Legislative Lowdown
Appropriators Tackle IRS Funding, OECD Support and Hydrogen-Credit Implementation. Last week, the House and Senate Appropriations Committees advanced spending legislation addressing several provisions enacted in the Inflation Reduction Act (IRA, Pub. L. 117-69) and ongoing global tax negotiations. Republican-sponsored House bills would rescind portions of the supplemental allocations provided to the IRS for enforcement and would scrap U.S. support for the Organisation for Economic Co-operation and Development (OECD)—an intergovernmental entity facilitating the implementation of the global minimum-tax agreement. In the Senate, Sen. Joe Manchin (D-WV) incorporated language into the committee’s report to limit the Treasury Department’s regulatory authority with respect to the section 45V hydrogen production tax credit.
The summaries below outline the tax implications of ongoing committee negotiations.
House Financial Services and General Government Bill
The House Appropriations Committee reported its Financial Services and General Government (FSGG) bill favorably on July 13 by a vote of 34 to 26 along party lines. The bill would provide $11.2 billion for the IRS and freeze spending for taxpayer services and operations support at FY2023 amounts, while imposing a significant $1.2 billion (23%) cut to tax enforcement appropriations. In accordance with an agreement made during the debt-ceiling debate earlier this year, the bill would rescind approximately $10.2 billion of the funding provided to the IRS by the IRA, repealing $6.1 billion and $4.1 billion from the IRS’s enforcement and operations-support accounts, respectively.
The clawback is intended to limit the IRS’s ability to increase taxpayer audits and has remained a priority of House Republicans throughout the 118th Congress. In his opening statement, House FSGG Subcommittee Chairman Steve Womack (R-AR) said the hiring efforts outlined in the IRS’s recent strategic operating plan would create “a super army of IRS agents poised to target individuals and small business owners.”
A new administrative provision included in the bill would prevent the IRS from developing a “free, public electronic return-filing service option” without prior approval from both the House and Senate Appropriations and tax-writing committees. An amendment offered by Rep. Mark Pocan (D-WI) would have reinstated the IRS’s ability to implement the e-filing option, but was rejected by Republicans.
Senate Financial Services and General Government Bill
The Senate Appropriations Committee reported its FSGG bill favorably on July 13 by a unanimous 29-0 vote. The bill would freeze IRS spending levels at approximately FY2023 amounts and would rescind $10 billion from IRA-provided IRS funds—entirely from the allocations made for enforcement.
The committee also adopted a manager’s amendment offered by FSGG Subcommittee Chairman Chris Van Hollen (D-MD) that made several changes to the committee report. One such modification was language offered by Sen. Manchin clarifying that the committee “is concerned that the Department of the Treasury is considering imposing additional limitations or restrictions” on taxpayers claiming the section 45V hydrogen production tax credit. Sen. Manchin later referenced the amendment in a video on Twitter, noting that he “authored language that will prohibit this administration from advancing their radical climate agenda, including … opposing any arbitrary limitations on the hydrogen tax credits that are bringing jobs and investments to West Virginia.”
House Transportation, Housing and Urban Development, and Related Agencies Appropriations Bill
The House Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies reported its spending bill favorably on July 12 by voice vote. The bill rescinds over $25 billion from the supplemental IRS enforcement spending provided by the IRA. However, the provision will likely be rejected by Democrats during upcoming negotiations and is unlikely to be included in the final compromise bill.
House State, Foreign Operations, and Related Programs Appropriations Bill
The House Appropriations Committee reported its State, Foreign Operations, and Related Programs (SFO) appropriations bill favorably on July 12 by a vote of 32-27 along party lines. The bill would terminate funding for the OECD beginning in FY2024. The proposal follows a letter from Rep. Adrian Smith (R-NE) sent earlier this year to the chairman and ranking member of the House SFO Subcommittee urging lawmakers to end U.S. support for the economic organization. As the letter notes, the United States currently provides nearly $45 million or approximately 20% of the OECD’s primary budget—more than double the contribution of any other country. Notwithstanding GOP opposition, Democrats will likely insist on the inclusion of some OECD funding in the final compromise, although it may be scaled back from previous years.
Tax Worldview
Pillar Two Guidance Offers Some Relief as Congress Rebukes Implementation Efforts. The Organisation for Economic Co-operation and Development (OECD) issued administrative guidance on July 17 intended to provide additional rules and procedures for the Pillar Two global minimum-tax regime. In particular, the guidance provides countries more time to adopt Pillar Two through a safe harbor that protects a company based in a country with a corporate tax rate greater than 20%—namely the United States—against the undertaxed payments rule (UTPR) during a transition period, which is a fiscal year covering no more than 12 months beginning on or before Dec. 31, 2025, and ending before Dec. 31, 2026.
For companies with calendar-year financial statements, the safe harbor will sunset in the same time frame as the expiring provisions in the Tax Cuts and Jobs Act (Pub. L. 115-97). As a result, the transitional rule is expected to leverage those expiring provisions to create further incentives for the United States to align its tax code with the Pillar Two requirements.
The administrative guidance also addresses the accounting treatment of certain transferable tax credits under Pillar Two. The OECD asserts that this clarity was needed due to the “size and scale of the transferable credits arising under the Inflation Reduction Act” (IRA, Pub. L. 117-169). Namely, the IRA allows all U.S. taxpayers to make annual elections to transfer (sell) some or all of their tax credits with respect to certain clean-energy property, including solar, wind, hydrogen and alternative-fuel production facilities.
The guidance is open to differing interpretations. The Treasury Department and Senate Finance Committee Chairman Ron Wyden (D-OR) suggest that the new administrative guidance allows originators of transferrable IRA credits to treat them like refundable credits, which receive favorable treatment under Pillar Two. The OECD guidance, however, does not appear to afford parallel treatment to buyers of transferrable IRA credits. Because the credits are subject to a “single sale” rule under the IRA, they do not qualify as “marketable” under the OECD guidance, which is required for the buyer to treat the credit as if it were a refundable credit. Thus, the new OECD guidance can be read to require a credit to be “marketable” for both the originator and the buyer to obtain favorable treatment under Pillar Two. In addition, this rule, if read favorably, only covers currently transferable tax credits, which means other important credits, like the research and development credit, are not included.
The modifications to Pillar Two come as several foreign governments have already begun to enact policies to implement the global minimum-tax regime. Notwithstanding international support, congressional Republicans’ opposition to the agreement makes it unlikely to be enacted in the United States in the near future.
1111 Constitution Avenue
Cryptocurrency Reporting and Taxation Questions Remain Unanswered. Last Tuesday, Senate Finance Committee Chairman Ron Wyden (D-OR) and Ranking Member Mike Crapo (R-ID) published a letter requesting policy input on the taxation of digital assets. The request is the latest in a series of actions undertaken by lawmakers seeking to improve the taxation of emerging technologies like cryptocurrencies. The letter mentions that the tax code does not distinguish between digital assets and other types of financial instruments. As part of the letter, Chairman Wyden and Ranking Member Crapo have solicited answers to multiple questions concerning the trade, sale, reporting and valuation of digital assets.
Further complicating the debate surrounding cryptocurrency taxation policy, a district court ruled last Thursday that Ripple Labs’ XRP cryptocurrency token is only classified as a security when sold to institutional investors—but not when sold to the general public. The ruling directly conflicts with the SEC’s current approach of classifying most cryptocurrencies as securities. SEC Chairman Gary Gensler said he was “disappointed” with the ruling.
The ruling has numerous implications for tax policy, as the determination of whether a cryptocurrency is classified as a security (the viewpoint favored by the SEC) or as a commodity affects the reporting requirements and taxation of the assets. Commodities tend to have less regulatory oversight and receive more favorable tax treatment than securities.
In the midst of these developments, however, is noticeable silence from the Treasury Department and IRS regarding the promulgation of expected transaction-reporting guidance. The Infrastructure Investment and Jobs Act (Pub. L. 117-58) imposed new requirements for reporting digital asset transactions that occur after 2022, but new regulations are yet to be issued.
At a Glance
- Congressional Democrats Say Tax Preparation Companies May Have Violated Privacy Laws. Led by Sen. Elizabeth Warren (D-MA), seven Democratic lawmakers wrote a joint letter to several oversight agencies accusing TaxSlayer, H&R Block and TaxAct of sharing taxpayers’ sensitive personal and financial information with Meta and Google. The letter coincided with a report released by the group asserting that the firms used the data for advertising purposes and that both the tax preparation companies and the technology firms were reckless in the handling of such data. The letter further asserts that these sharing practices may violate taxpayer privacy rights and laws, and it urges the appropriate enforcement entities to investigate the issue for evidence of potential legal wrongdoing.
- IRS Highlights Expanded Tax Administration and Enforcement in Recent Filing Season. The IRS issued a press release on July 14 highlighting the agency’s use of supplemental funding provided by the Inflation Reduction Act (Pub. L. 117-169) during the 2023 filing season. The document focuses on several agency objectives noted previously in the agency’s April Strategic Operating Plan, including efforts to bolster taxpayer services. Specifically, the document noted that the IRS opened 35 Taxpayer Assistance Centers since the enactment of the IRA and expanded use of digital filing tools like the new 1099 filing platform—the Information Return Intake System (IRIS). The IRS also said it was using new IRA funding “to go after delinquent millionaires.” In just the last few months, the agency reports having closed 175 tax cases targeting millionaires, generating an additional $38 million in enforcement revenue.
- OECD Announces Updates Concerning Pillar One Agreement. The Organisation for Economic Co-operation and Development (OECD) issued an Outcome Statement last week highlighting progress made toward developing the multilateral Pillar One solution to reform global digital-taxation rights. The statement noted that OECD members are approaching an agreement to determine “Amount A,” which would govern eligibility for market jurisdictions eligible to tax a portion of multinational businesses’ residual profits. However, Manal Corwin, director of the OECD Center for Tax Policy and Administration, noted that the organization must still address several countries’ issues with provisions in the current agreement. Corwin said that the OECD would continue to negotiate the framework concerning “Amount B” under Pillar One, which would standardize the taxation of in-country marketing and distribution arrangements.
Brownstein Bookshelf
- Bipartisan Legislation to Expand Child Care Affordability. Reps. Salud Carbajal (D-CA) and Lori Chavez-DeRemer (R-OR) sponsored the Child Care Investment Act (H.R. 4571) to expand the employer-provided child care credit, dependent care flexible spending accounts and the child and dependent care tax credit.
- Digital-Services Tax Doomed Without U.S. Support. The European-Union-based think tank Tax Observatory published a report asserting that the Pillar One global tax deal will be ineffective without U.S. backing because of the high concentration of multinational groups based in the country.
- Tax Writers Propose Legislation to Limit IRS Oversight of Tax-Exempt Organizations. House Ways and Means Committee members Reps. Mike Kelly (R-PA) and Jodey Arrington (R-TX) introduced the Don’t Weaponize The IRS Act (H.R. 4622) to exempt certain nonprofit entities from tax-reporting requirements.
Hearings and Events
House Ways and Means Committee
On Wednesday, the Tax Subcommittee will hold a hearing entitled “Biden’s Global Tax Surrender Harms American Workers and Our Economy.” The following witnesses will testify:
Panel 1
- Michael Plowgian, Deputy Assistant Secretary for International Tax Affairs, Treasury Department
Panel 2
- Mindy Herzfeld, Professor of Tax Practice, University of Florida Levin College of Law
- Adam Michel, Director of Tax Policy Studies, CATO Institute
- Anne Gordon, Vice President, International Tax Policy, National Foreign Trade Council
- David Schizer, Dean Emeritus and Harvey R. Miller Professor of Law and Economics, Columbia Law School
- Peter Barnes, International Tax Advisor and Of Counsel, Caplin and Drysdale
Senate Finance Committee
The committee has no tax hearings scheduled for this week.