Washington Tax Insight January 2022
Politics and Congressional Activity
The first session of the 117th Congress ended at the end of 2021 with key parts of the Biden agenda having been enacted, but without final approval of the Build Back Better Act (BBBA) or action on other key Democratic priorities, such as voting rights. The fall mid-term elections will have an impact on what Democrats are able to accomplish in 2022 and during the remainder of the Biden presidency in light of the possibility that control of Congress could change as a result of those elections.
Senate Democrats will continue negotiations on the BBBA in an effort to reach agreement within their caucus on a revised version of the bill, which Majority Leader Schumer (D-NY) has said he would like to schedule for Senate Floor consideration by the end of January. Voting rights legislation is also a priority that Senate Democrats would like to deal with in January, but moving forward on that issue will likely require a change or exception to the filibuster rules with some Senate Democrats continuing to oppose such changes. Congress will also have to deal with the issue of government funding for Fiscal Year 2022, since the current Continuing Resolution (CR) terminates on February 18th. The National Defense Authorization Act was enacted prior to the end of 2021, which included defense funding, but Congressional appropriators must produce several other spending bills for the remainder of this fiscal year.
One of the key controversial issues which involved increasing the debt limit was resolved when Congress approved and President Biden signed legislation that increases the federal statutory borrowing cap by $2.5 trillion (to $31 trillion), which is an amount that should be enough to ensure that the US can pay its bills until after the 2022 mid-term elections. In order to gain approval of this resolution in the Senate, an agreement was reached between Senate Majority Leader Schumer and Minority Leader McConnell (R-KY) that allowed for a parliamentary process that was shielded from the possibility of a filibuster.
Funding for Fiscal Year 2022
FY 2022 began on October 1st, but in the absence of a package of spending bills approved by both the House and Senate, the government continues to operate under a CR that funds operations at FY 2021 levels. Congress approved a second CR that funds the federal government through February 18, 2022.
The Build Back Better Act
On November 19th, the House approved the BBBA, H.R. 5376, by a vote of 220-213 on party lines with one Democrat voting against 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. The BBBA is being considered pursuant to the Fiscal Year 2022 budget resolution that provides for budget reconciliation legislation to be advanced with these tax and spending proposals.
The BBBA is now being considered by the Senate, and Senate Majority Leader Schumer has stated that he would like to bring the bill to the Senate Floor for a vote before the end of January. Procedurally, the House-passed version of the bill would be brought up for consideration to begin the budget reconciliation debate with the Senate substitute amendment then offered representing the Senate version of the bill.
On December 11th, Senate Finance Committee (SFC) Chair Ron Wyden (D-OR) released text of the tax section of the bill with changes to certain provisions, most notably to the new proposed corporate minimum tax and certain international tax provisions. One of the issues affected by the delay in Senate approval of the BBBA relates to the treatment of research and development (R&D) costs, with the 2017 Tax Cuts & Jobs Act (TCJA) provision becoming effective on January 1, 2022. Companies now must amortize their R&D costs over five years (15 years for foreign R&D). The BBBA would delay this change until 2026.
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.
House/Ways & Means Committee
Ways & Means Committee member Stephanie Murphy (D-FL) announced that she will not seek re-election in 2022. Six members of the committee have announced their departure from Congress.
The Ways & Means Oversight Subcommittee held a hearing to examine “the Pandora Papers and hidden wealth.” The Pandora Papers were published in October of 2021 by the International Consortium of Investigative Journalists (ICU) and were based on a review of 12 million confidential files that were leaked detailing what the ICU describes as “14 offshore services firms from around the world that set up shell companies and other offshore nooks” for their clients. Democrats and Republicans on the Subcommittee appeared to be divided over how to address what appears to be the use of tax havens around the world, including in the US, to allow ultrawealthy individuals to arrange their financial affairs in ways that are meant to minimize scrutiny by tax authorities and law enforcement.
Treasury and the IRS
The Senate Finance Committee has approved the nomination of Neil MacBride to be the General Counsel of the Treasury Department. Mr. MacBride currently is the co-chair of the white collar defense practice at Davis Polk & Wardwell.
Issues and Guidance
Foreign Tax Credit Final Regulations Released: The IRS issued final regulations on the foreign tax credit (FTC) and the foreign-derived intangible income (FDII) regime. The regulations provide guidance related to (1) the disallowance of a credit or deduction for foreign income taxes with respect to dividends eligible for a dividends-received deduction; (2) the allocation and apportionment of interest expense, foreign income tax expense, and certain deductions of life insurance companies; (3) the definition of a foreign income tax and a tax in lieu of an income tax and the definition of foreign branch category income; and (4) the time at which foreign taxes accrue and can be claimed as a credit. The rules also provide guidance that clarify the FDII rules. Treasury’s Deputy Assistant Secretary for International Tax Affairs stated that the final regulations are “largely consistent” with the topics addressed in the 2020 proposed rules.
Employer’s Tax Guide for 2022: The IRS released a revision to Publication 15, (Circular E), Employer’s Tax Guide, for use in 2022, which reflects pandemic-related employment tax credits and other tax relief. Issues that are covered include the tax credit for qualified sick and family leave wages, the employee retention credit, and the credit for COBRA premium assistance payments.
Tax Guide for 2021 for Individuals: On December 17, the IRS issued Publication 17, Your Federal Income Tax (for Individuals), updated for 2021 tax year filing. The publication covers the general rules for filing a federal income tax return, and the updated version identifies several tax changes due to the Congressional response to the pandemic, including a new deduction for charitable contributions for non-itemizers, the economic income payments and recovery rebate credit, the elimination of the tuition and fees deduction, and legislative changes to the child tax credit and earned income credit.
2022 Rates Used for Various Federal Income Tax Purposes: The IRS issued Revenue Ruling 2022-01 that provides various prescribed rates for federal income tax purposes including the applicable federal interest rates, the adjusted applicable federal interest rates, the adjusted federal long-term rate, and the adjusted federal long-term tax-exempt rate.
Guidance on Method of Accounting Change: The IRS issued Revenue Procedure 2022-09, which modifies the rules for seeking the automatic approval to switch accounting methods under Sections 263A, 448, 460, and 471. It includes guidance on how small businesses can obtain automatic consent from the IRS to change their accounting methods to comply with final rules on accounting simplification provisions that were included in the TCJA. Final regulations were released in January 2021 on the TCJA provision that permits businesses to use the cash method of accounting if average annual gross receipts, adjusted for inflation, are $25 million or less. This new guidance provides procedures for businesses to get automatic approval from the IRS for accounting method changes for those who want to apply an exemption under the final rules or those that no longer qualify for an exemption. It also describes how to revoke an early election to apply the final small business accounting simplification rules.
Guidance on Early Termination of the Employee Retention Credit: The IRS released Notice 2021-65, which covers the early termination of the Employee Retention Credit (ERC) since the credit is no longer available for 4Q 2021 except for businesses that meet the definition of “recovery startup businesses.” In recognition of the fact that some businesses might have continued to utilize the ERC in 4Q prior to approval of the infrastructure bill that included the termination, the IRS provided guidance on how businesses that received advanced payments can return the money that requires them to repay the money by the time the tax return is due. The guidance also explains how businesses that reduced payroll tax deposits in anticipation of receiving the credit can avoid penalties, stating that the penalties will be waived for employers who followed the rules to claim the credit, deposited the amounts they retained on or before the due date for wages paid on December 31, 2021, and report how much they owe the IRS in the 4th quarter. Businesses are required to have stopped reducing payroll tax deposits by December 20th in order to qualify for the waived penalties. The IRS will consider “reasonable cause relief” for employers who do not qualify under the specific rules in the notice.
Final Regulations on LIBOR: The IRS issued final regulations that provide tax guidance on the transition from the use of certain interbank offered rates in debt instruments, derivative contracts, and other contracts. The new guidance ensures that companies will not be subject to capital gains tax under Section 1001 if they alter loans and derivatives to replace the LIBOR with new rates. LIBOR and other interbank offered rates ended on December 2021 with a small subset allowed to continue until June 30, 2023, including the overnight publication of one-month, three-month, six-month, and 12-month USD LIBOR.
Treatment of Certain Stock Distributions by REITS and RICs: The IRS issued Revenue Procedure 2021-53, which provides temporary guidance regarding the treatment of certain stock distributions by publicly offered real estate investment trusts and publicly offered regulated investment companies in recognition of the need for liquidity as a result of COVID-19. The guidance reduces the minimum required aggregate amount of cash that distributee shareholders may receive to no less than 10% of the total distribution in order for Section 301 (by reason of Section 305(b)) to apply to such distribution.
Standard Mileage Rates for 2022: The IRS issued Notice 2022-03, which provides the optional standard rates used to deduct the costs of using a car for business, charitable, medical or moving purposes in 2022. The rate for computing the deductible costs of automobiles operated for a business expense purpose under Section 162 is 58.5 cents per mile, which is an increase of 2.5 cents per mile.
Chemicals Subject to Superfund Taxes: The IRS issued Notice 2021-66 that contains a list of substances that will be subject to the Superfund taxes beginning July 1, 2022, and registration requirements for exemptions for certain sales and uses of taxable chemicals. These taxes were reinstated as part of the infrastructure bill that was enacted in 2021. The IRS notice also asks taxpayers to comment on whether any issues related to the reinstated taxes require additional guidance or clarification.
Form 8992/GILTI: The IRS released instructions for Form 8992, US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), to reflect a new separate Schedule A and eliminate the requirements for domestic partnerships to file the form.
IRS Backlog: Several members of the House sent a letter to IRS Commissioner Rettig about their concerns regarding the backlog of unprocessed returns from the current 2021 and 2020 filing seasons as the agency heads into preparations for the 2022 filing season. The letter notes the decision by the Taxpayer Advocate Service not to accept any cases regarding amended returns due to the backlog and states that this situation is causing significant burdens for families and small businesses. The letter included several questions related to IRS plans to deal with the backlog and asked for a response by December 17, 2021.
Request for Comments on Reporting Payments to Nonresident Aliens: The IRS has requested comments on regulations for reporting interest payments to nonresident aliens that were included in T.D. 9584. Comments will be accepted through February 8, 2022.
Extension of E-Signature Option: The IRS said that it would extend the window through October 31, 2023, for using electronic signatures on some forms, including the form for reporting tax withholding on US income for foreign taxpayers. The IRS memorandum includes a list of forms for which the e-signature will be acceptable.
IRS Compliance Campaign on Section 965: The IRS has announced that it is extending the compliance campaign on the repatriation tax under Section 965 to include audits of entities beyond C corporations, including large partnerships and S corporations.
Reporting of Cancelled Student Loans: The IRS released Notice 2022-1 which states that certain discharged student loans do not have to be reported to the IRS by lenders or loan servicers. If the discharge is excluded from a borrower’s gross income, the servicers or lenders should not file information returns or furnish payee statements. Under the March 2021 pandemic relief law, gross income does not include any amount that would otherwise be included in gross income because of the discharge, in whole or in part, after December 31, 2020 and before January 1, 2026.
New IRS Practice Units: On December 14, 2021, the IRS released several Practice Units including a Practice Unit that is an overview of the base erosion anti-abuse tax (BEAT) after issuance of 2020 final regulations. The Practice Unit covers concepts such as aggregate group, gross receipts, foreign related party, base erosion percentage, applicable taxpayer, base erosion payment, base erosion tax benefit, waiver of deductions, computation of base erosion minimum tax amount, anti-abuse rules, and the effective date of the regulations.
The IRS also released a Practice Unit on the impact of flow-through entities on the foreign tax credit. This Practice Unit is applicable for individual taxpayers that receive Schedule K-1(s) from partnerships or S corporations that report foreign income, related deductions and taxes. Members of LLCs who file a Form 1065 and beneficiaries of a Trust which files a Form 1041 are also subject to the rules discussed therein. The updates reflect Treasury Regulation §1.861-9 regarding apportionment of interest expense.
The IRS also released a Practice Unit that explains interest on deferred tax liability in installment sales transactions under Section 453A. It discusses the steps an examiner would take to determine the interest amount that would include computing the deferred tax liability, computing the applicable percentage determining the underpayment rate, and computing the interest due on the deferred tax liability.
The IRS also released a Practice Unit that guides examiners through the procedures for properly conducting promoter investigations. The goal of a promoter investigation is to identify and quickly terminate the abusive promotion or activity, assert promoter penalties where applicable, and identify participants in the abusive transactions.
New Rules from the Treasury Financial Crimes Unit: The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department released a new rule that would establish a beneficial ownership database that would help prevent the illicit movement of funds through shell companies. The rule would require that corporations, limited liability companies, and similar entities submit the full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document, such as a passport, for all beneficial owners. FinCEN is required under the Corporate Transparency Act (included in the National Defense Authorization Act for FY 2021) to create rules governing the database. FinCEN released a set of questions and sought public input in April of 2021.
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. These rules are the first of three expected sets of guidance: the Model Rules; an explanatory Commentary, which is expected in January; and a more detailed Implementation Framework, which is expected to be released in mid-2022 at the earliest. These rules cover the income inclusion rule (IIR) and undertaxed payments rule (UTPR), which are collectively referred to as GloBE.
The release confirms again that the aim is for Pillar Two to be brought into law in 2022, to be effective in 2023, and the UTPR effective in 2024. A public consultation event on the implementation framework will be held in February of 2022, and on the Subject to Tax Rule (STTR) in March of 2022, with the draft model STTR provision and its commentary to be released at that time.
The model rules are divided into 10 major sections. Chapter 1 addresses questions of scope, while Chapters 2-5 contain the key operative rules. Chapter 6 deals with mergers and acquisitions, and Chapter 7 provides special rules that apply to certain tax neutrality and existing distribution tax regimes. Chapter 8 deals with administration, Chapter 9 provides for rules on transition, and Chapter 10 contains definitions.
In releasing the rules, the OECD states “The new Pillar Two model rules will assist countries to bring the GloBE rules into domestic legislation in 2022.” They went on to say that “in that context, the OECD/G20 Inclusive Framework on BEPS agreed, in its October 2021 statement, that consideration will be given to the conditions under which the US Global Intangible Low-Taxed Income (GILTI) regime will co-exist with the GloBE Rules, to ensure a level playing field.”
The model regime sets up a coordinated system of interlocking rules that the OECD says will:
- Define the multinational enterprises (MNEs) within the scope of the minimum tax
- Set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis, and for determining the amount of top-up tax payable under the rules; and
- Impose the top-up tax on a member of the MNE group in accordance with an agreed rule order.
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. Republicans on the SFC sent a letter to Treasury Secretary Yellen in December of 2021 stating that they are concerned about the lack of detail underlying an agreement among the US and the other OECD countries on these new rules. The letter says that the Treasury Department has not substantiated its statement that the new rules would be largely revenue neutral for the US nor shared information on how US companies will be affected. The timeline for implementation of the Pillar One rules is “likely unachievable” according to the SFC members with other concerns included about the impact of the Pillar One rules.
European Union: The EU proposed a new directive on December 22, 2021, that would require member countries to implement the GloBE model rules for the minimum tax. The Draft Directive closely follows the OECD Model Rules, but departs with some necessary adjustments to guarantee conformity with EU law. The goal is adoption at the EU level on the directive by the end of June of 2022, according to the EU Commissioner for the Economy, Paolo Gentiloni. EU countries have already agreed to the minimum tax on corporations at the OECD level. If successfully adopted, Member States then have until December 31, 2022, to implement the rules into their national systems.
The European Commission stated that 15% of tax payments reallocated to EU countries under the Pillar One deal should be paid into the EU budget with a more detailed plan to be available in the near future. This would replace the digital levy which was suspended indefinitely.