeted individual tax relief provisions, clean energy incentives, and increased spending on healthcare, education, childcare, and other programs.
On December 11th, Senate Finance Committee (SFC) Chair Ron Wyden (D-OR) released text of the tax section of the bill with changes to several provisions in the House bill. For a discussion of the SFC draft, please see this True Insight. Although discussion of the BBBA continues, serious negotiations appear to be moving slowly with no current deadline for completing the bill.
A group of House Democrats sent a letter to the White House to push for final action on the BBBA in order to get approval of significant funding for climate change. The House-approved version of the BBBA includes $555 billion in funding for climate initiatives, including several incentives for clean energy. SFC Chair Wyden in recent comments identified the clean energy incentives as a key part of any revamped BBBA bill in the Senate.
For more information about the process and timing of this legislation as well as a summary of the provisions in the House-approved bill affecting individual taxpayers, please see this True Insight. For a detailed summary of the provisions of the House-approved bill 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.
New COVID-Relief Legislation
Democrats in both the House and Senate are discussing the possibility of proposing a new round of tax incentives designed to help businesses and workers deal with the effects of the pandemic. The discussion suggests that this legislation could move separately from the BBBA, possibly being included in an omnibus spending bill for FY 2022 (discussed above). Targets of this relief include restaurants, hotels and other small businesses with some talk of a revamped employee retention credit and additional funds for the Restaurant Revitalization Fund. Other possible beneficiaries could be businesses that have been severely impacted by supply chain issues, while there may be additional money for pandemic testing and schools. The White House is expected to send a supplemental request to Congress for emergency funds.
House/Ways & Means Committee
New Committee Member: Congressman Greg Murphy (R-NC) will take the place of Congressman Devin Nunes (R-CA) on the Committee, since Nunes left Congress in December 2021.
2022 Agenda: In the months before the mid-terms, the Committee is expected to spend time on efforts to advance a bipartisan package of retirement-related proposals. This agenda item would build on the Securing a Strong Retirement Act of 2021 (SECURE) with proposals related to 401(k) and 403(b) plans. There is also interest in working on some of the tax extenders, including the expensing of R&D costs and the treatment of the interest deductions related to business loans.
Senate Finance Committee
Investigation into Opportunity Zone Program: SFC Chair Wyden (D-OR) announced that he has opened an investigation into potential misuse of the Opportunity Zone Program, and that he has sent letters to seven companies seeking information on their investments in the program. His letter requested a reply by February 3rd that included a list of all the projects their opportunity funds are invested in, explanations describing how and when they conceived of such projects, and detailed information about their real estate-related projects.
The White House
Infrastructure Guidebook Released: The White House released guidelines for state, local, tribal, and territorial governments for implementation of the infrastructure law. The guide breaks down the funding available at the program level as well as grant authority qualifications.
US Cryptocurrency Policy: The Biden Administration is preparing to release an initial government strategy for digital assets in the next month, which will assign tasks to federal agencies to assess the risks and opportunities that these assets present. It will be drafted as an executive order, and it will establish the White House as the center of this issue while various agencies handle economic, regulatory, and national security issues.
Joint Tax Committee Report on Tax Extenders: The Joint Committee on Taxation (JCT) issued its annual report listing nearly 100 temporary tax provisions that have expired or will expire over the 10 year period of 2021-2031. Several of these provisions expired at the end of 2021, including the child tax credit.
Treasury and the IRS
IRS to hire 200 attorneys to target abusive tax transactions: The IRS plans to hire 200 additional attorneys nationwide to address “abusive tax schemes” such as conservation easements and micro-captive insurance arrangements. These attorneys will provide legal advice during audits, handle cases in the Tax Court, and serve on trial teams.
Issues and Guidance
Passive Foreign Investment Companies (PFICs): On January 25, 2022, the IRS and Treasury published proposed regulations that provide guidance to domestic partnerships and S corporations that own shares of PFICs. The new guidance would treat US partners, instead of their partnerships, as PFIC shareholders for making qualified electing fund (QEF), mark-to-market (MTM), or purging elections, recognizing QEF or MTM income, applying the controlled foreign corporation (CFV) overlap rule, and filing Forms 8621 (PFIC information returns). Partners would be required to notify the partnership of their election. The proposed regulations would apply from the date they are finalized, and would not nullify previous partnership-level elections.
The proposed rules also provide guidance on: (1) the controlling domestic shareholders of foreign corporations; (2) the owner of a CFC or QEF that makes an election under Section 1411; (3) the treatment of S corporations with accumulated earnings and profits; and (4) the determination and inclusion of related person insurance income under Section 953(c).
Aggregation Rules for Determining Stock Ownership: On January 25, 2022, the IRS published final regulations on the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations. These final rules treat domestic partnerships as aggregates of their partners for purposes of determining income inclusions under Section 951.
Automatic Consent List for Accounting Changes: The IRS released Revenue Procedure 2022-14, which includes an updated list of accounting method changes for which the agency will provide its automatic consent. Section 446(e) requires taxpayers to obtain the consent of the IRS before changing a method of accounting for federal income tax purposes.
IRS Test Program for Expedited Letter Rulings: The IRS issued Revenue Procedure 2022-10, which announces a new 18-month pilot program that is designed to fast-track certain letter ruling requests that fall solely or primarily under the jurisdiction of the Associate Chief Counsel (Corporate). The new program is scheduled to run through July 14, 2023, or when a superseding revenue procedure is released. The pilot program is the result of several taxpayer comments regarding the time it takes to receive a PLR. Taxpayers who want to participate must first request a pre-submission conference and provide the required information. Next, the taxpayer must draft the PLR request, which involves fulfilling normal PLR request requirements, along with including the taxpayer’s reasons for seeking fast-track processing, The intention is that the IRS will process these requests in 12 weeks.
Research & Development FAQs: On January 5, 2022, the IRS issued a set of FAQs on a change in IRS policy on refund claims for the Research and Development Credit under Section 41 that were filed on amended returns. The IRS originally announced the new policy in an October 15, 2021, Chief Counsel Memorandum (R&D Memo). The R&D Memo imposed a new set of requirements for a valid administrative refund claim for the R&D Credit that significantly increased the amount of information required. With this new guidance, the IRS has also extended the period of time allowed to correct errors or provide complete information on their applications to 45 days (up from 30 days). The IRS then released additional FAQs on this issue on February 9, 2022. This guidance includes information about how to provide five required items of information when the claim relates to a research credit from a pass-through entity, whether taxpayers filing electronically must include the information in electronically filed amended returns, and whether taxpayers can challenge determinations that their research credit refund claims are not valid with the agency’s Independent Office of Appeals.
IRS No Ruling List and other Procedural information: The IRS issued Revenue Procedure 2022-07, with the annual list of areas under the jurisdiction of the Associate Chief Counsel (International) on which the IRS will not issue letter rulings or determination letters under any circumstances, as well as those areas in which it will issue letter rulings only when there are unique and compelling reasons for doing so. The IRS issued Revenue Procedure 2022-01 which provides guidance on letter rulings, determination letters, information letters, and other guidance under the jurisdiction of associate chief counsels. The IRS issued Revenue Procedure 2022-03 which lists areas under the jurisdiction of the Associate Chief Counsels (Corporate, Financial Institutions and Products, Income Tax and Accounting, Passthroughs and Special Industries, Procedure and Administration, and Tax Exempt and Government Entities) for which the IRS will not issue letter rulings or determination letters. The IRS issued Revenue Procedure 2022-02 covering procedures on (1) when and how an Associate office provides technical advice, conveyed in a technical advice memorandum (TAM), and (2) the rights of taxpayers when a field office requests a TAM regarding a tax matter.
Filing Season 2022: The IRS started accepting individual tax returns on January 24, 2022, for the 2021 tax year. Tax returns are due on April 18th (except in Maine and Massachusetts, where they are due on April 19th).
Child Tax Credit Filing Procedure and FAQs: The IRS issued Revenue Procedure 2022-12 which simplifies filing procedures for those claiming the child tax credit, 2021 recovery rebate credit or earned income credit who are not otherwise required to file a tax return. The IRS released an updated set of frequently asked questions (FAQs) on the child tax credit for the 2022 filing season. The FAQs include information on eligibility and reconciling advance credit payments with claiming the credit on tax returns for 2021.
Recovery Rebate Credit FAQs: The IRS released FAQs on the 2021 Recovery Rebate Credit. Individuals who did not qualify for, or did not receive, the full amount of the third Economic Impact Payment may be eligible to claim the 2021 Recovery Rebate Credit based on their 2021 tax year information.
Low-Income Housing Credit: The IRS issued Notice 2022-05, adding to relief provided in Notice 2021-12, by including a carryover deadline extension. The notice extended the deadline for carryover allocation to meet the 10% test two years from the original deadline for those whose original deadline was between April 1, 2020, through December 31, 2020, and the end of this year for those whose deadlines fall on or after January 1, 2021. It also changed the window for rehabilitation expenditures and placement of low-income into service.
CCA on Anti-Abuse Rule Applicable to US Parent’s Financings to Repatriate Money from CFCs (Section 956): Chief Counsel Advice (CCA) was issued on January 21st detailing a case where a US parent had a principal purpose of avoiding Section 956 when it structured the repatriation of funds through several CFCs.
Chief Counsel Memorandum on “Tax Equalization” Programs: A Chief Counsel Memorandum was issued on a case related to the “tax equalization” programs, which stated that an employer cannot get a subsequent refund of withholding taxes it pays under special arrangements often used for employees working in foreign countries. Under the arrangement, the pay for an employee working overseas is reduced if the foreign assignment has the effect of increasing an employee’s tax liability. In exchange, the employer pays the employee’s tax withholding out of its own funds rather than deducting it from the employee’s wages.
Internal Revenue Manual Guidance on the CARES Act Deferrals of Employee Social Security Taxes and the Early Termination of the Employee Retention Credit (ERC): A revision was made to Internal Revenue Manual 10.1.4, Failure to Deposit Penalty, that would add guidance on Social Security tax deferment and early termination of the ERC.
IRS Audit Technique Guide on Auditing Attorneys: An Audit Technique Guide was issued that outlines information to enable examiners to effectively audit issues pertaining to attorneys. The Guide covers areas that may be unique to attorneys, such as the collection of fees on a contingency basis.
IRS Practice Unit: The IRS issued a Practice Unit on an overview of the Section 245A Dividends Received Deduction. Section 245A allows certain domestic corporations that are US shareholders to claim a 100% dividends received deduction for the portion of foreign income received from “specified 10%-owned foreign corporations.”
IRS Guidance on Corporate Spinoffs: The IRS is considering major changes to expected corporate spinoff proposed rules as a reaction to two recently announced transactions involving GE and J&J and the spinoff of major business units. Under Section 355, the IRS will consider how to simplify and clarify what taxes are owed, if any, when companies want to divest businesses. For example, a senior IRS official said that they are looking at simplifying the “per se” tests, which would determine if a spinoff is tax-free or not.
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.
United States: The US already has its own minimum tax—GILTI—that differs from Pillar Two in some key ways, such as calculating a company’s effective tax rate globally rather than in each country. The BBBA international tax provisions would bring GILTI closer in line with Pillar Two. If the BBBA is not approved this year, agreement on these changes may become more difficult especially if the Republicans gain control of either the House or Senate or both. It isn’t clear how Republicans might change the legislation on these issues, and some have suggested that the US should not change its minimum tax rules until other countries have first acted on the OECD rules in order to prevent US companies from being disadvantaged.
With respect to Pillar One, it is unclear whether implementing those rules, which would allocate corporate profits more based on where a company’s sales are located, would require changes to existing tax treaties. Treasury has said they are seeking input on this issue from both Democrats and Republicans.
European Union: The EU has put forward a draft directive on a minimum tax law under Pillar Two. It is due to present a law on Pillar One covering the reallocation of taxing rights this summer. Several EU finance ministers have expressed their concern about the goal of implementing Pillar Two by 2023, since they believe that putting a minimum tax into place in all countries may not be possible, although there appears to be broad support for the December 2021 EU Directive on the minimum tax.
OECD – Miscellaneous
Harmful Tax Regime List: The OECD’s Forum on Harmful Tax Practices reviewed the tax regimes of six jurisdictions that have been carried on its list of harmful tax regimes and has concluded that five of the regimes are no long harmful or were in the process of being amended. The jurisdictions affected include Hong Kong, Lithuania, Qatar, Mauritius, and Costa Rica. Only Albania’s software industry incentives are still under review.
Transfer Pricing Guidance: The OECD released updated transfer pricing guidelines, which set out a standard approach for governments to apply when reviewing how multinationals value transactions between their entities. The new guidelines consolidate earlier revisions to separate pieces of guidance, including how to use a method for splitting profits and how to handle hard-to-value intangible assets. The nearly 700-page document incorporates revisions the OECD issued in 2018 to address the profit split method.
Code of Conduct: European Commission tax official Benjamin Angel stated at a recent business group meeting that he is confident that EU countries will agree on reforms to the Code on Conduct on Business Taxation in 2022, although member states failed to agree in 2021. The failed initiative that was presented in 2021 is being revised to reflect the European Commission goal of looking at the general structure of a country’s tax system rather than just specific tax measures.
New Domestic Minimum Tax: The British government has said that it is exploring the idea of imposing a domestic corporate minimum tax that would effectively steer tax revenues from the low-taxed profits of UK entities into the UK treasury, so as to avoid those revenues being lost to another country under the new OECD global minimum tax regulations. In a consultation document, HM Treasury said that this type of domestic minimum tax would go beyond what would be required under the Pillar Two rules.