Washington Tax Insight May 2021
Politics and Congressional Activity
The Biden Administration has completed its first 100 days in office with the focus primarily on the COVID-19 pandemic and stimulus for the economy. The agenda for the remainder of 2021 is ambitious and likely to be even more challenging with issues related to inequality, voting rights, and the role government should play in directing economic growth. Reports are that President Biden has big goals in mind to build on the success of his agenda thus far, but he also is known to be a realist who will understand the need for compromise on all of these issues.
Although he is already facing opposition from Congressional Republicans on many of his proposals, he is also finding significant support from both parties when the American people are polled. The 2022 mid-term elections are never far from the minds of both parties in Washington and will likely influence the 2022 agenda, so the President and his staff understand that they must push to achieve as much of their agenda as possible this year.
The Biden Administration – Key Tax Proposals and the FY 2022 Budget
The American Jobs Plan
The Biden Administration released their American Jobs Plan, which is a tax and spending proposal designed to address infrastructure issues and job creation. The $2 trillion package would be offset by the Biden Administration’s Made in America Tax Plan, which was released concurrently with the American Jobs Plan. The Made in America Tax Plan provides for corporate-related tax increases, including raising the corporate tax rate to 28% (from the current law 21%) and repealing or restricting certain current-law tax incentives.
Key business issues in the Made in America Tax Plan include:
- Increase the corporate tax rate to 28%
- Impose a 15% minimum tax on the book income of the “very largest corporations” (undefined in the proposal)
- Changes to the global intangible low-taxed income (GILTI) regime including an increase in the effective tax rate to 21% and a requirement that it be calculated on a country-by-country basis
- Eliminate the deduction for foreign-derived intangible income (FDII)
- Repeal the Base Erosion and Anti-Abuse Tax (BEAT) and replace it with another regime (as yet undefined)
- Proposals designed to address offshoring and inversions
If you would like additional information on the international tax proposals included in the American Jobs Plan and the recent legislation introduced by SFC Chair Wyden (D-or), please see our recently published True Alert on this topic here: International Tax Reform in 2021: A Look at the Biden Administration Proposals and the Senate Finance Committee Framework
The American Families Plan
During his first address to Congress on April 28th, President Biden announced his “American Families Plan,” which includes an ambitious $1.8 trillion social plan financed by new tax increases directed at wealthy individuals and an IRS enforcement initiative. The plan included new spending on what the Biden Administration is calling “human infrastructure” priorities such as paid family and medical leave, universal child care, access to pre-kindergarten education and free community college, and nutrition assistance programs, along with tax relief targeted primarily at lower- and middle-income taxpayers.
The revenue-raising proposals included in the new plan are:
- Increase the top individual income tax rate to 39.6% for taxpayers “within the top one percent.” The plan does not specify income thresholds that would apply for individual filers and married taxpayers filing jointly.
- Tax income from long-term capital gains and certain dividends at ordinary rates for “households making over $1 million.”
- Permanently eliminate the carried interest loophole.
- Repeal the step-up in basis of inherited assets at death for gains greater than $1 million ($2.5 million per couple when combined with current-law exemptions for real estate). Special rules would apply to protect family-owned businesses and farms that are passed on to “heirs who continue to run the business.”
- End the like-kind exchange rules for gains on real property greater than $500,000.
- Permanently extend the excess business loss limitation, which was extended through 2026 by the American Rescue Plan.
- Ensure that the 3.8% Medicare tax on net investment income enacted as part of the Patient Protection and Affordable Care Act is applied consistently to those making over $400,000.
- An increase in IRS funding to allow the IRS to expand its audits of high-income individual taxpayers and corporations.
- Require financial institutions to “report information on account flows so that earnings from investment and business activity are subject to reporting more like wages already are.”
The plan also includes several enhanced family tax credits including:
- Extend the temporary increases in the child tax credit amount through 2025. Full refundability of the credit would be extended permanently.
- Permanently extend the temporary increases in the amount of the child and dependent care tax credit.
- Permanently extend enhancements to the earned income tax credits for childless workers.
- Permanently extend taxpayer-friendly changes to the Affordable Care Act’s health insurance premium tax credit.
There has been considerable debate about how Democratic leaders in Congress plan to move additional legislation such as the American Jobs Plan and the American Families Plan given their slim margin of control in the Senate. The Senate Parliamentarian has now ruled that the budget reconciliation procedure can be used again if the budget resolution is revised to include new budget reconciliation instructions, which may give Senate Majority Leader Schumer the ability to use budget reconciliation two more times in 2021. Bills using this procedure cannot be filibustered, but they are subject to a set of restrictions.
The FY 2022 Budget
President Biden released his Fiscal Year 2022 budget request, which is intended to help shape Congressional negotiations on the budget and appropriations bills. The document released on April 9th lays out top-line spending numbers for federal departments and agencies for FY 2022, but did not include tax policy changes. A formal budget is expected to be released in May including a more detailed description of the Treasury tax proposals.
House of Representatives/Ways & Means Committee
Ranking Minority Member Kevin Brady announces retirement: Rep. Kevin Brady (R-TX), who is currently the Ranking Minority Member on the Committee and was the former Chair of the Committee announced that he will retire at the end of his current term in 2022. The jockeying for the senior Republican position on the Committee started immediately, but it is unlikely to be resolved until 2022 after the mid-term elections.
Hearing on Paid Family and Medical Leave/Neal Proposal: The Ways & Means Committee held a hearing on the role of tax policy related to the issue of paid family and medical leave, entitled “Paid Leave, Child Care, and an Economy That Failed Women.” The Joint Committee on Taxation issued a background report prior to the hearing covering the legal background, empirical information, and policy considerations related to the hearing topics (JCX-19-21).
In conjunction with the hearing, Chair Neal (D-MA) released a new proposal to provide up to 12 weeks of paid family and medical leave, called the “Building an Economy for Families Act.”
Senate/Senate Finance Committee
Hearing on Climate and Energy Policy/Wyden Energy Tax Proposal: The Senate Finance Committee held a hearing on climate and tax policy. Prior to the hearing, SFC Chair Wyden (D-OR) reintroduced legislation that would consolidate and refocus a range of tax incentives directed at clean electricity, transportation, and conservation. His “Clean Energy for America Act” would also repeal a number of tax incentives used by the fossil fuel industry. Wyden’s intention is to move these proposals as part of the infrastructure package proposed by President Biden, who also included several energy proposals in his American Jobs Plan. Senators Crapo (R-ID) and Whitehouse (D-RI) introduced bipartisan legislation that would simplify energy tax credits by consolidating the investment and production tax credits into a new single credit.
In a related development from the Biden Administration, John Kerry, the White House Special Envoy for Climate, said in an interview that President Biden is exploring the idea of a border adjustment tax designed to put a levy on imports from countries with weaker climate policies.
Hearing on Taxing the Wealthy: The SFC Subcommittee on Fiscal Responsibility and Economic Growth held a hearing on “Creating Opportunity Through a Fairer Tax System,” which focused on the taxation of upper-income taxpayers and the legislation to impose new levies on wealthy individuals sponsored by Senator Warren (D-MA), who chaired the hearing.
Hearing on Racial, Ethnic, and Gender Disparities in the Tax Code: The SFC held a hearing to address the topic of racial, ethnic and gender disparities in the tax code entitled “Combatting Inequality: The Tax Code and Racial, Ethnic, and Gender Disparities.” One of the issues that drew significant attention during the hearing was the current law $10,000 cap on state and local tax deductions (SALT), which was enacted in the 2017 TCJA. There have been calls to repeal the SALT cap, but those have come mostly from House members with several members of the SFC opposing the proposals to repeal the cap. The hearing covered several other provisions of the TCJA including the passthrough deduction of section 199A and Opportunity Zones.
Tax Court: The Tax Court has found that a treaty does not override the tax code requirement that taxpayers file returns as a condition for claiming US deductions. The case of Adams Challenge (UK) Ltd v. Commissioner, 156 T.C. No. 2, dealt with section 874 and section 882(c)(2) of the Code.
JCT Report on the Federal Tax System: The Joint Committee on Taxation issued its annual overview of the federal tax system as currently in effect (JCX-18-21). The report covers the areas of income taxes, payroll taxes on wages, estate, gift, and generation-skipping transfer taxes, and excise taxes on goods and services.
Congressional Research Service Reports: The Congressional Research Service released a report called “Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97).” The report discusses the international tax changes enacted as part of the TCJA and concerns raised by the Biden Administration and others in Congress that the 2017 law should be revised to increase the tax burden of corporations with overseas income. It discusses policy options for revisions to current law, including GILTI, FDII, BEAT, thin capitalization rules, deemed repatriation, and anti-inversion rules.
The CRS also issued a brief report titled “Trends and Proposals for Corporate Tax Revenue,” which discusses several bills and Biden Administration proposals to increase corporate tax rates, tax book income, and tighten international tax rules.
Treasury and the IRS
Treasury Personnel and Policy Updates
New Climate Hub and Climate Counselor: The Treasury announced a new coordinated climate policy strategy that will: “Bring to bear the full force of the Treasury Department on domestic and international policymaking, leveraging finance and financial risk mitigation to confront the threat of climate change. These actions will position the economy for strong and sustainable growth consistent with a net-zero emissions future.”
To implement this strategy, Treasury will focus on the broad range of its climate-related policy work connected to 1) climate transition finance, 2) climate-related economic and tax policy, and 3) climate-related financial risks. As part of this strategy, Treasury is also creating a new Climate Hub and has named John E. Morton as the new Climate Counselor to coordinate and lead many of its efforts to address climate change.
IRS Personnel Changes: Robert Malone has been appointed the IRS Director of Exempt Organizations and Government Entities. He replaces Stephen Martin, who has been serving as Acting Director, and who will now return to his role as Director of Exempt Organizations Rulings & Agreements. Sunita Lough has returned to the position of Commissioner of the IRS’ Tax-Exempt and Government Entities Division. Edward Killen will return to the position of Deputy Commissioner.
The IRS announced the appointment of Nikole Flax as Commissioner of the Large Business & International (LB&I) Division. She replaces Douglas O’Donnell, who is now moving to become IRS Deputy Commissioner, Services and Enforcement. Holly Pax will become the LB&I Deputy Commissioner.
COVID-19 Crisis Guidance & Related Issues
American Rescue Plan regulations process: The White House has announced that the Office of Information and Regulatory Affairs (OIRA) will accelerate approval of new rules related to provisions of the COVID-19 and stimulus bill that was enacted in March. Shalanda Young, the acting Director of the Office of Management and Budget, has indicated that OIRA will take 5 days to approve urgent regulations and 3 weeks to approve less urgent rules, which is a shortened timeline from the usual OIRA procedure, which can take up to 90 days.
Guidance for Expanded Meals Deduction in 2021: The IRS issued Notice 2021-25, which provides guidance regarding the temporary 100-percent deduction for expenses that are paid or incurred in 2021 for food or beverages provided by a restaurant. This guidance explains when the temporary 100-percent deduction applies and when the 50-percent limitation continues to apply under section 274, which was modified in December by the Consolidated Appropriations Act, 2021.
Tax Credits for paid leave for employees to get vaccinations: In FS-2021-09, Treasury and the IRS announced details of tax credits available under the American Rescue Plan to help small businesses by providing for paid leave for employees receiving COVID-19 vaccinations. The tax credits are available to eligible employers that pay sick and family leave for leave from April 1, 2021, through September 30, 2021. The new IRS Fact Sheet provides information about eligibility for the tax credits and the process for claiming the credits.
Safe Harbor for businesses to claim deductions related to PPP loans: Treasury and the IRS issued Revenue Procedure 2021-20, which provides a safe harbor for small businesses to claim deductions related to first-round Paycheck Protection Program (PPP) loans. Under prior guidance, businesses that received PPP loans to cover payroll costs, interest on covered mortgage obligations, covered rent obligation payments, and covered utility payments could not deduct corresponding expenses. With the December 27, 2020, enactment of the Consolidated Appropriations Act, 2021, businesses now may claim these deductions even though they received PPP loans to cover original eligible expenses. These businesses can use the safe harbor provided by the guidance to deduct those expenses on the return for the immediately subsequent year. This relief is targeted at businesses who had a taxable year that ended prior to the December legislation enactment date.
Penalty Relief for Employment Tax Deposits: The IRS issued Notice 2021-24, which expands on previously issued guidance in Notice 2020-22 that provides penalty relief under section 6656 for an employer’s failure to timely deposit employment taxes. The new guidance will help ensure that employers may pay qualified sick leave wages and qualified family leave wages, qualified wages, and COBRA continuation coverage premiums using Employment Taxes that would otherwise be required to be deposited without incurring a failure to deposit penalty.
Opportunity Zones: The IRS issued proposed regulations related to the requirements that certain foreign individuals and foreign-owned partnerships must meet to access tax benefits for qualified opportunity funds and their investors under Section 1400Z-2 of the Code. The proposed rules would also allow under certain circumstances, “for the reduction or elimination of withholding under section 1445, 1446(a) or 1446(f) of the Code on transfers that give rise to gain that is deferred under section 1400Z-2(a)”. Finally, the rules also instruct on the two-year extension of the working capital safe harbor in the case of federal disasters.
Other Issues and Guidance
IRS Seeks Input on Guidance Priorities: The IRS issued Notice 2021-28, which solicits public input on the agency’s 2021-2022 Priority Guidance Plan with comments due by May 28, 2021. The guidance plan lists the priority tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance during the period from July 1, 2021, through June 30, 2022.
Treaty Update: Treasury has opened negotiations with Colombia over a new tax treaty and is looking into amending existing treaties with Switzerland and Israel. The US has completed negotiations with Norway and Romania, though the treaties are not yet signed, and is in ongoing talks with Croatia.
Office of Promoter Investigations: The IRS has launched the Office of Promoter Investigations, which will focus on abusive tax transactions including microcaptive insurance schemes and syndicated conservation easements. The Office will be led by Lois Deitrich and will be housed in the Small Business and Self-Employed Division. It will, however, do agencywide compliance work and coordinate with promoter teams in other business divisions.
Advance Pricing and Mutual Agreement Program: The IRS has issued an annual review of its Advance Pricing and Mutual Agreement Program (APMA) that describes the experience, structure, and activities of the APMA Program during calendar year 2020. The report shows few major changes in the number and types of APAs processed in 2020 despite disruptions from the pandemic affecting both the IRS and corporate participants. The processing time for APAs, however, decreased significantly last year. While executing 127 APAs in 2020, the median processing time was reduced by 6 months from 38.8 months in 2019 to 32.7 months in 2020.
IRS Chief Counsel Memorandum – Foreign Entities Classified Even When the Classification is Irrelevant: An IRS Chief Counsel Memorandum was released that found that certain foreign entities can be classified in a particular way, e.g., a partnership, even when that classification is irrelevant. The memorandum stated that “an entity has a classification for federal tax purposes at all times including during periods when its classification is not relevant and regardless of whether the classification has ever been relevant.
Jose Murillo, Deputy Assistant Secretary for International Tax Affairs at Treasury, has said that it is moving forward on several international tax packages that were not completed under the prior Administration, including work in the following areas:
- Final foreign tax credit rules
- Previously Taxed Earnings and Profits (PTEP)
- Passive Foreign Investment Companies (PFIC)
- Attribution rules under Sections 958(b)(4) and 954(c)(6)
- Qualified pension funds under Section 897(l)
- Targeted rule under Section 367(d) related to the transfer of intellectual property back to the US and the deemed inclusion rules
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The OECD continues to have a target date of mid-summer for reaching a consensus on new global tax rules. Pascal Saint-Amans, who is the director of the OECD’s Center for Tax Policy, recently indicated that they have begun to focus on the implementation period for the reforms suggesting that once an agreement is reached this summer, they would be looking at the following 18 months for implementation.
The US made a presentation at the OECD Steering Group of the Inclusive Framework in early April that outlined its negotiating position on the current Pillar One and Pillar Two concepts, which are part of the OECD project with “blueprint” documents on the two pillars released in October 2020. Pillar One would create new income apportionment and nexus rules to allow jurisdictions to tax certain multinational companies on income earned in jurisdictions where such multinationals may not maintain a physical presence. Pillar Two would create a global minimum tax.
The presentation proposes a new approach on Pillar One which is intended to simplify the OECD’s existing proposals and avoid perceived discrimination against US multinationals. The new approach includes a 21% global minimum tax that would apply to companies that meet revenue and profit-margin thresholds regardless of their industry and whether they are consumer-facing or not. The result is that the proposal would focus on no more than 100 of the world’s most profitable multinationals, and thereby eliminate business line segmentation.
The presentation also confirms the Biden Administration support for Pillar Two of the project and outlines the Administration’s legislative proposals to adopt an OECD-compliant minimum tax in the US. The US also committed to: (1) reform the GILTI regime to align with the Income Inclusion Rule more closely, which is part of the Pillar Two approach, including by adopting a country-by-country foreign tax credit limitation, and (2) repeal the US BEAT and replace it with a regime resembling the Undertaxed Payments Rule, which is also part of the Pillar Two approach.
SFC Chair Wyden (D-OR) has expressed support for these positions of the Biden Administration stating that they could be the basis for a global deal. In contrast, however, House Republican Ways & Means members sent Treasury Secretary Yellen a letter saying they were concerned that the Pillar 2 negotiating position would permit other countries to enact minimum taxes at rates lower than the current GILTI effective rate, while the Biden Administration seeks to double the GILTI rate paid by US-headquartered companies. The letter also asked for a briefing on the Pillar 1 proposal and the Administration’s negotiating goals.
Reaction from other key players in the discussions, including France, Germany, the Netherlands, and the UK, has been positive to this development with respect to optimism on the talks proceeding, but discussion of a specific tax rate is somewhat controversial especially in the 21% range. The OECD has recently stated that the goal is to reach a political agreement for a global consensus-based solution by the G20 Finance Ministers meeting scheduled for July 9-10, 2021.
The EU has stated publicly that it plans to continue planning for a digital tax from January 1, 2023, even if OECD talks succeed in reaching a global consensus. Margrethe Vestager, who is the EC Competition Commissioner, said that even if an OECD agreement is reached, it will take time before it is ratified and implemented. Also, the EC Director of Direct Taxation indicated that any agreement to a global minimum tax would have to be implemented through legislation in the EU and could become difficult to approve because of the bloc’s unanimity rule.
The European Union is working to advance sweeping new tax transparency rules that will require companies to disclose publicly how and where they pay taxes. The proposal would require large multinationals that file taxes in the EU (potentially those with over 750 euros in annual revenue in each of the last two consecutive years) to disclose information including how much profit they make and how much tax they pay in each jurisdiction. Negotiations have begun with the final text requiring ratification by both the European Council and the Parliament. Early details have signaled that non-EU multinationals with subsidiaries in the EU may be included in the new rules.
OECD Model Tax Treaty Commentaries: The OECD has launched a consultation to update its model tax treaty commentaries, which complement the model treaty and suggest how countries should interpret and apply treaties. The consultation period runs until May 28th and is linked to February guidance the OECD published on transfer pricing for financial transactions. Among the proposed updates are new wording in sections covering interest deductibility, dispute resolution, and business profits.