Washington Tax Insight July 2021
Politics and Congressional Activity
Congress has returned from the July 4th recess and is scheduled to leave again for the August recess on August 9th and return on September 10th. There is the possibility that the August recess will be delayed, especially considering the busy schedule facing the House and Senate. Senate Majority Leader Schumer (D-NY) has warned his Senate colleagues that the recess will be deferred until the Senate passes both a bipartisan infrastructure bill and a budget resolution outlining the plan for a budget reconciliation bill that will include other Democratic policy priorities. The current agenda includes infrastructure legislation, a budget reconciliation bill with a variety of Administration policy priorities, police reform legislation, government funding for the new fiscal year, and the debt limit issue.
Infrastructure Legislation and the Rest of the Biden Economic Agenda
Bipartisan Infrastructure Package Released
On June 24, 2021, President Biden announced an agreement on an infrastructure package with a group of bipartisan Senators that would authorize $580 billion in new spending on roads, bridges, public transit, rail, airports, and broadband. The package would repurpose certain unspent pandemic relief funds, resulting in a total infrastructure investment of $973 billion over five years and $1.2 trillion over eight years.
The Administration had hoped to include several tax proposals that would have increased taxes for big corporations and wealthy individuals in this package, while GOP Senators had proposed indexing fuel taxes and imposing user fees on electric vehicles. None of those proposals are included in this package, although the Biden proposals will undoubtedly resurface as part of the second bill that address the “human” infrastructure issues.
A summary of the potential “financing sources” for the bipartisan package include:
- Reduce the IRS tax gap;
- Unemployment insurance program integrity;
- Redirect unused unemployment insurance relief funds;
- Repurpose unused relief funds from 2020 emergency relief legislation;
- State and local investment in broadband infrastructure;
- Allow states to sell or purchase unused toll credits for infrastructure;
- Extend expiring customs user fees;
- Reinstate Superfund fees for chemicals;
- 5G spectrum auction proceeds;
- Extend mandatory sequester;
- Strategic petroleum reserve sale;
- Public private partnerships, private activity bonds, direct pay bonds and asset recycling for infrastructure investment; and
- Macroeconomic impact of infrastructure investment.
The issue of the “tax gap” has been the subject of much attention recently including at multiple hearings at which IRS Commission Rettig has testified where he has told Congress that the annual tax gap could be as high as $1 trillion. The House Appropriations Subcommittee on Financial Services and General Government has approved a fiscal year 2022 budget package that includes a $13.6 billion allocation for the IRS, which is an increase of $1.7 billion over the 2021 level and includes the $417 million requested by the Biden Administration to address the “tax gap.” Senator Warner (D-VA), who is one of the negotiators of this package, said that the negotiators were planning on $100 billion over 10 years from narrowing the tax gap, based on an investment of $40 billion in new spending to expand IRS enforcement and compliance operations. For more information on IRS plans to address the “tax gap,” please see the True Insight on “Narrowing the “Tax Gap: Treasury & the IRS Target “High-Income Taxpayers” and Cryptocurrency Transactions.”
During the Congressional recess, legislators and staff began the work of drafting legislative language for the infrastructure bill. The two chambers will likely move their own versions of the bill and then resolve the differences between the two.
Strategy for Getting Approval of Infrastructure and Budget Reconciliation
The House and Senate must reach agreement on a budget resolution for fiscal year 2022 that includes budget reconciliation instructions for the relevant congressional committees, which will then develop their legislation in accordance with those instructions. The current plan is to move the budget resolution through Congress prior to the August recess. The Senate Budget Committee Democratic leadership has announced that an agreement has been reached on the parameters of the budget resolution. The proposal sets an overall limit of $3.5 trillion that would cover the Democratic policy priorities that will not make it into a bipartisan infrastructure deal. The budget resolution will include not only the budget reconciliation instructions for the “human infrastructure” package, but also seven out of the 12 federal appropriations bills that must be approved before the fiscal year ends on September 30th. It will likely not include, however, five of the appropriations bills that cover some of the most challenging issues, such as police reform and immigration.
Democratic leadership plan to move a separate package under the budget reconciliation protections that will address the “human” infrastructure proposals and tax policy priorities that President Biden outlined in the American Jobs Plan, the American Families Plan, and his budget proposal recently sent to Congress. The legislative package would include those parts of the Biden American Jobs Plan that are unlikely to be included in the infrastructure plan as well as proposals from the American Families Plan. It may also include other Democratic priorities including Medicare expansion, lowering drug prices, immigration reform, and enacting a permanent child tax credit. Agreement on this second package even among Democrats will be challenging as moderate Democrats may balk at the size of additional spending. Also, some issues may be ruled to be outside the permissible scope of the budget reconciliation process by the Senate Parliamentarian.
Initially, it appeared that the Schumer-Pelosi plan was to move the two bills simultaneously, with each bill needing the other to pass. Although the President appeared to align with this plan, he has now revised his initial comments in order to state that he is not tying the two packages together with respect to approval. Senate Majority Leader Schumer (D-NY), however, has said, “We can’t get the bipartisan bill done unless we’re sure we’re getting the budget reconciliation bill done.” He added, “We can’t get the budget reconciliation bill done unless we’re sure of the bipartisan bill.” House Speaker Pelosi (D-CA) has echoed these comments. Clearly, approval of the second bill through the budget reconciliation process remains a high priority for Democratic leaders, but maintaining bipartisan support for the infrastructure package is critical.
The Debt Limit
At the same time that Congress is dealing with the budget resolution and the infrastructure package, it will be necessary to address the need for action on the debt limit. Treasury Secretary Yellen has said that the tools Treasury has to prevent the national debt from breaching the Congressionally mandated debt limit may be exhausted as soon as August when Congress is on recess with their return to work scheduled in mid-September. In 2019, Congress suspended the debt limit, which is currently $28 trillion, through July 31, 2021. Once the debt limit is reached, the Treasury Department is barred from borrowing funds to cover government expenses. Treasury can shift federal funding for some period of time, but then would begin to default on maturing debt repayments. The situation this year is complicated by issues related to the pandemic, which may make it more difficult for Treasury to manage the situation for a few weeks while Congress negotiates on the issue.
Democratic leaders are considering different approaches such as including the issue in the budget reconciliation bill or finding ten Republicans to join the effort in the Senate in order to avoid the filibuster, but the latter approach might require agreement to spending concessions rather than a clean debt limit bill. The issue could also be included in the infrastructure package or a continuing resolution to fund the government beyond the start of the new fiscal year if a new budget is not approved by September 30th. If there is no path to raising the debt limit, Congress could consider doing another suspension of the debt limit similar to what was approved in 2019.
House of Representatives/Ways & Means Committee
House approves tax reporting bill: The House approved a corporate governance package that would amend the Securities Exchange Act of 1934 to require publicly traded corporations to report certain specified tax and non-tax information to their shareholders on a country-by-country basis. The Corporate Governance Improvement and Investor Protection Act cleared the House by the narrow nearly party-line vote of 215-214. Corporations subject to the disclosure rules generally would be required to report information such as their total pre-tax profits and total amounts paid in state, federal, and foreign taxes for each jurisdiction in which they operate. They also would be required to disclose a number of specific tax-related items such as total accrued tax expenses, stated capital, and total accumulated earnings for each of their subsidiaries, as well as on a consolidated basis. The SEC would be required to issue a proposed rule implementing the reporting requirement within one year after the legislation is enacted and to finalize a rule no later than 18 months after the enactment date. The reporting requirement would become effective one year after the rule is issued. This information is already required by the IRS. The bill now goes to the Senate for consideration, but it is currently unclear if or when Senate Democratic leaders plan to schedule it.
Senate/Senate Finance Committee
The Joint Committee on Taxation released a technical explanation of the Clean Energy for America Act (JCX-31-21), which was approved by the Senate Finance Committee on May 26, 2021. The bill generally promotes clean energy while terminating tax incentives for fossil fuels.
On US taxes and foreign competition, SFC Chair Wyden (D-OR) is leading a bipartisan group of senators who plan to introduce legislation that would establish a tax incentive for domestically developed semiconductor technology. The bill would create a 25% investment tax credit as well as various other incentives.
Business interest: SFC Chair Wyden (D-OR) is planning to propose changes to the TCJA business deduction under section 199A for partnerships, LLCs, and other entities taxed only at the individual owner level. Reports are that his bill will start phasing out the deduction for individuals making above $400,000 in annual business income with the benefit unavailable for people making over $500,000. He has said that he is looking for ways to revise the deduction to make it more accessible for middle-class small business owners and not a give-away to high-income taxpayers. Although proposals on section 199A were not included in the two economic packages released by the Biden Administration, a top Treasury official said not to read too much into its absence. Senate Minority Leader McConnell (R-KY) has said repeatedly that Republicans are not interested in revising the TCJA. Despite the fact that Chair Wyden is planning proposed changes to the provision, he would still keep the 2025 expiration for the deduction in place so that it would be in the mix of discussions on other proposals that expire at the same time.
Remote sellers compliance with state sales tax laws: Many states are expected to adopt more aggressive compliance strategies in the next year with respect to requiring out-of-state sellers to collect tax on e-commerce transactions. In the three years since the Supreme Court ruling in the Wayfair case, many states have relied on voluntary compliance programs and letters to online businesses, but reports are that only a fraction of businesses operating online in the US are complying. Since the court case, all 45 states that collect sales tax have enacted laws on this topic, and many of them have exemptions based on thresholds related to total sales or the number of transactions.
Treasury and the IRS
Treasury Personnel and Policy Updates
The Senate Finance Committee approved four of President Biden’s nominations for key Treasury Department positions, including Lily Batchelder as Treasury Assistant Secretary for Tax Policy, Jonathan Davidson as Treasury Assistant Secretary for Legislative Affairs, J. Nellie Liang as Undersecretary of Domestic Finance, and Ben Harris as Assistant Secretary for Economic Policy. No schedule has been released for confirmation of these nominees in the full Senate.
The IRS Enforcement Initiative
President Biden’s “American Families Plan” includes an ambitious $1.8 trillion social plan financed by new tax increases directed at wealthy individuals and an IRS enforcement initiative. The Budget includes a proposal to increase IRS funding by $1.3 billion to a total of $13.2 billion as part of an initiative to collect $778 billion over ten years from increased tax compliance measures.
The Biden Budget Includes several proposals to address the problem of the “tax gap,” including coverage of cryptocurrency, a budget increase to the IRS to target the wealthy, expanded reporting by financial institutions, reporting and enforcement tools for the IRS, and regulation of tax preparers. On May 20, 2021, the Treasury Department issued a report on the Biden Administration’s tax compliance proposals that were included in the President’s American Families Tax Plan (“Treasury Report”). The Treasury Report calls for stricter enforcement of existing tax laws, additional funding for the IRS, and expanded information reporting requirements all designed to narrow the “tax gap,” which is the difference between the amount of tax owed to the government and the amount paid.
In Congressional testimony, the IRS Commissioner testified that if the increased IRS funding is approved, the IRS intends to hire agents who have specialized experience in high-net-worth and global high-wealth tax issues, large passthrough returns, large and ultra-large corporate tax compliance issues, non-filer virtual currency issues, Bank Secrecy issues, and abusive transactions. The IRS has stepped up its focus on high net worth individuals in recent years including a global high-wealth program called the IRS “wealth squad”; a high-income non-filer compliance campaign that targets taxpayers who have not filed required tax returns; and a compliance campaign focused on expatriated individuals who have not complied with filing and payment requirements.
For more information on this topic, please see the True Insight on “Narrowing the “Tax Gap: Treasury & the IRS Target “High-Income Taxpayers” and Cryptocurrency Transactions.”
COVID-19 Crisis Guidance & Related Issues
IRS Guidance on Tax Credits for Paid Leave: The IRS issued a set of new Frequently Asked Questions (FAQs) on the tax credits available to employers with fewer than 500 employees for qualified leave wages taken by employees beginning on April 1, 2021. The mandate for paid leave under the Families First Coronavirus Response Act expired at the end of 2020, but the American Rescue Plan provided employer tax credits for paid leave for the 6-month period between April 1, 2021, and September 30, 2021.
BEAT Reporting for Qualified Derivative Payments: The IRS issued Notice 2021-36, which delays until January 1, 2023, a reporting provision that was set to take effect in June 2021 as part of a regulation related to the Base Erosion Anti-Abuse Tax (BEAT) under section 59A and section 6038A of the Code. BEAT imposes an extra tax on companies that effectively transfer too much in profits out of the US through deductible payments to foreign affiliates. The 2019 regulation would allow companies to opt out of certain tax deductions in order to reduce their BEAT payments. This guidance defers until 2023 the applicability date related to the reporting of section 59A qualified derivative payments, which are payments made to a foreign affiliate related to a derivative on which the company recognized a mark-to-market gain or loss. The IRS said it needs more time to study whether further guidance is needed on the interaction of the exemption, the related reporting requirements, and a separate rule on netting of transactions. In the interim period, the rules described in §1.59A-6(b)(2)(iv) of the regulations that apply during the transition period will continue to apply.
IRS Practice Unit: GILTI Concepts: The IRS Large Business & International Concept Unit released a practice unit on key concepts of the Global Intangible Low-Taxed Income (GILTI) rules under section 951A. GILTI rules require US shareholders of controlled foreign corporations (CFCs) to include GILTI in gross income each year (GILTI inclusion). A US shareholder’s GILTI inclusion is the excess of the US shareholder’s pro rata share of net CFC tested income over its net deemed tangible income return (net DTIR). Concepts covered by the practice unit include key terminology, who is subject to GILTI, the GILTI formula, the GILTI computation, and the GILTI inclusion, and examples are included.
IRS Guidance on PTEP: A Treasury official recently stated that the IRS is facing complex questions in its efforts to create regulations for repatriating previously taxed earnings and profits (PTEP) including defining the relationship between a company’s specific shares in a foreign affiliate and the amount of PTEP that was distributed. The problem also includes the tax basis that is allocated as a result of that distribution because the basis that a corporate shareholder has in the stock of a foreign affiliate, which is an amount initially determined by the US company’s investment, can cause the shareholder to see a taxable gain when it takes home PTEP due to a timing mismatch between different calculations. He also said that the GILTI rules have also complicated the repatriation process because the measure operates based on how much a company owes among all controlled foreign corporations (CFCs) in which it has a stake rather than a CFC-by-CFC calculation. In April, another Treasury official said that upcoming PTEP guidance will cover basis adjustments to the stock of a lower-tier CFC, while a second guidance package will focus on partnerships.
Other Issues and Guidance
Guidance for Calculating Rental Property Depreciation: The IRS issued Revenue Procedure 2021-28 and Revenue Procedure 2021-29 that advise taxpayers on the change of method for depreciation for certain residential rental property. The guidance reflects changes that were made by the Consolidated Appropriations Act, which was enacted in December of 2020. Rev. Proc. 2021-28 details how a taxpayer must change the method of computing depreciation to provide a 30-year recovery period under the alternative depreciation system for some properties controlled by a business that started renting before 2018. Rev. Proc. 2021-29 will permit some rental partnerships to file amended forms for reporting each partners’ income as an alternative option to filing an administrative adjustment request.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The Finance Ministers of the G-7 nations, which includes the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom, issued a communique on June 5th that describes a high-level political agreement on global tax changes. This was an important step forward, but challenges still remain in reaching agreement and implementation by all participating countries.
In the communique, the G7 Finance Ministers committed to an approach for Pillar One put forward by the Biden Administration that would focus new profit allocation rules on the largest and most profitable multinational enterprises, rather than solely on companies providing automated digital services and consumer-facing businesses. It would also use lower revenue thresholds, and there was agreement that market countries would be awarded at least 20% of profit exceeding a 10% margin.
They agreed to a global minimum tax of at least 15% on a country-by-country basis and to provide for “appropriate coordination between the application of the new international tax rules and the removal of all Digital Services Taxes, and other relevant similar measures, on all companies.” The latter issue is important to members of Congress who have been involved in this issue.
The G-20 Finance Ministers met on July 10-11th and endorsed the OECD Inclusive Framework statement that was issued on July 1, 2021, which outlines the overall proposal agreed to by nearly all of the Inclusive Framework member countries. If agreement is reached, then the focus would turn to the technical work of drafting the necessary legal rules, including possible treaty provisions, that would need to be enacted and agreed to by participating countries with respect to both pillars. The implementation process is expected to take several years with some of the changes likely requiring Senate approval of a treaty, which requires a two-thirds vote in the Senate.
U.S. Congressional Reaction: Republican reaction to the G-7 agreement was cautious and skeptical about the details of a final agreement. Treasury Secretary Yellen has told SFC Ranking Republican Crapo (R-ID) that their objectives are “aligned,” but her efforts to connect the OECD proposals to some of the Biden Administration tax proposals, such as replacing the BEAT with a new measure called the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD), could complicate an attempt to get Republicans on board.
EU Reaction: The European Union has announced that it will delay moving ahead with a bloc-wide digital tax in order to focus on the OECD global negotiations.
United States: The US Trade Representative (USTR) announced the conclusion of its Section 301 investigations of Digital Service Taxes (DSTs) adopted by Austria, India, Italy, Spain, Turkey, and the United Kingdom. The final determination in the investigations was to impose additional tariffs up to 25% on certain goods from these countries, but immediately suspend the tariffs for up to 180 days to provide additional time to complete the ongoing multilateral negotiations on international taxation at the OECD and in the G-20 process. The USTR will continue to monitor the effect of the trade actions, the progress of the OECD and G-20 discussions, and the progress of discussions with the six affected countries. They may adopt appropriate modifications to the actions taken with the announcement, taking into consideration comments received in response to its March 31 notices. An earlier 301 investigation into the DST adopted by France resulted in a similar 25% tariff on goods but was also suspended.
OECD – Miscellaneous
Global Collaboration on Fighting Tax Crime: The OECD convened a meeting of the heads of tax crime investigations from 44 member countries to discuss ways to increase collaboration between governments, including better using exchanged information to capture cross-border tax crime. A proposal to establish a joint process to identify emerging tax crime risks was discussed. The group is also considering projects including improving the use of information on financial accounts that is shared among governments under the OECD’s Common Reporting Standard, sharing intelligence about illicit virtual assets, and strengthening international cooperation on stopping professional enablers of tax crime. They released an updated set of principles for tackling crime.
New EU Value-Added Tax takes effect July 1st: A 2019 law included changes to the value-added tax (VAT) rules that were scheduled to take effect on January 1, 2021, but were delayed by six months due to the pandemic. The package of new rules approved in 2019 were aimed at modernizing VAT for cross-border transactions and decreasing VAT fraud in the EU. The new rule will require the payment of VAT on goods worth less than 22 euros ($27). Such goods were not being taxed because the revenue on them was not considered worth the paperwork required. Additional changes include the expansion of the so-called “One Stop Shop,” which will allow non-EU companies to make VAT payments to multiple European tax authorities through a single member state, and new tax liability for online marketplaces that facilitate e-commerce sales within the EU.