Washington Tax Insight June 2021
Politics and Congressional Activity
Congress returned from its recess on June 7th and now decisions will be made by Congressional leadership about how to proceed with infrastructure legislation and whether they can reach a bipartisan agreement. It is expected that Speaker Pelosi will direct her committee chairs to complete their work on a budget resolution and other implementing legislation before the July 4th recess in the event it is necessary to proceed with budget reconciliation legislation with a goal of completing both before the August recess.
Other issues that Congress will face include legislation on police reform and approval of S.1 in the Senate, which is the elections and ethics bill. They must also address the issue of funding the government, with the possibility that action may need to be taken on the debt limit, since the current fiscal year ends on September 30th.
The Biden Administration Fiscal Year 2022 Budget
The Biden Administration released its Fiscal Year 2022 Budget (“Budget”), which calls for $6 trillion in spending and significant tax increases for large corporations and high-income individuals. Spending initiatives cover new funding for traditional physical infrastructure projects and “human” infrastructure initiatives along with tax relief for lower- and middle-income taxpayers, all of which were outlined in the Biden Administration’s American Jobs Plan and the American Families Plan.
In conjunction with the release of the Budget, the Treasury Department issued its “General Explanations of the Administration’s Revenue Proposals,” which is known informally as the Green Book. The Green Book provides background information on the President’s tax proposals, reasons for the policy changes, proposed effective dates, and revenue estimates.
The proposed tax increases would increase federal revenue by $3.6 trillion over ten years, providing a major funding source for the spending included in the Budget, which totals $4.1 trillion for the American Jobs Plan and the American Families Plan.
The following corporate tax proposals are included in the Green Book:
- Raise the corporate income tax rate to 28%
- Revise the Global Minimum Tax Regime (reducing the section 250 deduction from 50% to 25% to achieve a 21% GILTI rate assuming a 28% corporate income rate and applying GILTI on a per-country basis); disallow deductions attributable to exempt income; and limit Inversions
- Reform taxation of foreign fossil fuel Income by eliminating tax preferences and reinstating Superfund taxes
- Repeal the deduction for Foreign-Derived Intangible Income (FDII) and use the resulting revenue to expand R&D investment incentives
- Replace the Base Erosion Anti-Abuse Tax (BEAT) with the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) Rule, which would deny tax deductions to domestic corporations when certain payments are subject to a low tax rate
- Limit Foreign Tax Credits from sales of hybrid entities
- Restrict deductions of excessive interest of members of financial reporting groups for disproportionate borrowing in the US
- Impose a 15% Minimum Tax on book earnings of large corporations (with book income over $2 billion)
- Provide tax incentives for locating jobs and business activity in the US and remove tax deductions for shipping jobs overseas.
- Extend permanently the current limitation on certain excess business losses
The Green Book also explains the proposals to tax capital gains and carried interests as ordinary income for certain upper-income taxpayers (AGI above $1 million), and to limit the current step-up in basis rule to treat transfers of appreciated income by gift or on death as realization events by taxing the unrealized gain on certain inherited assets. Also included is a proposal to eliminate like-kind exchange treatment for real estate gains greater than $500,000 ($1 million for joint returns).
Most changes in the Budget would take effect for tax years ending after either December 31, 2021 or the date of enactment, but the proposed increase in the capital gains tax rate would be effective “for gains required to be recognized after the date of announcement.” Administration officials have said that the “date of announcement” is April 28, 2021, which was the date the President announced the American Families Plan. Typically tax rate increase proposals are prospective, so the capital gains rate increase effective date would be outside of the norm especially since it is based on a “date of announcement.”
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.
What are the Next Steps for the Budget?
The Administration’s Budget is an opportunity for the President to outline his tax policy agenda, but these proposals are not binding and the responsibility for drafting legislation lies with the Congress.
Although there have been discussions between Democrats and Republicans in Congress about infrastructure legislation, there has been no start to formal negotiations on a budget resolution for Fiscal Year 2022 that would be needed to provide “budget reconciliation instructions” for consideration of the Administration tax proposals. Even if they reach a bipartisan agreement on an infrastructure bill, it is expected that Congressional Democratic leadership will proceed with a budget reconciliation bill to address other issues. Such legislation will need the support of all Senate Democrats and most House Democrats for approval.
What’s Missing from the Budget Proposals
Section 199A: One tax issue that the Biden Administration is not including in its current proposals is elimination of the section 199A deduction for pass-through businesses, despite the fact that the President and some Democrats have called for eliminating it. A significant amount of the benefit from this TCJA tax change reportedly goes to wealthy taxpayers, but it is also perceived to be a small business benefit, which makes its elimination more challenging.
SALT: The budget does not call for any change to the TCJA $10,000 cap on state and local tax deductions, but this will be an issue that must be considered since several members of the House have stated that they will oppose the Administration’s economic agenda unless changes are made to the SALT rules.
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 this summer, which is earlier than had been expected. The current suspension of the US debt limit expires on July 31 after which Treasury then is required to engage in measures to shift federal funding in order to manage the situation. It is likely that the absolute date for action will not come until fall, but this will raise the issue of whether the debt limit extension will be packaged along with other legislation in order to ensure a timely completion.
Infrastructure Legislation and The American Jobs Plan
The Biden Administration’s American Jobs Plan is a tax and spending proposal designed to address infrastructure issues and job creation, and it would be offset by the Biden Administration’s tax proposals as outlined above. Following the President’s announcement of this initiative, ongoing negotiations between Congressional Democrats and Republicans with the White House have taken place.
After the initial announcement, the Administration proposed a new $1.7 trillion package to which Congressional Republicans countered with a $1 trillion package that would be paid for by “reprogramming” unspent pandemic-relief funds. A group of Senators who belong to the bipartisan G20 group of moderate senators are also working on an alternative package of spending options and revenue offsets. It appears that the gap between the positions of Congressional Republicans and the White House may be too large to resolve, which leaves Congressional Democrats with the option of proceeding using the budget reconciliation process. Senator Manchin (D-WV), however, continues to hold firm on his position that the infrastructure legislation should be a bipartisan effort, thereby potentially blocking the ability of Senate Democrats to get 50 votes in favor of budget reconciliation legislation.
The most challenging disagreement between Democrats and Republicans on infrastructure legislation is how to pay for the legislation. The Biden Administration is holding firm on its plan to raise taxes on corporations and the wealthy to offset the cost. The latest proposal from President Biden is to apply a 15% minimum tax on corporations combined with increased IRS enforcement as a way to pay for his infrastructure plan. Senator Capito (D-WV), who has been negotiating with the White House for Senate Republicans, has said that repealing or rolling back provisions of the 2017 tax reform law are dealbreakers for her party.
House of Representatives/Ways & Means Committee
Retirement Legislation Approved: The W&M Committee approved by a voice vote a bipartisan bill introduced by Chair Neal (D-MA) and Ranking Member Brady (R-TX) that is aimed at making it easier for businesses to offer tax-qualified retirement savings plans to their employees and for individuals to participate in retirement plans and increase their tax-preferred savings. The Securing a Strong Retirement Act of 2021 builds on the SECURE Act, which was enacted in 2020. No date for House Floor consideration has been announced. A Senate Finance Committee aide has suggested that this legislation could be on the agenda for the SFC after the August Congressional recess. A bipartisan bill was introduced by Senators Portman (R-OH) and Cardin (D-MD), which will contribute to interest in moving this legislation through the SFC later this year.
Hearing on capital gains and estate taxes: The W&M Select Revenue Measures Subcommittee held a hearing on proposals to increase the capital gains tax rate and modify the estate tax rules, which are included in the Administration’s American Families Plan.
Hearing on the tax treatment of wealthy taxpayers: The W&M Committee held a hearing on the tax treatment of wealthy individuals.
Infrastructure Funding Hearing: The W&M Committee held a hearing entitled “Leveraging the Tax Code for Infrastructure Investment.”
Hearing on Paid Leave: The Subcommittee on Worker and Family Support held a hearing on paid leave that included a new legislative proposal from committee Republicans. The issue of paid leave has been included in the Administration’s American Families Plan, and Chair Neal (D-MA) recently introduced his own bill on paid leave. The Senate Health, Education, Labor and Pensions Committee also held a hearing on paid leave.
Senate/Senate Finance Committee
Hearing on Climate and Energy Policy/Wyden Energy Tax Proposal: The Senate Finance Committee approved the Clean Energy for America Act, which would consolidate and refocus a range of tax incentives directed at clean electricity, transportation, and conservation. It would also repeal several tax incentives that benefit the fossil fuel industry. The bill passed along party lines with Ranking Member Crapo (R-UT) expressing support for the technology-neutral policy direction of the bill, while stating that it would jeopardize jobs and energy security.
The power-sharing agreement currently in effect in the Senate allows legislation to advance out of committee on a tie vote. The fate of the bill is uncertain at this time, although Chair Wyden (D-OR) has said that he would like to see it considered as part of the infrastructure legislation that is currently being negotiated in Congress. That is unlikely if a bipartisan infrastructure package can be agreed to given the Republican opposition to this energy bill, but if infrastructure legislation advances as part of a Democratic effort through reconciliation, inclusion there might be possible. The Joint Tax Committee has estimated the cost of the energy package to be $259 billion over 10 years, however, which could prove to be a complication for including it in an infrastructure package.
Hearing on offshore tax evasion: The SFC Subcommittee on Taxation and IRS Oversight held a hearing called “Closing the Tax Gap: Lost Revenue from Noncompliance and the Role of Offshore Tax Evasion.” Chair Whitehouse (D-RI) has cosponsored legislation with Senate Majority Whip Durbin called “No Tax Breaks for Outsourcing Act.” This legislation includes proposals on GILTI, inversions, and earnings stripping.
Infrastructure Funding: The SFC held a hearing entitled “Funding and Financing Options to Bolster American Infrastructure.”
Remote Workers/Supreme Court: The Biden Administration has urged the Supreme Court not to review a New Hampshire lawsuit that challenges Massachusetts’ practice of taxing nonresidents who once worked from offices in Massachusetts, but now work remotely from New Hampshire. Should the Supreme Court let the case go forward, it could affect similar permanent tax laws in other states, including New York and Pennsylvania. Under the Court’s longstanding practice, states seeking to sue another state under the Court’s original jurisdiction are required to ask permission and show they lack an alternative forum to press their case.
Tax Treaty Update: At a public forum, a Treasury official stated that the US wants to amend existing income tax treaties with Switzerland and Israel; has opened tax treaty negotiations with Colombia; has completed tax treaty negotiations with Norway and Romania; and is engaged in ongoing tax treaty discussions with Croatia. Three pending US income tax treaties with Chile, Hungary, and Poland have not yet been completed and ratified.
Tax Court Update: The US Tax Court does not yet have a date for resuming operations in person so remote work will continue for the foreseeable future.
Tax Haven Disclosure Bill: The House Financial Services Committee approved legislation that would require multinationals to publicly disclose country-by-country financial reporting including total pre-tax profits and total amounts paid in state, federal, and foreign taxes. Similar legislation has been introduced in the Senate. No date for House Floor consideration has been announced.
Treasury and the IRS
Treasury Personnel and Policy Updates
The Senate Finance Committee held a confirmation hearing for several Treasury Department nominations, including Lily Batchelder for the position of Assistant Treasury Secretary for Tax Policy. The other nominees that were questioned included Benjamin Harris to be an Assistant Secretary of the Treasury, J. Nellie Liang to be an Under Secretary of the Treasury, and Jonathan Davidson to be Deputy Under Secretary of the Treasury. No date has been announced for a SFC vote on the nominations or consideration by the full Senate.
Michael Hsu was appointed the first deputy controller and also took charge as the Acting Chief of the Office of the Comptroller of the Currency.
COVID-19 Crisis Guidance & Related Issues
Taxation of Dependent Care Assistance Programs: The IRS issued Notice 2021-26, which provides guidance on the taxation of dependent care assistance programs (DCAPs) due to the application of either the carryover or the extension of a claims period enacted by the Consolidated Appropriations Act, 2021.
Guidance on Credit for COBRA subsidies: The IRS issued Notice 2021-31, which provides guidance for employers on recouping COBRA subsidies. The American Rescue Plan provides a 100% subsidy for premiums for health plans continued by people who have lost their jobs or had their hours reduced (available from April 1 through September 30, 2021). The Notice provides information regarding the calculation of the credit, the eligibility of individuals, the premium assistance period, and other information to help employers, plan administrators, and insurers understand the credit. IRS officials have also said that guidance will be forthcoming on rules applying to the subsidy for both employees and employers.
Other Issues and Guidance
Accounting Guidance for Foreign Corporations: The IRS issued Revenue Procedure 2021-26, which provides guidance to foreign corporations that make changes to their accounting method. The IRS had previewed this guidance in 2019 final regulations under section 951A, which deals with global intangible low-taxed income (GILTI). The guidance describes how taxpayers can get automatic consent to change to the proper method of accounting and how to implement the effects of that change. The guidance also offers some protection from IRS audits but certain prior limitations apply.
Updated drafts of new reporting forms for pass-through entities: The Treasury and IRS released updated drafts of new Schedule K-2 and K-3 for Forms 1065, 1120-S, and 8865 for tax year 2021. The schedules are designed to provide greater clarity for partners and shareholders on how to compute their US income tax liability with respect to items of international tax relevance, including claiming deductions and credits. The redesigned forms and instructions will also give useful guidance to partnerships, S corporations and US persons who are required to file Form 8865 with respect to controlled foreign partnerships on how to provide international tax information. To promote compliance with adoption of Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the Treasury Department and the IRS intend to provide certain penalty relief for the 2021 tax year in future guidance.
Opportunity Zones: The IRS announced that the boundaries for opportunity zones will not be adjusted based on new census information. An IRS official did make comments that they are considering some minor changes to the Opportunity Zone program, but no details were provided. An IRS official also advised taxpayers that the 24-month extension for holding working capital that was included in January 2021 guidance should not be considered to be automatic, rather taxpayers should be prepared to explain why they needed the additional time.
Syndicated Conservation Easement Court Cases: The IRS expects to settle a significant number of court cases involving challenges to tax deductions associated with conservation land deals, according to a senior official. Expected settlements would involve the payment of taxes, interest, and penalties. Several cases have gone to the US Tax Court where the IRS has offered a settlement program under which investors can deduct their cost of acquiring their stake but must pay a 10% penalty, while promoters are not allowed deductions and must pay a 40% penalty.
Representatives of Treasury and the IRS have made comments suggesting upcoming guidance for the following issues:
- Natural gas property guidance covering the ability to recover the cost of property used to transmit and distribute natural gas
- Guidance on disaster-related losses related to the pandemic and the ability to claim a casualty loss
- Regulations on the treatment of intercompany sales of partnership interests related to the limit on debt interest payment deductions
- Relief for entities that elect to be S corporations but have operating agreements that classify them otherwise and relief for S corporations that accidentally terminate their S corporation status
- “One-stop shop” for private letter rulings on tax-free spinoffs
OECD – Adoption of a Global Minimum Tax & Digital Taxation
At a meeting of the G-7 nations, which includes the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom, the Finance Ministers reached an agreement in principle that multinational corporations should pay at least a 15 percent tax in jurisdictions where they conduct business. The agreement also pledges cooperation on finding further consensus on the allocation of taxing rights among nations, and it calls for the removal of all unilateral digital services taxes. The US proposal for a global minimum corporate tax of at least 15% was instrumental in efforts to reach this consensus, which will be reviewed at the meeting of the G-20 Finance Ministers in early July. The chairs of the US House Ways & Means Committee and the Senate Finance Committee issued a joint statement praising the “historic agreement” stating that they “look forward to reviewing the details of today’s deal and applaud the Biden Administration’s leadership in working to level the international playing field and support American workers.”
United States: The Treasury Department issued an update on its negotiations with members of the OECD and the Administration’s support for a global minimum tax of at least 15 percent. The Treasury update explains that 15 percent “is a floor and that discussions should continue to be ambitious and push that rate higher.” The Biden Administration has proposed a 21 percent minimum tax rate on the foreign income of US corporations.
Congressional Action: SFC Ranking Member Crapo (R-ID) sent a letter to Treasury Secretary Yellen on the OECD negotiations in which he asked for more details on new proposals the US recently presented to its negotiating partners. His letter included a number of questions for which he requested a response by June 4th.
European Union: The EU approved the development of a new digital services tax in July of 2020, and a EC official has now said that the EU tax will be broadly based so as not to discriminate against US companies.
New Corporate Tax Framework: The EU presented plans for a new corporate tax framework titled “Business in Europe: Framework for Income Taxation” that would create a single corporate tax rulebook and reallocate profits between member states. The proposal will not be presented in detail until 2023, and it will face a challenge in that unanimity is required among member states on taxation issues. The European Commission has, however, suggested it might use a Treaty clause to override the need for unanimity if these is a risk of serious distortion of the single market. The Commission plan would allow a group or company to determine its tax liability in each member state according to a single set of rules, which could lead to big companies filing a single EU tax return. The EU also announced that it will set out a agenda for shorter term changes to the tax rules, including proposing legislation to combat the misuse of shell companies and creating incentives for companies to favor equity more than debt.
Country-by-country tax reports: EU member countries met with members of the EU Parliament on June 1st to discuss a proposal they have approved to make public the tax report of large multinationals. Companies with consolidated revenue of more than 750 million euros already have to report their activities to national tax authorities on a per-country basis where they operate, and this proposal would make those reports public. The proposal must be agreed to and ratified jointly by the European Parliament and the Council of the EU.
Amazon case in the EU General Court: The EU General Court has found that EU regulators failed to show that the Amazon was given special treatment by Luxembourg’s tax authority in violation of state-aid rules. The case was brought by the EU competition chief as part of an effort to target preferential fiscal deals.