Tax Tidbit

CPC Recommends Executive Action. Congressional legislative action generally slows during election years, particularly as November draws closer. With primary season heating up, some Democrats are anticipating fewer and fewer opportunities to advance their policy priorities through Congress. Especially as the Build Back Better Act appears increasingly unlikely to pass—at least in terms of what the White House originally envisioned—progressive Democrats are mounting pressure on the administration to act unilaterally and bypass Congress to advance its agenda.
 
The possibility of executive action was reportedly discussed at length earlier this month during the House Democrats’ policy retreat in Philadelphia. Following the meeting, Congressional Progressive Caucus Chair Pramila Jayapal (D-WA) outlined several executive actions President Biden could take as legislative movement on Capitol Hill slows. Those related to tax policy are explained below. 

Other executive action recommendations would address issues like healthcare costs, student loan debt, wage rates, police reform and immigration. 
 
Other Democratic groups are also expected to soon release their own recommendations. For instance, recommendations from the Congressional Black Caucus and the Congressional Hispanic Caucus could come within the next few weeks.

Legislative Lowdown

Bipartisan IRS Proposal in the Works. Sens. Ben Cardin (D-MD) and Rob Portman (R-OH), both of whom sit on the Senate Finance Committee, are working on legislation to improve the IRS. The package, which remains under development, would primarily address IRS information technology (IT) modernization efforts. Little is publicly known about the package, but Cardin recently confirmed it would provide “more predictable support” for IRS modernization.
 
The package could potentially gain more widespread bipartisan support. Senate Finance Committee Ranking Member Mike Crapo (R-ID), for instance, acknowledged the IRS needs more assistance updating its IT systems. However, Crapo stopped short of fully supporting the package since he had not yet seen it. Crapo said he would “be open to looking at what they’re doing.” The potential package was also welcomed by Senate Finance Committee Chair Ron Wyden (D-OR) and Sen. Elizabeth Warren (D-MA), another member of the committee.
 
Rettig Testifies Before Ways and Means. [RM1] Internal Revenue Service (IRS) Commissioner Charles Rettig appeared before the House Ways and Means Subcommittee on Oversight last week to answer questions about the ongoing 2022 tax filing season. The discussion focused on issues that have proven problematic for the IRS, such as the growing processing backlog, the challenges facing the IRS with respect to its workforce shortage and the limitations imposed on the agency because of insufficient funding.
 
Below are some highlights from the hearing:

• Processing Backlog: Rettig said the additional resources the IRS is dedicating to the processing backlog—such as hiring 10,000 new employees and shifting existing workers—will allow the agency to eliminate the backlog by December 2022.

• Workforce: Rettig said the direct hiring authority the IRS received under the recently enacted Consolidated Appropriations Act, 2022, would allow the agency to onboard employees as quickly as 45 days, rather than eight months, as is the case under current operations.

• Tax Enforcement: When asked what additional resources the IRS needs to address the tax gap, Rettig said it needs a robust enforcement mechanism and experienced employees.

For a comprehensive summary of the hearing, please contact a member of the Brownstein Tax Policy Team.
 
Finance Examines Charitable Giving. The Senate Finance Committee held a hearing last week on charitable giving trends in the nonprofit sector. Sen. Ron Wyden (D-OR), who chairs the committee, explained the reason for the hearing: the Coronavirus Aid, Relief and Economic Security (CARES) Act (P.L.116-136) enacted in March 2020 contained a temporary tax deduction for charitable donations of up to $300, for taxpayers who opt to claim the standard deduction and not itemize deductions. That was then expanded for 2021 before expiring at the beginning of 2022.
 
Wyden made a number of recommendations with respect to the expired tax break, saying “there ought to be bipartisan interest in reviving it and expanding it to promote even more giving.” He also suggested the Senate consider ways to help nonprofits operate, such as through the Employee Retention Tax Credit. Finally, he mentioned the WORK NOW Act he introduced last year that would establish a grant program to provide emergency relief to nonprofit organizations, particularly those struggling because of the COVID-19 pandemic.
 
Senate Finance Committee Ranking Member Mike Crapo (R-ID) sounded open to Wyden’s invitation to bipartisanship. During his comments, Crapo said he and Sens. James Lankford (R-OK), Tim Scott (R-SC) and Catherine Cortez-Masto (D-NV) have been “crafting bipartisan legislation to help increase charitable giving.”
 
For a comprehensive summary of the hearing, please contact a member of the Brownstein Tax Policy Team.

1111 Constitution Avenue

IRS Plans IT Hiring Spree. The IRS announced last week it will seek to hire more than 200 new technologists to help the agency modernize its technology. The effort is part of the agency’s larger goal of hiring an additional 10,000 employees to address the processing backlog, improve taxpayer assistance and modernize IRS IT. The IRS will be aided by the direct hiring authority it received under the recent Continuing Appropriations Act, 2022, which President Biden signed into law last week.
 
According to the release, the IRS will fill entry-level positions as well as roles for experienced and supervisory IT specialists who focus on system development, architecture, engineering, cybersecurity, IT operations, network services and customer support. Applicants should be well-versed in areas like zero-trust security, artificial intelligence and machine learning.

Global Getdown

Congressional Pressure Mounts on Companies Operating in Russia. The ongoing conflict between Russia and Ukraine is motivating key members of Congress to attempt to eliminate certain tax benefits for companies that continue operating in Russia. These efforts are focused on barring the availability of U.S. foreign tax credits for taxes paid on income earned in Russia, as well as eliminating the preferential treatment of such income under the global intangible low-taxed income (GILTI) rules.
 
Senate Majority Leader Chuck Schumer (D-NY) and Senate Finance Committee Chair Ron Wyden (D-OR) said in a joint statement that “Senate Democrats are exploring legislation to add Russia to existing laws that already deny foreign tax credits for taxes paid to North Korea and Syria.” The senators stressed that “American companies that continue to do business in Russia should not receive U.S. tax benefits that offset taxes paid to Putin’s regime."
 
While the senators have focused their attention on one company in particular that plans to continue operating in Russia – Koch Industries – other companies are also resisting demands that they exit or suspend activities in Russia according to a list compiled by Yale University professor Jeffrey Sonnenfeld.
 
It is unclear whether the effort to limit U.S. tax benefits will advance in Congress. However, the concept has potential bipartisan support, with Sen. Rob Portman (R-OH), a member of the Senate Finance Committee, recently indicating on Twitter that he supports congressional action along these lines.
 
Not So Smooth Sailing for the Global Minimum Tax. Nearly 140 countries reached consensus last October on the Inclusive Framework on Base Erosion and Profit Shifting – a two-pillar agreement through which countries agreed to tax certain large multinational companies based on the location of sales (Pillar One) and establish a 15% minimum tax applicable to a broader array of multinational businesses (Pillar Two). After working for years through the Organisation for Economic Co-operation and Development (OECD), the countries agreed to adopt the two pillars within the next few years.
 
Since the agreement on the Inclusive Framework, the OECD released Model Rules for participating countries to use as the basis for their national legislation to implement the Pillar Two minimum tax.  Earlier this month, the OECD also released a detailed Commentary on the Model Rules along with illustrative examples. The OECD also opened a public consultation to solicit input on implementation and tax-administration issues relating to Pillar Two, with comments due by April 11, 2022. Similar work on Pillar One continues with related guidance expected later this year.
 
While the OECD continues to flesh out the details of the global minimum tax, fissures have recently appeared in Europe. Last week during a meeting of European Union (EU) finance ministers, Poland, Sweden and Malta withheld their support for the bloc’s directive to implement Pillar Two. Opposition from one—let alone three—EU member countries prevents the EU from adopting the measure, or at least delays it since the EU can only move forward with unanimous consent of all 27 member countries.  
 
Below is a brief overview of the objections:

• Malta said it will require an extension on applying rules and additional flexibility on Pillar Two.
• Sweden continues to consult with its parliament and has previously noted that its constitutional process for implementing the proposed tax is lengthy and likely to take longer than the proposed 2023 target for implementation.
• Poland asked for the EU to provide a strong, legally binding agreement linking the adoption of the Pillar Two minimum tax to the Pillar One profit-allocation regime.

French Finance Minister Bruno Le Maire, whose country will hold the EU presidency until June, said he will continue seeking the support of the holdout countries in the coming weeks before the countries meet again next month. Le Maire plans to call up the EU Pillar Two directive again for reconsideration at next month’s EU finance ministers meeting.
 
U.S. Multinationals Push Back on Pillar Two. Implementation issues also remain in the United States, with U.S. multinationals urging Treasury Secretary Janet Yellen to ensure the agreement does not undermine domestic tax incentives like those related to research and development.
 
Companies fear that without changes to the Pillar Two rules, they will be subject to the global minimum top-up tax if they take advantage of U.S. tax incentives like the research and development tax credit, low-income housing tax credit, New Markets tax credits, or myriad other tax incentives under U.S. law.  The OECD Model Rules only allow tax incentives to be taken into account if they are refundable by the government.
 
In a forthcoming letter to Yellen, a group of trade associations is reportedly planning to warn Yellen that without these tax incentives, it would be financially unwise for companies to maintain their current level of U.S. investment, given the insufficient level of expected economic return. The signatories will also urge the Treasury Department to renegotiate the OECD Model Rules so they preserve the full value of these tax incentives.

At a Glance

• White House Prepares Budget Request. The White House is expected to send its annual budget request to Congress on March 28.
   
• Neal Open to Gig Reporting Proposal. Last week, a bicameral group of Democrats introduced legislation that would increase the de minimis exception for when third-party settlement organizations must issue a Form 1099-K. The Cut Red Tape for Online Sales Act would raise the reporting threshold from $600 to $5,000 on third-party transactions and require plain language notices to payees regarding Form 1099-K. In response to the bill, House Ways and Means Committee Chair Richard Neal (D-MA) said he wants “to take a look at the legislation as proposed, and we’ll see where it goes,” adding that he has “no preconceived notions” about what the final number should be.