Washington Tax Insight September 2021
Politics and Congressional Activity
The fall agenda for Congress will be busy and challenging; work must be completed on the infrastructure legislation, the budget reconciliation legislation, and the fiscal year 2022 government funding spending package along with addressing the debt ceiling limit. The House returns to Washington for votes starting on September 20th, but there are two weeks designated as “committee work weeks” prior to that and the two tax-writing committees are already working on the fall legislation. The Senate returns to Washington on September 13th.
Bipartisan Infrastructure Package
An infrastructure agreement with $550 billion of new spending was approved by the Senate on August 10th. The Infrastructure Innovation and Jobs Act includes new federal spending for roads, bridges, rail, public transit, water, and broadband. Revenue offsets in the bill include new cryptocurrency information reporting requirements, early termination of the Employee Retention Credit program, which now ends with 3Q 2021, and reinstatement of a Superfund tax on chemicals.
The House was called back from its recess the week of August 23rd in order to approve a budget resolution by a party-line vote of 220-212 directing the 13 House committees to draft legislation on $3.5 trillion in new spending and tax cuts, along with a list of tax increases to pay for much, if not all, of the package. The resolution also states that the House will vote on the Senate-approved infrastructure bill no later than September 27th.
Despite the fact that there is bipartisan support for changing the cryptocurrency provision as written in the Senate version of the bill, the House rule does not allow amendments to the infrastructure bill on the House Floor, which means that the Senate provision will not be changed in the House. This position was driven in part by the conclusion that there was likely not enough time for the House to make changes to the infrastructure bill and then send the bill back to the Senate for approval by the agreed end of September approval date.
The Budget Reconciliation Legislation
On August 11, the Senate approved a $3.5 trillion budget resolution, which includes many of the Biden proposals that constitute his “human infrastructure” agenda. The budget blueprint instructs House Committees to complete their work by September 15th. Democratic leadership has not committed to offsetting the total cost of this legislation, but it is certain that there will be revenue offset proposals included that will come in part from the Biden tax proposals forwarded to Congress as part of his budget plan targeting corporations and high-income individuals.
A group of centrist Democrats in the House were able to initially delay consideration of the budget resolution in the House in an effort to get House leadership to commit to a date certain for consideration of the infrastructure bill in the House. It is likely that there will continue to be negotiations within the Democratic party about priorities that should be reflected in the final version of the budget reconciliation legislation, while House leadership will also need to work with Senate Democratic leadership in order to produce a bill that will get the votes of all Senate Democrats, which will be needed for Senate approval.
The next step is for the individual House committees that have received instructions under the resolution to draft and approve those portions of the larger bill that are under their respective jurisdictions. There is no specific plan yet as to how the Senate will proceed and whether Senate committees will undertake consideration of provisions specific to their committee jurisdiction.
Ways & Means Committee Chair Neal (D-MA) has reported that he plans to have his Committee complete their markup of tax issues to be included in the bill by September 13th, and work in his Committee has started, although no list of revenue offsets has yet been released. He has made it clear that he plans to draft a detailed reconciliation tax package, thereby complying with the constitutional duty of the House to initiate tax legislation, and that his goal is for the legislation reported out of his committee to totally offset the cost with revenue increases. He has outlined priorities for their work that includes extending the expanded child tax credit, paid family leave, and improvements to Medicare. He also has said that he would like climate change legislation, including clean energy incentives, to be part of the Committee discussion.
SFC Chair Wyden has not yet announced a schedule for his committee but as detailed below, he has introduced legislation on a number of issues that are likely to be considered for inclusion in the budget reconciliation legislation. It is expected that the Democratic leadership of the House and Senate tax-writing committees will continue to work together behind the scenes on drafting their part of the legislation.
Included in the Senate version of the budget resolution was a statement that a “priority” for the Senate Finance Committee would be “SALT cap relief,” although no details were provided. The proposal will have to be worked out during committee consideration of the tax provisions of the budget reconciliation legislation.
The Debt Limit
The Bipartisan Budget Act of 2019 suspended the debt ceiling until July 31, 2021. The federal debt limit is the maximum amount of debt the Treasury Department is authorized to issue to the public or to federal agencies. The Congressional Budget Office has said that it expects the Treasury Department to be able to use “extraordinary measures” to keep the federal government running until October or early November, so this will be a priority issue for Congress this fall. There is no agreement yet between the leadership of both parties in the House and Senate as to how to deal with the debt ceiling issue.
Funding for Fiscal Year 2022
Congress must pass legislation funding the operation of the federal government before October 1, 2021. Prior to leaving for their August recess, the House approved a seven-bill spending package that would fund these programs: Agriculture-FDA, Energy and Water, Financial Services, Interior-Environment, Labor-HHS-Education, Military Construction-VA, and Transportation-HUD. No vote was taken on the Defense Appropriations bill. The Senate has not approved any spending bills to date. If Congress does not pass all of the fiscal year 2022 spending bills by the end of September, they will need to agree on a continuing resolution in order to avoid a government shutdown.
Senate/Senate Finance Committee
International Tax Reform Discussion Draft Released: SFC Chair Wyden (D-OR), along with SFC members Sherrod Brown (D-OH) and Mark Warner (D-VA), released a discussion draft for international tax reform that provides additional detail on proposed changes that were outlined in a high-level framework released by the three SFC members in April 2021. They will work to include the proposals as revenue offsets in the $3.5 trillion budget reconciliation bill that Congress will consider this fall. Draft legislative language and a section-by-section summary was included in the released material. The discussion draft includes proposed changes to the global intangible low-tax income (GILTI) regime, the foreign-derived intangible income (FDII) regime, and the base erosion and anti-abuse tax (BEAT). Comments on the discussion draft were due by September 3, 2021.
Carried Interest Legislation: SFC Chair Wyden introduced the “Ending Carried Interests Loophole Act,” which would reform the taxation of carried interest of fund managers and the compensation they receive in exchange for their services. It would change the current tax treatment of carried interest income from a capital gain or dividend to ordinary income. The Joint Committee on Taxation has estimated that the bill would raise $63 billion over 10 years, and it will be considered as a revenue offset for the budget reconciliation bill.
Taxation of Derivatives: SFC Chair Wyden has released the “Modernization of Derivatives Tax Act,” which would modify the taxation of income from derivative transactions. The bill, among other things, would require annual mark-to-market treatment of derivatives and ordinary tax treatment of the resulting gains and losses while also applying a single tax regime to all derivative contracts. This legislation is estimated to raise $16.5 billion over 10 years and will be considered as a revenue offset in the budget reconciliation bill.
Section 199A Pass-through Business Income Deduction: SFC Chair Wyden introduced the “Small Business Tax Fairness Act,” which would, among other things, modify the 20% deduction under Section 199A. The provision, which was enacted as part of the TCJA, provides a deduction equal to 20 percent of qualified business income (QBI) from a domestic proprietorship, partnership, S corporation, trust or estate. This bill would remove restrictions that prevented service business owners from taking the 20% deduction, but it would also phase out the deduction for individuals with incomes above $400,000.
Tax Incentives for Wind – New Legislation: Senator Markey (D-MA) introduced the Offshore Wind American Manufacturing Act, which would offer a 30% investment credit for the cost of preparing a facility to produce parts for offshore wind farming. Another tax credit would apply to the production of the parts themselves and vary between a multiple of 2 and 5 cents per watt produced by the turbine.
House/Ways & Means Committee
Ways & Means Committee: Ways & Means Committee member Ron Kind (D-WI) announced that he will not run for re-election in 2022. Republicans Kevin Brady (R-TX) and Tom Reed (R-NY) have also announced their retirements.
Treasury and the IRS
IRS Funding Increase: The House approved a fiscal year 2022 spending package that includes $13.6 billion for the IRS, which is an increase of $1.7 billion over the level enacted for FY 2021. The House-approved bill includes a baseline allocation of $13.2 billion for the IRS plus a program integrity allocation adjustment of $417 million requested by the Biden Administration as part of a multi-year effort to increase compliance and enforcement activities to narrow the “tax gap.”
COVID-19 Crisis Guidance & Related Issues
Expanded Credit for Employers Offering Paid Leave for Vaccines: The IRS announced that employers can now claim tax credits for providing paid leave to employees who take household members to vaccination appointments or care for them as they recover from the shot. This expands on previous guidance that stated that the credits were available to employers that provide leave to employees receiving or recovering from the vaccinations. This guidance was included in an update to the FAQs on the IRS website.
Employee Retention Credit: The IRS issued Revenue Procedure 2021-33 and an accompanying news release that provides a safe harbor pursuant to which employers are permitted to exclude certain amounts from gross receipts for purposes of determining eligibility for the Employee Retention Credit. This guidance permits employers to exclude the amount of forgiveness from a Paycheck Protection Program loan and grants from the Shuttered Venue Operators program and the Restaurant Revitalization Fund from their gross receipts for purposes of testing for eligibility for the Employee Retention Credit program.
Other Issues and Guidance
Work Opportunity Credit: The IRS issued Notice 2021-43, which provides transition relief to certain employers that claim the Work Opportunity Tax Credit (WOTC) under Section 51. The WOTC encourages employers to hire certain individuals from designated groups deemed to face barriers to joining the workforce including ex-felons, veterans, summer youth, and empowerment zone residents. With this guidance, businesses will get additional time beyond the current 28-day requirement to request certification for certain individuals hired as part of the credit program, including individuals who are part of the program’s designated community resident targeted group or the qualified summer youth employee targeted group.
Interest rates for underpayments and overpayments: The IRS issued Revenue Ruling 2021-17, which provides interest rates for underpayments and overpayments. The rates for interest determined under Section 6621 for the calendar quarter beginning October 1, 2021, will be 3% of overpayments (2% in the case of a corporation), 3% for underpayments, and 5% for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5%.
Enhanced Oil Recovery Credit: The IRS issued Notice 2021-47 announcing that based on 2020 crude oil prices, the enhanced oil recovery credit is available for 2021 at the full 15% rate. The enhanced oil recovery credit under Section 43 provides a tax credit for certain enhanced oil recovery (i.e., tertiary recovery) project costs incurred in the United States. In announcing the inflation adjustment factor and phase-out amount for the enhanced oil recovery credit for tax years beginning in the 2021 calendar year, Notice 2021-47 follows the format of previously published notices on this issue.
Accounting Method Change Procedures Guidance: The IRS issued Revenue Procedure 2021-34, which provides procedures for securing automatic consent for certain income tax accounting method changes made to comply with Section 451, which was modified by the TCJA. Revenue Procedure 2021-35 modifies procedures for the safe harbor method of accounting for original issue discounts on a pool of credit card receivables in response to changes made to Section 451 by the TCJA.
Foreign Credit Election/Chief Counsel Memorandum: In Chief Counsel Memorandum 202133013, the IRS stated that, while a corporate taxpayer may have ten years to change its election from deducting foreign taxes to claiming a foreign tax credit under Treas. Reg. Section 1.901-1(d), a company may not amend its return to claim a credit related to foreign taxes that were deducted in a previous tax year unless the taxpayer also amends that previous year’s return and pays any tax deficiency caused by eliminating the deduction for the foreign taxes. This rule is intended to prevent taxpayers from receiving a double benefit by, for example, amending a return to claim a foreign tax credit if the taxpayer also deducted those same foreign taxes in an earlier tax year, and the IRS is prohibited from assessing additional taxes for that earlier year due to the statute of limitations under section 6501(a).
Compliance Assurance Process (CAP) Applications: The IRS announced that publicly traded companies with assets of $10 million or more will be able to apply for the IRS real-time audit program for 2022 from September 1 to November 1. The IRS will inform applicants in February of 2022 if they have been accepted into the CAP program, which allows taxpayers to resolve issues in advance of an audit.
Publicly Traded Partnerships Withholding Applicability Dates: In Notice 2021-51, the IRS announced that it is amending final regulations under Section 1446 to make the applicable date for publicly-traded partnership-related transfer and distribution withholding and reporting January 1, 2023, including for qualified intermediaries. The notice said that the IRS pushed back the date one year in response to comments that taxpayers would struggle to comply by the original deadline in light of hurdles such as implementing new reporting infrastructure.
US-UK Competent Authority Agreements: The IRS issued Announcement 2021-14 stating that the US and the UK have entered into an arrangement providing that, notwithstanding the UK’s withdrawal from the European Union, UK residents will continue to be treated as “equivalent beneficiaries” for purposes of applying the derivative benefits test to trusts under the Limitation on Benefits provision of the US-UK income tax treaty. The IRS also issued Announcement 2021-13, stating that the US and UK have entered into an arrangement providing that references to the North American Free Trade Agreement (NAFTA) in the US-UK income tax treaty are to be interpreted as references to the US-Mexico-Canada Agreement (USMCA) upon the USMCA’s entry into force.
Auto Depreciation Tables: The IRS issued Revenue Procedure 2021-31, which for automobiles, trucks and vans modifies the amounts allowable as depreciation deductions by a price inflation adjustment amount under Section 280F(d)(7). The depreciation deduction limitation for passenger vehicles eligible for an additional deduction and placed in service in 2021 is $18,200 for the first tax year, up $100 from 2020.
Guidance on Single-Employer Defined Benefit Pension Plan Funding: The IRS issued Notice 2021-48, which provides guidance on the funding rules for single-employer defined benefit plans under Section 430. The guidance reflects changes made by the American Rescue Plan.
Wind Property Tax Credit Standards: The IRS asked for public feedback on standards for qualifying for a tax credit for small wind energy property under Section 48, which were outlined in Notice 2015-4, and on Form 8621, which is used to report income from stocks in foreign investment companies. Comments are due by October 4, 2021.
IRS Practice Unit: In a Practice Unit released August 4, 2021, the IRS Large Business and International Division outlined the process for evaluating the assessment of a penalty for failure to disclose reportable transaction information with a return.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
For the last several years, the OECD and several of its key member countries have been engaged in a campaign to take actions that would discourage multinational companies from shifting profits to low-tax countries. Plans are in place for a final OECD global agreement to be reached on several fundamental changes to international tax rules by October 2021, which coincides with work in the US Congress on major changes to US international tax laws as part of the $3.5 trillion budget reconciliation bill.
On June 5, 2021, the G-7 countries, which includes the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom, issued a communique that describes a high-level political agreement on global tax changes including the creation of a global minimum tax (GMT). An OECD Inclusive Framework statement was issued on July 1, 2021, which outlines the overall proposal agreed to by nearly all of the Inclusive Framework member countries.
The G-20 Finance Ministers met on July 10-11th and endorsed “the key components of the two pillars on the reallocation of profits of multinational enterprises and an effective global minimum tax.” They called on the Inclusive Framework members to finalize the design elements within the agreed framework together with a detailed plan for the implementation of the two pillars by the next G-20 meeting on October 15-16, 2021.
This timing aligns with Congressional work on a $3.5 trillion budget reconciliation bill that will consider a Biden international tax proposal to change the GILTI rules, including an increase in the current GILTI minimum tax rate. The OECD has issued a statement that FDII is “in the process of being eliminated” as part of the US budget reconciliation legislation, but the US has not commented specifically on that announcement.
Considerable progress has been made toward agreeing on some of the key aspects of Pillar One and Pillar Two, but there are still many key details and implementation issues that must be addressed before the effect of Pillar One and Pillar Two is seen in practice around the world. Proposals will have to be agreed to by the US Congress, and the EU will have to implement the changes with the requirement for unanimity (if a EU Directive is used), and those are significant hurdles that must be faced once the design of the two Pillars is agreed.
Countries are working on resolving the final details of the proposal approved by 132 jurisdictions, which includes both a 15% global minimum tax and a reallocation of taxing rights to countries that have customers but where companies lack a taxable physical presence. It will continue to be a challenge to reach agreement by the fall of 2021 within the Inclusive Framework on Pillar One and Pillar Two of the OECD project.
In the US, work on aligning with the Pillar Two concepts will be ongoing this fall with Congressional work on the budget reconciliation legislation, while work on aligning with any agreements on Pillar One will likely not be undertaken until 2022. The mid-term elections in the fall of 2022 will have an impact on the ability of Treasury to advance proposals in 2022, and any change in control of Congress as a result of the mid-term elections could impact the ability to make changes at all with respect to the current international tax rules in the US.
The European Union is considering policy options that would modify current rules so that debt does not receive favored treatment over equity and encourage companies to finance more through equity than debt. The effort includes a 2016 plan that was tied to a more far-reaching overhaul of the EU tax rules, known as the Common Consolidated Corporate Tax Base (CCCTB), which did not achieve unanimous support within the EU. This proposal is called the Debt-Equity Bias Reduction Allowance (DEBRA), which would be done as an EU Directive if approved. The European Commission has asked for comments by October 7th. Several options are being considered to carry out this policy, but enacting these changes would be expensive, which could make approval challenging.
The UK is proposing new tax incentives designed to encourage fund managers to bring their offshore assets back home. Effective in April of 2022, the tax rules would grant withholding tax exemptions, interest deductions, and a reprieve from burdensome compliance rules to qualifying asset holding companies in the UK. The changes would potentially benefit pension funds, asset managers, insurance firms, and private equity firms that currently use offshore holding companies.