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Washington Tax Insight September 2022

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

Politics and Congressional Activity

Congress has returned to Washington to face a busy agenda prior to the mid-term elections in November. The Democrat-controlled House and Senate appear to have gained some momentum going into the elections based on the enactment of the Inflation Reduction Act of 2022 (“IRA”) along with strong job growth and decreasing gas prices. Republicans continue to work toward a goal of gaining control of both the House and Senate.

With very little time between now and the elections on November 8th, it is likely that most issues on the agenda will not be completed prior to the elections and that political messaging will rule the day.  Whether Congress will deal with outstanding issues in a lame duck session remains to be seen and will be affected by the election results.

The most urgent issue that Congress must address prior to the elections is approval of a continuing resolution to provide stopgap spending for the federal government and to prevent a government shutdown on October 1st if appropriations bills are not fully approved by the end of the fiscal year on September 30th. Reports are that a continuing resolution will be considered by Congress the week of September 12th that extends current funding levels to December 16, 2022, which is the current projected adjournment date for the year for the House with the Senate scheduled to adjourn on December 21st.

Issues that could be added to the continuing resolution include Ukraine funding, additional funds for COVID-19 programs, disaster relief, and spending on monkeypox response.

Other issues that may be addressed include the following:

  • National Defense Authorization Act
  • Judicial nominations
  • Environmental permitting legislation
  • Marriage equality legislation
  • FDA legislation to extend user fees and modify drug approval processes
  • Electoral Count Act
  • US-China issues remaining after completion of recently enacted legislation
  • Senator Klobuchar sponsored technology industry antitrust legislation
  • Legislation on the legalization of cannabis
  • Debt limit increase (with the current limit likely to be reached late in 2023)

There will also be consideration of whether to advance an omnibus package of tax issues. In an election year, this issue is always impacted by what happens in the election and whether either party sees more leverage to be gained by moving sooner rather than later or waiting until a new session of Congress in 2023. Tax issues that could be considered include:

  • Whether to change the research and development rules that now require amortization rather than expensing
  • Tax extenders
  • Bipartisan retirement legislation
  • Relief for business taxpayers on business interest deduction rules that became more restrictive in 2022

The Inflation Reduction Act of 2022

As we reported in our last issue, the House and Senate both approved the Inflation Reduction Act of 2022 (“IRA”) via the budget reconciliation process, and President Biden signed the bill into law on August 16, 2022, giving Democrats a key legislative victory before the upcoming midterm elections in November.

For a detailed summary and analysis of the IRA, please see our True Insight at (insert link).

The IRA includes targeted corporate tax increases, increased funding for the IRS, incentives to promote climate change mitigation and clean energy, and provisions to promote health care affordability. It is also expected to provide deficit reduction savings of nearly $300 billion over 10 years.

Key non-tax provisions include changes to federal prescription drug pricing policies under Medicare and a three-year extension of expanded Affordable Care Act health care benefits through 2025. In addition to the energy and climate tax incentives, the bill also includes significant grants to address climate and energy issues.

IRS Commissioner Charles Rettig issued a statement on the signing of the IRA, which provides the IRS with $80 billion in new resources over the next 10 years, stating that the additional funds would add critical resources designed to improve taxpayer service and technology.  Treasury Secretary Yellen directed the IRS to compile a plan within six months that details how the IRS plans to use the additional funds.

Senate and Senate Finance Committee

SFC action on “shell bank” loophole/FATCA: SFC Chair Wyden (D-OR) released a report that details a loophole in the Foreign Account Tax Compliance Act (FATCA) that has resulted in tax avoidance. The report details a process that starts by setting up shell companies abroad and registering them with the IRS as offshore financial institutions.  The IRS issues the entities unique Global Intermediary Identification Numbers (“GINS”), which relieve the banks of FATCA’s requirement to investigate whether they are held by Americans. A lack of adequate resources at the IRS has significantly hindered the ability of the IRS to investigate this issue, and the report includes several recommendations to address it.

US-Chile Tax Treaty: Treasury Secretary Yellen has urged the Senate to approve the US-Chile tax treaty before the end of 2022 stating that the treaty would reduce barriers to trade and help US companies compete with those based in other countries that already have treaties with Chile. The treaty was approved by the Senate Foreign Relations Committee in March of 2022.

Cryptocurrency Updates

Legislation on Cryptocurrency Reporting Requirement: A bipartisan group of Senators introduced legislation that would make changes to the digital asset tax reporting provision in the infrastructure bill enacted in 2021. The bill is cosponsored by Senators Toomey (R-PA), Warner (D-VA), Lummis (R-WY), Sinema (D-AZ), and Portman (R-OH), and it would clarify that non-transactional entities, including cryptocurrency miners, validators, wallet providers, and certain developers are not required to report to the IRS. These senators tried to attach this issue by amendment to the infrastructure bill but failed despite the support of the Treasury Department. It is possible that this issue could be included in an omnibus year-end tax package should one progress in Congress.

Cryptocurrency Legislation: As summarized above, Congress returns to Washington with a busy agenda before the mid-term elections, and it is unlikely that other legislation on digital assets will become law in this session of Congress. Over 20 bills related to issues for cryptocurrency including taxation, consumer protection, and regulatory oversight have been introduced in Congress, and this legislation will help provide some idea of the direction of future legislation and regulation in this area.  Many of the bills are bipartisan and debate about the issues will continue on key issues including:

  • Will the cryptocurrency industry be allowed to self-regulate?
  • What is the application of the definition of “securities” with respect to digital assets?
  • How will regulatory authority be allocated between the Security and Exchange Commission and the Commodities Futures Trading Commission?
  • What rules will be enacted with respect to the regulation of stablecoins?

Also, several Administration reports on digital assets are due to be released this fall.  President Biden issued Executive Order 14067 in March on “Ensuring Responsible Development of Digital Assets” with the following issues to be covered in reports due within 180 days:

  • Future of Money and Payment Systems
  • Central Bank Digital Currency (“CBDC”) Legislative Changes
  • Consumer, Investor, and Business Protections
  • CBDC Technological Infrastructure
  • Law Enforcement
  • Energy and Climate Policy
  • US Competitiveness in Digital Assets

Form 1040 Question on Virtual Currency: The IRS has expanded the cryptocurrency question on the draft Form 1040 for the next filing season. The update added wording to further specify that taxpayers should report if they received digital assets as a “reward, award, or compensation.” The AICPA has sent a letter to the IRS asking that it clarify the meaning of virtual currency for purposes of the Form 1040. The letter recommended that the IRS should not ask about “digital assets” until it has been defined under Section 6045, and it said that the IRS should include examples of taxable and nontaxable events for the virtual currency question on the Form 1040.

Miscellaneous

Student Loan Forgiveness and Taxation by States: President Biden announced the intention to forgive billions in student loan debt, which will be exempt from federal taxation.  This loan forgiveness, however, could be taxable at the state level.  Most states are moving to address this issue, although not all states appear willing to confirm to the federal tax treatment.

US Tax Court Decision in Medtronic Case: On August 18, 2022, the US Tax Court issued its second opinion in the transfer pricing dispute between Medtronic and the IRS about the arm’s length royalty owed under intercompany licenses between the US parent of the Medtronic consolidated group and its Puerto Rican affiliate. The court held that the third-party agreement put forward by Medtronic (Pacesetter agreement) is not sufficiently comparable and that the comparable uncontrolled transaction (CUT) method is not the best method for pricing the controlled transactions. This decision represents a reversal in the approach the court had taken in its 2016 opinion where it held that the CUT method was the best method and made several adjustments to the Pacesetter agreement to arrive at a wholesale royalty rate of 44% for devices and 22% for leads manufactured by the Puerto Rican affiliate.

Treasury and the IRS

Treasury/IRS Administration

White House Climate and Clean Energy Tax Incentives Advisor: Gina McCarthy, who is currently the White House National Climate Advisor, has announced that she will leave the Administration in September.  President Biden has appointed John Podesta to be in charge of implementing the climate and energy law recently enacted including a broad range of clean energy tax incentives and other climate programs.

Tax-Exempt and Government Entities Division Director: Sunita Lough has announced that she will resign her position as the TE/GE Commissioner at the end of September.  She will be replaced by Edward Killen, who is currently Deputy Commissioner. The TE/GE division focuses on tax-exempt organizations, employee retirement plans, tax-exempt bonds, Indian tribal government, and federal, state, and local governments.

Issues and Guidance

Final Regulations Clarifying Partnership Property Election: The IRS issued final regulations regarding a partnership property election under Section 754 on making elections to adjust the basis of partnership properties. The guidance amends current regulations to remove the requirement that an election filed pursuant to Section 754 must be signed by a partner. The new rules, which finalized proposed regulations issued in October 2017, were effective on August 5, 2022.

Final Regulations on Disclosing Exempt-Group Information to States: The IRS issued final regulations expanding its ability to disclose information to state officials about tax-exempt organizations, including information about the IRS’s plans to revoke or deny an organization’s tax-exempt status before those plans are finalized. This guidance is intended to facilitate enforcement of state laws on exempt organizations, and it reflects changes made by the Pension Protection Act of 2006. Previously, only final determinations could be disclosed to states.

Extension of Deadlines for Certain Retirement Plans: The IRS released Notice 2022-33, which extends the deadlines for amending a retirement plan or individual retirement arrangement to reflect certain previously enacted laws including the SECURE Act and the CARES Act.

Foreign Currency Guidance Delay: Treasury and the IRS released Notice 2022-34 on August 15, 2022,  which defers the applicability date of certain final Section 987 regulations and certain related regulations by an additional year, to tax years beginning after December 7, 2023. These regulations had previously been deferred under prior notices, including Notice 2021-59 to taxable years beginning after December 7, 2022. The notice provides that several of the 2016 final regulations (including Secs. 1.861-9T, 1.985-5, 1.987-11, 1.988-1, 1.988-4, and 1.989(a)-1) along with related 2019 final regulations (Secs. 1.987-2 and 1.987-4) will apply to tax years beginning after December 7, 2023. Thus, under the notice, for calendar year taxpayers, the 2016 final regulations and the related 2019 final regulations would apply to the tax year beginning on January 1, 2024.

Penalty Relief for Certain 2019 and 2020 Tax Returns: The IRS released Notice 2022-36, which provides relief for certain individual and business taxpayers affected by the COVID pandemic from certain failure-to-file penalties and certain international information return penalties with respect to tax returns for tax years 2019 and 2020 (due in 2020 and 2021) filed on or before September 30, 2022. The notice also provides relief from certain information return penalties with respect to tax year 2019 returns filed on or before August 1, 2020, and with respect to tax year 2020 returns filed on or before August 1, 2021. The IRS also issued a News Release (IR-2022-155) stating that by the end of September, they expect to issue more than $1.2 billion in refunds or credits to many of the nearly 1.6 million taxpayers who already paid these penalties. Eligible penalties will be automatically waived, or if already assessed, abated, refunded, or credited without the need for taxpayers to request relief. The news release states that this penalty relief will allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help the agency return to normal operations for the 2023 filing season. The IRS is currently working on frequently asked questions (FAQs) to provide additional guidance and clarification of this penalty relief.

Section 871(m) Dividend Equivalent Rules Phase-in Period: The IRS released Notice 2022-37, which provides an extension of the transition relief phase-in period of the regulations under Section 871(m) for select transactions through 2024. The notice extends a phase-in period that previously had been provided for certain provisions of the Section 871 regulations and permits withholding agents to apply the transition rules from Notice 2010-46 in 2023 and 2024. The notice also provides for the anti-abuse rule in Treas. Reg. sec. 1.871-15(o) to continue to apply to the phased-in application of the Section 871(m) regulations and that a transactions that otherwise would not be treated as a Section 871(m) transaction may be treated as such. In 2020, the IRS previously extended the phase-in period through 2022 in Notice 2020-2. The IRS requests additional comments and states that they intend to “provide sufficient time for taxpayers and withholding agents to implement any changes to the regulations.”

Fourth Quarter Interest Rates: The IRS announced that interest rates for fourth quarter overpayments and underpayments will increase as of October 1, 2022.  The new rates are: (1) 6% per year for individuals for overpayments and underpayments; (2) for corporations, 5% for overpayments and 6% for underpayments; (3) 5% for corporate overpayments for the portion exceeding $10,000; and (4) 8% for large corporate underpayments.

Fourth Quarter Priority Guidance Plan Update: The IRS released its fourth-quarter update to the 2021-2022 priority guidance plan, which stated that the IRS completed 77 out of 193 projects through June 30, with 14 completions done in the fourth quarter (April to June). The new update includes 17 additional projects that were not included in the original plan.

Video Conferences: The IRS Independent Office of Appeals (“IRS Appeals”) is asking for suggestions on ways to enhance video conference options for taxpayers and tax professionals. The agency issued interim guidance in March 2021 in response to the COVID-19 pandemic. IRS Appeals is preparing to update the Internal Revenue Manual with permanent guidance and has requested comments by November 16, 2022.

Upcoming Guidance

Shell-Company Ownership Rules: A proposed rule requiring companies to disclose information to Treasury about their “beneficial owners” is under review by the Office of Information and Regulatory Affairs. The disclosure rule was mandated by legislation enacted in 2021 aimed at combating money laundering through anonymous shell companies.

Reporting Requirements in Schedules K-2 and K-3: The AICPA has written to the IRS asking for “urgent” guidance with respect to international reporting requirements in Schedules K-2 and K-3. The letter recommends broader exceptions to the relevance exception, partner attribute requirement, and general presumption. The AICPA called on the IRS to simplify the foreign tax credit information reporting for partnership Schedules K-2 and K-3, and they recommended that the IRS provide a permanent extension of the exception from filing Schedules K-2 and K-3 for certain partnerships and S corporations.

“Killer B” transactions guidance: Treasury and the IRS are working on regulations to target “Killer B’s”, which are triangular reorganizations involving foreign corporations under Section 368(a)(1)(B), which the IRS suggests have been used by companies to avoid taxes. This project was added to the IRS Priority Guidance Plan in September of 2021, after being omitted for the prior three years.  It is being actively worked on according to a Treasury official, who offered no certainty as to completion of the project. The regulations are generally expected to follow steps outlined in notices issued in 2014 and 2016. Although repatriation rules enacted as part of the 2017 tax law mitigated concern about these transactions, Treasury believes the regulations need to be issued in order for the rules in the notices to have the force of law. These transactions may also be used as part of corporate inversions, which have declined in recent years.

Remote Workforce Guidance: The AICPA has written the IRS requesting guidance in key areas related to remote workforce issues.  The letter detailed these areas of concern including (1) principal place of business; (2) work arrangements for employer-location based, remote, and hybrid; (3) pursuit of a trade or business; and (4) non-travel expenses incurred while working remotely. The AICPA stated that current revenue rulings and interpretations of case law are outdated, do not reflect the current work environment, and are unclear in many cases.

International Issues

OECD – Director of the Center for Tax Policy and Administration Announces Departure

Pascal Saint-Amans, who is the Director of the Center for Tax Policy and Administration, has announced that he will leave his position by the end of October 2022.  His deputy, Grace Perez-Navarro, will assume his role on November 1st until March 31, 2023, when she will also leave the OECD. Ms. Navarro will be supported by two Acting Deputy Directors, David Bradbury and Achim Pross. Finally, Chief Economist, Laurence Boone, already departed in July to join the French government.

Saint-Amans has been with the OECD for 15 years and in his current role as Director for 10 years, and he has been the driving force behind the current project to change how global multinationals are taxed.  Earlier this year, the OECD announced that they have delayed the implementation of the new rules until 2024, and it remains to be seen whether his departure will affect the progress and timeline of the project.

As we have noted in past issues of the WTS, the US has not yet enacted changes to their international tax rules that comply with the global minimum tax rules of the OECD project, and the EU is also having challenges in implementing Pillar Two.

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.

The OECD released a Progress Report on Amount A of Pillar One (“Progress Report”) on July 11, 2022, with comments requested by August 19, 2022.  The OECD also published frequently asked questions (FAQs) and a Fact Sheet that includes an overview of the rules on Amount A and a process map with steps for applying the rules (“Fact Sheet”). An in-person public consultation on Pillar One was held on September 12, 2022.

For a detailed discussion of the OECD Progress Report, please see our upcoming True Insight.

The Progress Report includes the following schedule for completion of the work on Amount A of Pillar One:

  • August 19, 2022: Stakeholder feedback was due on the Amount A Progress Report
  • October 2022: Inclusive Framework will review stakeholder input and seek to stabilize the rules at its meeting
  • Mid-2023: The work on the detailed provisions of the MLC and its Explanatory Statement is expected to be completed so that a signing ceremony of the MLC can be held in the first half of 2023 with the objective of enabling it to enter into force in 2024 once a critical mass of jurisdictions as defined by the MLC have ratified it.

The Cover Note also states that work on Amount B is to be delivered by year-end (i.e., 2022).

European Union: European finance ministers have not reached a unanimous agreement on a minimum tax in the EU to align with Pillar Two rules. The EU is currently at a stalemate due to the opposition of Hungary to advancing the Pillar Two Directive based on their position that the EU should be voting on both Pillar One and Pillar Two rules as a package so that they are tied together in a legally binding way rather than moving ahead first with Pillar Two. With respect to Pillar One, the EU Parliament has discussed plans to use part of the revenue from Pillar One to fund the EU budget.  An advisory opinion on this issue could be voted on in Committee in September after which the whole Parliament would need to approve the opinion.

United States: The US failed to include legislation that would bring it into alignment with the proposed rules in Pillar Two as part of the IRA which was signed into law in August. It is unlikely that additional legislation on this issue will be considered by Congress in 2022. The outcome of the November elections may have an impact on the road ahead in the US for this project, should Republicans gain control of either or both the House and the Senate as Republican leadership has expressed serious concerns about US participation in the global negotiations and the current status of those negotiations.

European Union

The Council of the EU and the European Parliament reached political agreement on the text of a draft regulation on foreign subsidiaries that, in certain cases, are distorting the internal market with the aim of the regulation being to ensure a level playing field in the internal market. The draft regulation follows the publication by the European Commission of a White Paper on distortive subsidies in June of 2020 in which they laid out several approaches to address distortive effects cause by foreign subsidiaries. The regulation will enter info force once it is formally adopted by the European Council and the European Parliament and published in the Official Journal. The Regulation will become directly applicable across the EU six months after entry into force.

United Kingdom

Liz Truss, the former UK Foreign Secretary, has won the race to become the new prime minister of the UK as Boris Johnson stepped down on September 6th. Truss defeated former Chancellor of the Exchequer Rishi Sunak in the contest to become the new leader of the Conservative Party.

One of the issues that is unclear with the appointment of Truss is the UK position on virtual currencies as she did not disclose her views during the campaign. By contrast, Sunak had spoken out in support of the industry while Chancellor and had outlined a plan aimed at reviving the UK’s reputation as a leader in financial technology.