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Washington Tax Insight July 2022

By: John V. Aksak John P. Bennecke Michael Chen Ross J. Valenza Jason Carter |

Politics and Congressional Activity

The House and Senate have returned from the July 4th recess and now must address several issues in the next few weeks before the August recess. Legislation that is on the priority list includes appropriations bills, the China competition bill, retirement security, and pandemic preparedness.  Other key issues include the war in Ukraine and other matters related to Russia as well as the unfinished Build Back Better Act (BBBA). Meanwhile, political fallout from the Supreme Court overturning Roe v. Wade and the public hearings on the January 6th insurrection is affecting the schedule and dominating discussions in Washington.

Congressional Action on Federal Spending Legislation

The House Appropriations Committee has approved the six remaining fiscal year 2023 spending bills, which sets all 12 appropriations bills for possible House floor action in July. The bills were approved on party-line votes based on Republican opposition to the funding levels and the omission of certain riders, including on abortion.

The Administration and Congress have not reached an agreement on the top-line spending levels for these appropriations bills, however, which increases the likelihood that a continuing resolution will be needed in September to keep the government funded when the fiscal year 2022 spending agreement expires on September 30th.

The Administration’s Build Back Better Act (BBBA)

Senate Majority Leader Schumer (D-NY) and Senator Joe Manchin (D-WV) have been working to reach an agreement on a $1 trillion revised version of the BBBA with the goal of approving it in the Senate before the August recess. The House-approved version of the BBBA in 2021 had a cost of $2.2 trillion and included $1.5 trillion in new tax hikes.

Congress has until the end of September to use the current budget reconciliation instructions to advance this legislation, but reaching agreement prior to the August recess would be preferable.

Although some reports have come out on issues of agreement and disagreement, no outline of a new bill has been released.

Manchin has said he wants to dedicate half of the revenue from tax increases to deficit reduction, which would provide $500 billion to offset new spending. A new issue being considered is whether to extend Affordable Care Act premium subsidies, which were included in a 2021 pandemic relief package but are due to expire in 2023.

The two Senators have reportedly agreed on prescription drug provisions that would cap out-of-pocket costs for seniors and allow Medicare to negotiate drug prices. Although the Senators had been discussing which climate and energy proposals would be included, Senator Manchin has now announced that he will not support a bill that includes climate provisions and tax increases. This abrupt change in position now creates uncertainty about the timetable and contents of this legislation.

If a bill should advance in the Senate, the $10,000 state and local tax (SALT) cap could pose problems for the BBBA in the House because supporters have indicated that they are willing to block this legislation unless it includes an increase to the cap, which is set to expire in 2025.

For information about the provisions affecting individual taxpayers that were included in the House-approved BBBA legislation, please see this True Insight. For a detailed summary of the provisions 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. For a discussion of the SFC draft for the BBBA, please see this True Insight.

House and Ways & Means Committee

The House approved legislation that would extend to 10 years the Department of Justice deadline for filing fraud charges against recipients of Paycheck Protection Program funds and loans from the SBA Economic Injury Disaster (EIDL) Loan program.  Both bills are pending before the Senate Committee on Small Business and Entrepreneurship.

Congressman David Kustoff (R-TN) joined the House Ways & Means Committee to replace Congress Tom Reed (R-NY) who resigned from Congress.

The Committee held a hearing entitled “The Burnout Epidemic and What Working Women Need for a Stronger Economy.” Members in both parties agreed that increasing access to affordable childcare and paid family and medical leave is critical to helping women remain in the workforce but they have different ideas about how to enact those policies.

Senate and Senate Finance Committee

China Competition Bill: Congress continues to work on the China competition bill as a key priority to be finished before the August recess.  Senate Minority Leader McConnell, however, has recently stated publicly that he will use the filibuster to block this bipartisan bill if Senate Democrats continue to work on a revised “partisan” version of the BBBA. This “threat,” however, is unlikely to prevent approval of the legislation as there are other paths to enactment for the bill, which has bipartisan support. The bill is designed to boost US competition with China and provide subsidies for the domestic semiconductor manufacturing industry.

Bipartisan retirement legislation:  The SFC unanimously approved retirement legislation, the EARN (Enhancing American Retirement Now) Act, in its recent markup, which now allows for this follow up to the 2019 SECURE (Setting Every Community Up for Retirement Enhancement) Act to move toward enactment in 2022. Earlier this year, the House passed its version of a bipartisan bill (HR 2954) while the Senate Committee on Health, Education, Labor, and Pensions has also approved its version of retirement legislation (S. 4353). The SFC bill aims to make it easier for businesses to offer tax-qualified retirement savings plans to their employees and for individual to participate in retirement plans and grow their tax-preferred savings.

During the SFC markup, language was added to the EARN Act to curb controversial land donations known as syndicated conservation easements. The new provision, however, would be prospective, which means that it will not affect transactions that take place before the date of enactment, unlike a similar proposal approved by the House which was retroactive.

The Senate must act now to approve both Committee bills after which a conference committee will work to resolve the differences between the House and Senate legislation.

Suspension of the Federal Gas Tax and a Windfall Profits Tax on Oil and Gas Companies: President Biden called for a temporary suspension of the federal gas tax to ease the cost of gas for US consumers. The proposal would need to be authorized by Congress and would suspend the 18 cents per gallon tax for three months, which would result in a loss of $10 billion to the federal government. He also called on states to temporarily lift their state gas taxes. Although there is bipartisan concern about current gas prices, this type of proposal is unlikely to advance in Congress.

SFC Chair Wyden has been considering legislation that would enact a windfall profits tax on large oil and gas companies with a proposal that would levy a 21 percent tax on the excess profits (10 percent or higher) of oil and gas companies with more than $1 billion in annual revenue.

Hearing on the Wayfair case: The SFC held a hearing on the Supreme Court ruling in South Dakota v. Wayfair and its effect on small businesses and remote sales. The 2018 decision allowed states to collect taxes on internet purchase from sellers with no physical presence in the taxing state.

Issues related to Russia and the War in Ukraine

Related to the Administration ban on US accounting and consulting firms working with Russia, the American Institute of CPAs (AICPA) has stated that they have been working with Treasury on guidance that is expected to provide critical information about the operation of the sanctions. Treasury has said they will issue this guidance soon as the sanctions took effect in June.  In an FAQ, Treasury explained that US firms may provide tax advisory and preparation services to US subsidiaries of a Russian company if the services are not exported to the Russian parent company without violating the sanctions.

Miscellaneous

Joint Tax Committee report: The Joint Tax Committee has issued its annual “Overview of Federal Tax System 2022,” which is a summary of the present-law federal tax system covering individual and corporate income taxes, payroll taxes, estate and gift taxes, and excise taxes.

Supreme Court review of Whirlpool case: Whirlpool has asked the Supreme Court to review its 2021 loss in the US Court of Appeals for the Sixth Circuit related to regulations issued under Section 954(d), the manufacturing branch rule. The Supreme Court has completed its current term, so a decision on review is not expected until the fall of 2022.

US Court of Appeals decision in case involving Section 965 transition tax: The US Court of Appeals for the Ninth Circuit has issued an opinion affirming a lower court’s 2020 ruling that upheld the Section 965 transition tax, finding that the tax did not exceed Congress’s taxing authority.

Supreme Court review of case on foreign bank reporting (FBAR) penalties: The Supreme Court has agreed to hear a case on foreign bank account reporting penalties, which focuses on the maximum penalty allowed for failing to disclose FBARs to the IRS. Taxpayers with foreign bank account balances exceeding $10,000 are required to file a single form disclosing the accounts each year. The issue to be decided is whether taxpayers are liable for a single $10,000 penalty for each year of non-willful reporting failure, or whether the penalty applies annually to each unreported account.  The issue has divided federal appeals courts with the US Court of Appeals for the Ninth Circuit stating that the penalties apply once per year and the Fifth Circuit ruling they apply for each account that was not reported.

Treasury and the IRS

Treasury Secretary Yellen Testimony before Congress

Treasury Secretary Yellen testified before the Senate Finance Committee on June 7th and the House Ways & Means Committee on June 8th about White House budget proposals for fiscal year 2023, but she was questioned on a number of other topics including the pending OECD global tax agreement, inflation, the federal tax gap, retirement security, and the federal debt ceiling. In both hearings, Secretary Yellen was asked to discuss the status of negotiations on a revised version of the President’s BBBA and specific provisions, including by Republican members who oppose certain proposals such as the 15 percent corporate minimum tax on book income.

Treasury/IRS Administration

IRS Criminal Investigation Division: The IRS announced that Guy Ficco will be the new deputy chief for its Criminal Investigation Division starting in July 2022. Ficco is currently Executive Director of Global Operations for IRS Criminal Investigations.  In his new role, he will manage agents who police financial crimes like tax fraud, money laundering, and identify theft.

Treasury Inspector General for Tax Administration: The Treasury Inspector General for Tax Administration (TIGTA) announced three members of the senior leadership team. Heather Hill has been named Deputy Inspector General for Audit, charged with leading the program that performs oversight audits of the IRS. Russell Martin has been named the new Deputy Inspector for Inspections and Evaluations, leading the team that performs services including quick reaction reviews, on-site inspections, and analyses of major IRS programs. Trevor Nelson has been named Deputy Inspector General for investigations, leading the office that investigates attempts to corrupt IRS employees and programs as well as investigating waste, fraud, and abuse.

Issues and Guidance

Possible Changes to Final Foreign Tax Credit Regulations: As summarized in past issues of Washington Tax Insight, the IRS issued final regulations on the foreign tax credit (FTC) in December 2021 that took effect in March 2022. For a detailed discussion of key issues addressed in these regulations, see this True Insight.

As noted in the prior issues of Washington Tax Insight, there has been significant opposition to the new guidance with requests that the regulations either be withdrawn or delayed for one year. Republicans on the Ways & Means Committee sent a letter to Treasury Secretary Yellen on June 16th calling again for a delay in the implementation of the FTC final regulations until January 1, 2023.

During recent testimony by Secretary Yellen before both the Ways & Means Committee and the Senate Finance Committee, she said that she does not expect that Treasury will extend the implementation date for the final FTC regulations. She did suggest, however, that some changes to the final regulations could be applied retroactively.

Delay in BEAT Reporting for Qualified Derivative Payments: The IRS issued Notice 2022-30, which announces plans to delay for another two years a requirement to report qualified derivative payments (QDPs) under its 2019 base erosion and anti-abuse tax (BEAT) regulations implementing Section 59A. The IRS in 2021 had extended the reporting date to January 1, 2023. The guidance explains that the IRS intends “to provide that §1.6308A-2(b)(7)(ix) will apply to taxable years beginning on or after January 1, 2025. Until §1.6308A-2(b)(7)(ix) applies, the rules described in §1.59A-6(b)(2)(iv) that apply during the transition period will continue to apply.” The 2019 regulations allow companies to opt out of certain tax deductions in a way that could reduce their payments under BEAT. Qualified derivative payments, which are payments to a foreign affiliate that are related to a derivative on which the company recognized a mark-to-market gain or loss, are one such type of deduction. The IRS said that the delay will allow more time to study the interaction of the QDP exception, the BEAT netting rule, and QDP reporting requirements.

Superfund Tax: The IRS issued Revenue Procedure 2022-26, which explains how to request that a substance be added to or removed from the list of substances subject to the Superfund excise tax under Section  4671(a). In the 2021 Infrastructure Investment and Jobs Act, the Superfund excise tax was reinstated to take effect on July 1, 2022. In the new guidance, the IRS explained, “Specifically, the reinstated taxes impose an excise tax on the sale or use of a taxable chemical by the manufacturer, producer or importer of the taxable chemical. They also impose an excise tax on the sale or use of a taxable substance by the importer of the taxable substance.”

The IRS also issued Notice 2022-66 that prescribed the tax rates for 121 chemicals that are subject to the Superfund excise tax and included registration and procedural rules for the reinstated tax. The tax rate schedule will be included in the instructions to Form 6627, Environmental Taxes. The IRS also posted a set of Frequently Asked Questions (FAQs) that provide general information about the tax, including how it is computed and which taxpayers are affected.

Proposed Regulations on Estate Expense Deductions: The IRS issued proposed regulations that provide new guidance to estates of decedents that deduct expenses and certain claims under Section 2053.  The proposed rules instruct on the proper use of present-value principles in determining the amounts deductible by an estate for funeral expenses, administration expenses, and claims against the estate.

IRS “Dirty Dozen” List: In the June issue of WTS, we summarized the first four items, which were categorized as potentially abusive arrangements, announced by the IRS to be on its Dirty Dozen list. The agency has now announced the final eight issues on this list which include “tax scams” in these four categories: (1) pandemic-related scams; (2) offer in compromise “mills”; (3) suspicious communications; and (4) spear phishing attacks.

Increased Mileage Rates for July-December 2022: The IRS announced that it will increase the optional standard mileage rates for the second half of 2022 by four cents per mile, reflecting the rapid price increases in gasoline. The optional standard mileage rate for the months of July through December will be 62.5 cents per mile. The new rate for deductible medical or moving expenses will be 22 cents for the remainder of 2022.

IRS Audit Technique Guide: Oil and Gas Industry: The IRS issued an IRS Audit Technique Guide that outlines the examination of income tax returns of taxpayers in the oil and gas industry.  The guidelines identify potential issues and problem areas for agents covering acquisitions; types of organizations; intangible drilling costs; leveraged oil and gas drilling partnerships; production and operation of oil and gas properties; oil and gas well depletion; sales, exchanges, and other dispositions; and oil and gas transportation.

Letter rulings on spin-off/termination transactions: The IRS issued Revenue Procedure 2022-28 that notifies taxpayers that the IRS will not issue private letter rulings on whether a spin-off/termination transaction that involves excess assets results in an employer reversion under Section 4980(c)(2). The revenue procedure will be enforced for all ruling requests that are pending or received on or after June 21st.

Upcoming Guidance

IRS Acceptance of Advance Pricing Agreements: The IRS is reviewing its process of approving advance pricing agreements and may make changes to that process in the future according to Jennifer Best, Director of the IRS Large Business & International Division, Treaty and Transfer Pricing Operations. She also commented that the IRS is focusing on improving the “cycle times” for cases and working on updating revenue procedures related to APAs and competent authority.

Cryptocurrency Reporting Guidance:  Reportedly, Treasury and the IRS may delay the January 2023 date for cryptocurrency brokers and exchanges to start gathering detailed information on their clients’ trading. The 2021 Infrastructure Investment and Jobs Act included new cryptocurrency reporting requirements that are intended to provide the IRS with more data to investigate tax evasion in the virtual currency area.

International Issues

OECD – Adoption of a Global Minimum Tax & Digital Taxation

The OECD began work on a two pillar solution to address the challenges arising from the digitalization of the economy in 2020, and that work is now reaching its conclusion and implementation.  Proposed rules are under review with respect to both Pillars One and Two with public consultations taking place.

According to the original OECD documents, it was planned that both Pillar One and Pillar Two rules would take effect in 2023. OECD Secretary-General Mathias Cormann recently suggested that the timeline for implementation of Pillar One will likely be delayed a year from 2023 to 2024.

The OECD has been holding a series of rolling consultations on the main feature of Pillar One and the plan was to finalize the model rules and multilateral convention by mid-2022.  He said, however, that now the expectation is that the timeline will extend to the end of 2022. He has stated that the goal is to have an agreement in principle on the Pillar One technical rules by the date of the G20 meeting of Finance Ministers in July 2022.

On December 20, 2021, the OECD published the Model Rules under its Pillar Two proposal to impose a 15% minimum tax on a jurisdictional basis. OECD officials have announced that the technical work on Pillar Two is finished so it is now up to individual countries to implement the new rules.  They believe that it will not make sense for a country not to align its rules because otherwise revenue will be available for other countries to collect, so once there is a critical mass of countries on board, others will join the system.

The OECD has collected a list of Pillar Two guidance requests from tax administrations and taxpayers, and the plan is to publish guidance as quickly as possible but no later than the end of 2022. According to OECD officials, the implementation plans also include a peer review process, safe harbors, and capacity-building training.

European Union: European finance ministers have still been unable to reach a unanimous agreement on a minimum tax in the EU. Hungary vetoed an agreement on a draft directive implementing Pillar 2 during an Economic and Financial Affairs Council meeting in June 2022.

United States: As noted above, Treasury Secretary Yellen responded to a number of questions on the OECD negotiations when she appeared before the Senate Finance Committee and the House Ways & Means Committee to testify on the White House budget proposals for fiscal year 2023. Republican members of the two committees have repeatedly expressed concern to Treasury that the commitments the Biden Administration has made on behalf of the US would erode US competitiveness and tax revenue to the federal government.

OECD – Other Issues

The OECD plans to consider tax issues related to remote work in the next year focusing on cross-border tax questions including on issues related to taxable presence. The review will cover issues related to treaties and transfer pricing rules according to Grace Perez-Navarro, Deputy Director at the OECD Center for Tax Policy and Administration.

A new OECD forum on carbon mitigation has begun work on assessing tax approaches to fighting climate change, but the work could take five years according to Pascal Saint-Amans, Director of the OECD Center for Tax Policy and Administration. The OECD’s new inclusive forum on carbon mitigation is focused on collecting data on carbon-mitigation methods and assessing how the policies work.

European Union

The European Commission formally endorsed Ukraine’s application for EU membership, which gives Ukraine candidate status, and which was approved by all 27 governments at the June 23rd summit. Moldova and Georgia were also approved for candidate status.

The EU reached a provisional agreement on its landmark Markets in Cryptoassets (MICA) directive after years of debate on how to regulate the digital-asset industry. The European Parliament, Council, and Commission approved new provisions on the supervision of cryptoasset service providers, consumer protection, and environmental safeguards for cryptoassets, including cryptocurrencies like Bitcoin and Ether. The European Securities and Markets Authority (ESMA) will be responsible for oversight of the industry. The provisional agreement now must be approved by the Economic and Monetary Affairs Committee, followed by a plenary vote with the Council also approving the entire deal before it will come into force.