Washington Tax Insight January 2020
Happy New Year!
Politics and Congressional Activity
Prior to adjourning for the year, the House and Senate both approved a $1.37 trillion spending bill, which the President signed, thereby avoiding a government shutdown. This bill includes a number of tax provisions that were agreed upon, including retirement legislation, extenders, disaster-relief provisions, and health-related tax issues, with a revenue cost estimate of $426 billion over 10 years. The House returns to work on January 7, 2020, and the Senate on the 3rd.
The issue of funding for a border wall was “resolved” by leaving the funding static for the next year at $1.4 billion instead of the $8.6 billion the President requested, but no language is included that would prevent the President from shifting funds from other accounts. There was a last minute veto threat from the White House over language that would have required prompt release of funding to Ukraine with the language ultimately dropped.
The House approved two articles of impeachment against President Donald Trump with a Senate trial expected to take place in early 2020. The House voted to approve the new trade deal between Mexico, Canada and the United States, but Senate action is not yet scheduled.
Speaker Pelosi (D-CA) invited the President to deliver his State of the Union address on February 4, 2020, one day after the Iowa presidential caucuses.
Year-End Tax Legislation
As noted above, prior to adjourning for the year, Congress approved a major spending bill with a number of tax provisions being included in the final package. The President signed the legislation.
The Joint Tax Committee estimates that the bill’s tax provisions would reduce federal revenue by more than $426 billion over 10 years. The legislation does not include revenue offsets sufficient to offset the entire cost of the bill. The House waived its “pay-as-you-go” budget rules in order to advance the legislation.
Because the tax extenders run only through the end of 2020, these issues will be faced again next year along with consideration of some of the major provisions from the TCJA that expire in the near term including the treatment of R&D expenses, limits on business interest, 100% expensing, and the individual and pass-through provisions that are due to sunset in 2025.
Retirement Legislation: The bill includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which had been approved by the House in May but never considered by the Senate due to the objections of a handful of Senators, would make a number of improvements to individual and employer-sponsored savings plans. The legislation is aimed at making it easier for smaller businesses to offer tax-qualified retirement savings plans to their employees, encouraging individuals to participate in retirement plans, and promoting savings for certain nonretirement expenses. The revenue cost of these provisions is partially offset by several revenue raisers including one that would accelerate distributions of retirement account assets in certain cases after an account holder’s death (“stretch IRAs”).
Health-related tax issues: The bill repeals the Affordable Care Act’s “Cadillac tax” on high cost employer-sponsored health coverage, the 2.3% excise tax on medical devices, and the fee imposed on providers of health insurance.
Extenders: The bill includes an extension of 34 tax provisions generally through 2020, including the Work Opportunity Tax Credit, the look-through rule for related controlled foreign corporations, the employer credit for paid family and medical leave, the New Markets tax credit, and tax incentives for biodiesel and other green energy production and transportation provisions. Some of these provisions had expired in 2017 or 2018, while others were to expire at the end of 2019. The bill does not include a revenue offset for the extender provisions.
Technical corrections: The majority of technical corrections were not included in the bill except for the repeal of a provision from the TCJA related to the tax treatment of parking benefits offered to employees by churches and other nonprofit organizations, and a “glitch” in a TCJA provision regarding the tax-exempt status of certain grants to rural electric cooperatives. The bill also repeals—as part of the SECURE Act — a change to the so-called “kiddie tax.”
Disaster Tax Relief: The bill provides targeted, temporary tax relief to individuals and businesses in areas in which a major federal disaster was declared during the period running from January 1, 2018 through 60 days after the bill’s enactment date. The provisions are generally effective upon enactment, and they are not offset, reducing federal revenues by $12.76 billion over 10 years.
House/Ways & Means Committee
The House approved legislation that would levy a significant excise tax on drug manufacturers if they do not engage in negotiations with the federal government on the pricing of prescription drugs. The bill will be sent to the Senate for action, but that chamber is considering a different approach to prescription drug pricing. HR 3 would require manufacturers of specific drugs to negotiate with the Department of Health and Human Services on drug prices or pay an excise tax on the sales of those drugs starting at 65 percent of the price of each sale and phasing upwards to a maximum of 95 percent for additional periods of noncompliance. Drug manufacturers would not be able to deduct excise tax payments in determining their income taxes.
Senate/Senate Finance Committee
Senator Ben Sasse (R-NE) has been selected to take a seat on the Senate Finance Committee when Congress returns in 2020 as the replacement for Senator Johnny Isakson (R-GA), who is retiring mid-session for health reasons.
Joint Tax Committee
The Joint Committee on Taxation (JCT) staff on December 19 released its estimate of federal tax expenditures for fiscal years 2019-2023. Cost estimates are based on tax legislation enacted as of September 30, 2019. Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 as “revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” The JCT provides cost estimates for these provisions to “help both policymakers and the public to understand the actual size of government, the uses to which government resources are put, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation.”
State and Local Tax (SALT) Deduction Cap
The House approved legislation by a close vote of 218-206 that would temporarily raise and then eliminate for two years the $10,000 cap on state and local tax (SALT) deductions. Five Republicans supported the bill, and sixteen Democrats voted against it. The Ways & Means Committee-approved version of the bill would have suspended the deduction cap for all taxpayers for 2020 and 2021, but a last minute amendment was added that would retain the current-law cap for taxpayers with AGI over $100 million. The legislation will now be sent to the Senate, but it is not expected to advance there.
Treasury and the IRS
Tax Cuts & Jobs Act (TCJA) Guidance
Base Erosion and Anti-Abuse Tax (BEAT) – Final and Proposed Regulations: The IRS issued final and proposed regulations implementing Code section 59A, which imposes the new base erosion and anti-abuse tax (BEAT). The BEAT operates as a minimum tax on certain large corporations with deductions paid or accrued to foreign related parties that are greater than 3 percent of their total deductions (two percent in the case of certain banks or registered securities dealers). The final rules provide guidance regarding which taxpayers are subject to Code section 59A, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount, and the required BEAT resulting from that calculation. Senior Treasury officials have stated that the final rules include an exception for when a US corporation purchases a depreciable or amortizable asset from a foreign related party in a transaction that qualifies as a tax-free transaction for regular tax purposes. They also noted that the final rules simplify the BEAT calculation in cases where there are multiple US taxpayers in a group.
Foreign Tax Credit Rules: The IRS released final regulations that provide guidance on determining the foreign tax credit in light of changes made by the TCJA. The rules also finalize proposed regulations on overall foreign losses that were published on June 25, 2012, and they finalize certain parts of proposed regulations published on November 7, 2007, relating to a US taxpayer’s obligation to notify the IRS of a foreign tax redetermination. The IRS also released proposed regulations that provide guidance on the “allocation and apportionment of deductions and creditable foreign taxes, the definition of financial services income, foreign tax redeterminations, availability of foreign tax credits under the transition tax, and the application of the foreign tax credit limitation to consolidated groups.”
Per-Diem Rules for Travel: The IRS issued Revenue Procedure 2019-48, which updates the rules for per diem rates, rather than actual costs, to substantiate expenses for lodging, meals, and incidentals for business travel away from home. The guidance clearly states that the TCJA “amended prior rules to disallow a deduction for expenses for entertainment, amusement, or recreation paid or incurred after Dec. 31, 2017.” The IRS explains that otherwise allowable meal expenses remain deductible if the food and beverages are purchased separately from the entertainment, or if the cost of the food and beverages is stated separately from the cost of the entertainment. Notice 2019-55 provides the rates that have been in effect since October 1, 2019.
Rules Limiting Executive Compensation Tax Benefits: The IRS issued proposed rules under Code section 162(m) on the limit for the deduction for employee remuneration above $1 million in a taxable year. Code section 162(m) was amended by the TCJA to repeal the performance-based compensation and commission exceptions, modify the definition of “covered employee,” and expand the definition of “publicly held corporation.” A public hearing is scheduled for March 9, 2020.
SALT Deduction Rules: The IRS issued proposed regulations under Code sections 162, 164, and 170 regarding the $10,000 cap on state and local tax (SALT) deductions. The new guidance updates the regulations under Code section 162 to reflect current law related to a taxpayer that makes a payment or transfer to an entity described in 170(c) for a business purpose and provides certain safe harbors with respect to such payments.
Opportunity Zones Guidance: The IRS issued final regulations under Code section 1400Z-2 on opportunity zones, which provide tax benefits to taxpayers who invest in certain specified distressed localities. Qualified investors can temporarily defer tax on capital gains that are reinvested in a Qualified Opportunity Fund (QOF) until the date the QOF investment is sold or exchanged, or December 31, 2026, whichever is sooner. The investor may qualify for a permanent exclusion of capital gain if the investment is held for at least ten years.
The new regulations instruct taxpayers on electing opportunity zone benefits regarding certain equity interests in a QOF. The IRS explains that the rules address comments received on previously proposed rules and “provide additional guidance for taxpayers eligible to elect to temporarily defer the inclusion in gross income of certain gains if corresponding amounts are invested in certain equity interests in QOFs, as well as guidance on the ability of such taxpayers to exclude from gross income additional gain recognized after holding those equity interests for at least 10 years.” The rules also cover the requirements for an entity to qualify as a QOF, including those that must be met to qualify as a qualified opportunity zone business.
Treasury officials described the new rules as taxpayer-friendly, as did several Congressional supporters and the Economic Innovation Group. Interesting points about the guidance include the fact that more time is given for investors to give and opportunity funds to deploy money as well as some changes with respect to brownfield sites, where redevelopment may be complicated by pollutants.
Other Issues and Guidance
Dividend Equivalents: The IRS issued final rules for certain financial products providing for payments that are contingent upon or determined by reference to US source dividend payments. Issued under §1.871-15, the final rule defines the term “broker” for purposes of Code section 871(m). The IRS also issued Notice 2020-02, which provides additional guidance for complying with its regulations under Code sections 871(m) and extends the transition relief provided in Notice 2018-72 for two years.
Distributions in Corporate Spin-Offs: The IRS issued final regulations under Code section 355(e) and section 355(f) on distributions by a corporation of stock or securities of a controlled corporation without the recognition of income, gain, or loss. According to the IRS, the rules generally adopt the approach in its 2016 Proposed Regulations “with limited modifications.” Specifically, the final rules provide guidance “in determining whether a corporation is a predecessor or successor of a distributing or controlled corporation for purposes of the exception under section 355(e) … to the nonrecognition treatment afforded qualifying distributions.” They apply to distributions after December 15, 2019.
Partnership Capital Reporting Rule: The IRS issued Notice 2019-66, which provides a one-year delay in the requirement that partnerships report partner shares of partnership capital on the tax basis method. For this year, partnerships and others must continue to report partner capital accounts “consistent with the reporting requirements in the 2018 forms and instructions, including the requirement to report negative tax basis capital accounts on a partner-by-partner basis.” The Notice also provide relief from certain penalties.
Foreign Currency Guidance: The IRS issued Notice 2019-65, which announces forthcoming changes to its foreign currency regulations under Code section 987. The IRS stated it will amend parts of its 2016 final regulations and 2019 final regulations regarding the determination of gain or loss “to apply to taxable years beginning on or after the first day of the first taxable year following December 7, 2020 (the amended applicability date).” Prior to the IRS proposing amendments to the regulations, taxpayers may rely on the provisions of Notice 2019-65 regarding the proposed changes.
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.
Program of Work
Pillar 1: The Public Consultation was held on November 21-22 on the Pillar One document. Treasury Secretary Mnuchin sent a letter to OECD Secretary General Gurria that has created some uncertainty for the OECD project. The letter stated that the US believes broad agreement on the framework is important to prevent the proliferation of unilateral proposals, but that there are “serious concerns regarding potential mandatory departures from arm’s-length transfer pricing and taxable nexus standards,” which are key elements to the Pillar One proposal. Mnuchin suggested the possibility of making Pillar One a safe harbor regime, which would allow companies to decide whether to follow the new rules or existing rules. The Secretary General responded that this idea could push back the completion date of the project. The OECD intention is to reach agreement on the core design elements in January of 2020. Comments from Chip Harter, Treasury Deputy Assistant Secretary for International Tax, indicated that the Trump Administration will decide if it believes Pillar One should have a safe harbor or be mandatory for businesses after more decisions have been made about the plan’s structure.
Pillar 2: The OECD held a public consultation on December 9th on Pillar 2, which deals with how to design a global minimum tax on multinational group profit, also known as the global anti-base erosion (GloBE) tax. OECD officials also used the meeting to discuss the issues that the US has raised about Pillar 1 and the suggestion that it be a safe harbor proposal.
Several US business groups, including the Business Roundtable, the US Chamber of Commerce, and the National Association of Manufacturers, have expressed concern about the negotiations on Pillar 2 and whether the US GILTI (global intangible law-taxed income) law is being incorporated in the global work, noting that if GILTI isn’t grandfathered into the OECD process, companies would face multiple taxation on some of their income unless Congress amends the law.
Individual Country Actions
Canada’s Finance Minister has not stated specifically when the Government will introduce a digital tax, but he has confirmed that there continue to be plans to do so. The US has threatened tariffs if Canada should move ahead, as they have done with France, but Canada will move forward, although they support a global solution instead, as do other countries who have acted unilaterally.
France has said that they are prepared to take any tariffs that the Trump Administration levies to the World Trade Organization, stating that their unilateral digital tax does not discriminate against US companies because it also hits companies from China and the EU. The USTR released a report on its investigation of France’s digital services tax and proposed imposing more than $2 billion of tariffs on French goods in retaliation and with the intent of warning other countries such as Austria, Italy, and Turkey as the US is considering similar investigations of those unilateral proposals. The USTR action received support from SFC Chair Grassley (R-IA) and Ranking Democrat Wyden (D-OR) in a joint statement saying that they believe the French tax to be “unreasonable, protectionist and discriminatory.”
The UK & Brexit
Prime Minister Boris Johnson secured a significant majority in Parliament after the December 12th election, giving him the ability to now proceed with Brexit with a deadline to meet of January 31, 2020. The House of Commons has approved the Withdrawal Agreement Bill, which clears the way for the UK to leave the European Union by January 31st, but the bill could be amended when Parliament returns in January, and it must be approved by the House of Lords. Prior to his election victory, the PM had announced that the scheduled decrease in the UK corporation tax rate from 19% to 17% would be deferred if he were re-elected, using the revenue for public services.
At a meeting of the EU Competitiveness Council on November 28th, a compromise proposal on a public country-by-country CbC) reporting directive, amending the accounting the directive on disclosure of income tax information, failed to get enough support to move forward. Under the proposal, multinationals would be required to publish, for each country in which they are established, their assets and taxable income in that country, the amount of tax paid, the number of employees, etc. There was broad support for enhanced transparency, and the leadership said they would continue work in the area.