Tax Worldview
Regulators Offer Temporary Reprieve from Revised Foreign Tax Credit Regulations. The Treasury Department and IRS issued Notice 2023-55 (the “Notice”) on July 21, providing temporary relief from the foreign tax credit (FTC) regulations published on Jan. 4, 2022 (T.D. 9959, the “Regulations”). The Regulations modified the FTC rules in several ways, including the creation of new requirements intended to limit taxpayers’ ability to claim an FTC with respect to certain “novel extraterritorial taxes.” However, the Regulations have been widely criticized as overbroad in their disallowance of FTCs for various foreign taxes that were considered creditable under the pre-2022 rules. The Notice provides relief by allowing taxpayers to apply the FTC rules that existed prior to the Regulations, except with regard to digital services taxes (which remain non-creditable).
The temporary relief applies to any tax years beginning on or after Dec. 28, 2021, and ending on or before Dec. 31, 2023. Thus, for calendar-year taxpayers, the relief applies to two tax years. For taxpayers with a fiscal year, the relief will likely result in only one tax year within the relief period. A taxpayer may apply the relief to all foreign taxes either (a) paid by the taxpayer during the relief period or (b) paid by any other person for which the taxpayer would be eligible to claim a credit (under section 901, with the adjustments made by the Notice).
A member of a consolidated group may take advantage of the Notice, but only if all members of the consolidated group apply the temporary relief to the relief year. In addition, a taxpayer may not rely on the Notice in a relief year to claim a credit (under section 901) for any amount of foreign tax for which a deduction is allowed.
The Notice highlights that the Treasury Department and IRS are contemplating amendments to the Regulations to address unresolved issues before the end of the relief period. In addition, the Notice provides that regulators “are considering whether, and under what conditions, to provide additional temporary relief beyond the relief period."
Legislative Lowdown
House Tax Writers Debate Treasury’s Role in Global Tax Negotiations. The House Ways and Means Tax Subcommittee hearing on Wednesday highlighted lawmakers’ sharp partisan division over the merits of the Organisation for Economic Co-operation and Development (OECD) global tax agreement. The subcommittee heard testimony from Treasury Deputy Assistant Secretary for International Tax Affairs Michael Plowgian, who defended the agency’s part in developing the proposed “Pillar Two” minimum-tax regime. While subcommittee Democrats expressed strong support for the Treasury Department’s role in ongoing negotiations, Republicans lambasted the Biden administration for “negotiating [a deal] behind closed doors” that would “surrender over $120 billion in U.S. tax revenues to foreign countries.”
In his opening statement, Tax Subcommittee Chairman Mike Kelly (R-PA) characterized the original purpose of U.S. negotiations with the OECD as an effort to allow foreign countries to enact their own global minimum taxes mirroring the U.S. Global Intangible Low-Taxed Income (GILTI) regime. However, he noted that the OECD failed to recognize GILTI as a qualifying tax throughout the negotiations, instead requiring the United States to make sweeping modifications to its tax code to comply with the global agreement. Accordingly, Republicans asserted that, without congressional approval, the Treasury Department allowed the OECD to construct an agreement that would provide favorable treatment to foreign tax systems while limiting the effectiveness of nonrefundable U.S. tax incentives, like the research and development credit.
Plowgian disputed Republicans’ characterization of the Treasury Department’s role in shaping Pillar Two, asserting that Congress was consulted during every step of the process that occurred during his tenure. He later committed to providing the subcommittee with evidence of prior agency consultation with members of Congress with respect to the negotiations. He further argued that the Pillar Two agreement would provide a common tax base, necessary to create an equal playing field among jurisdictions. To counter claims that the deal was unfavorable toward U.S. businesses, Plowgian highlighted the Treasury Department’s progress in securing favorable tax treatment of the transferable clean-energy tax credits, housing tax credits and accelerated depreciation. He argued it would be preferable for the United States to continue to be involved in OECD negotiations than to abandon them and risk losing its stake in the decision-making process.
Democrats largely approved of continued U.S. participation in the negotiations. Tax Subcommittee Ranking Member Mike Thompson (D-CA) stated that the intent of the Pillar Two negotiations was to prevent multinational corporations from shifting profits to low-tax jurisdictions, and he said U.S. enactment of the agreement would accomplish this objective.
Republicans Take Action to Counter OECD Agreement. In conjunction with the Tax Subcommittee hearing (discussed above), Rep. Ron Estes (R-KS) introduced the Unfair Tax Prevention Act (H.R. 4695) intended to discourage foreign countries from imposing extraterritorial levies on U.S. companies—a key enforcement mechanism of the Pillar Two agreement. The bill would modify the U.S. Base Erosion and Anti-abuse Tax (BEAT) to apply more broadly to foreign-parented companies in countries adopting extraterritorial taxes on U.S. businesses. In a press release, Rep. Estes said the current OECD agreement “has a disproportionately negative effect on the United States and [its] economic competitiveness” and weakens U.S. sovereignty. The bill is co-sponsored by 10 other Republican House Ways and Means Committee members, including its chairman, Rep. Jason Smith (R-MO).
More broadly, Chairman Smith has remained a strong critic of ongoing OECD negotiations and previously introduced his own Pillar Two remedy proposal—the Defending American Jobs and Investment Act (H.R. 3665). That bill would require the Treasury Department to identify and regularly update a list of countries imposing extraterritorial and discriminatory taxes and create new enforcement remedies under the U.S. tax code to protect against such adverse tax regimes.
Separately, the House and Senate appropriations committees are preparing for a clash on whether to continue U.S. monetary contributions to the OECD. The GOP-controlled House Appropriations Committee reported its State, Foreign Operations, and Related Programs (SFO) appropriations bill favorably along party lines, proposing a full repeal of funding for the OECD beginning in FY2024. Notwithstanding hardline Republican opposition toward funding the intergovernmental group, the Democratic-controlled Senate Appropriations Committee reported its SFO spending bill favorably that would provide $3.6 billion in funding for the OECD and other international organizations—a $174 million increase over FY2023.
Whistleblowers Testify on IRS’s Mishandling of Hunter Biden Tax Case. On Wednesday, July 19, two IRS whistleblowers appeared before the House Oversight Committee in their first public testimony in connection with accusations that the Biden administration took deliberate action to sabotage the Hunter Biden tax evasion case. The IRS agents, Gary Shapley and Joseph Ziegler, answered lawmakers’ questions regarding a collection of investigative documents made public last month by the House Ways and Means Committee.
In the hearing, Republicans criticized the IRS for perceived preferential treatment to the Biden family, as well as the Department of Justice for further impeding the tax-enforcement agency’s investigation. House Ways and Means Committee Chairman Jason Smith (R-MO), who was invited to participate in the hearing, stated that the handling of the Hunter Biden case is demonstrative of a two-tiered justice system in the country, and he urged IRS employees to come forward with any other instances of misconduct.
Earlier this month, Chairman Smith led a bicameral group of Republican lawmakers on a letter to Special Counsel Henry Kerner calling for “an immediate review of reported reprisal against investigators who raised concern about the Hunter Biden investigation.” In response to the ongoing investigation, IRS Commissioner Daniel Werfel sent a memo to IRS employees on July 7, informing them of their right to raise concerns about internal conduct to the appropriate authorities, including congressional oversight committees.
Democrats in the hearing sought to portray Republicans’ persistent pursuance of the case as another attempt to fabricate a “smear campaign” against the Biden family. House Oversight Committee Ranking Member Jamie Raskin (D-MD) asserted the core issue that the whistleblowers have is with prosecutorial discretion and that Congress should not be attempting to intervene in the “tug of war between investigators … and prosecutors who are more attuned to the rigors of the courtroom."
1111 Constitution Avenue
Progressive Group Requests Expanded Direct e-File Offering Despite Public Skepticism. The newly-formed Coalition for Free and Fair Filing (CFFF) penned a letter to IRS Commissioner Daniel Werfel last week expressing support for the development of a full-scale Direct e-File tax preparation and filing tool. To accomplish this objective, the progressive group suggested that the IRS “be as ambitious as possible” in administering its upcoming Direct e-File Pilot Program in the 2024 filing season and furnish a “road map” of improvements that could be made to expand the program in future years.
The coalition is comprised of over 200 liberal advocacy groups and was launched on July 20 with a stated mission of supporting the development of a “free, simple, and publicly owned online tax filing tool.” CFFF is led by several Democratic-leaning organizations that have opined favorably on an IRS-operated filing tool in the past, including Code for America, Public Citizen and the Center for the Study of Social Policy. This new Direct e-File push is also supported by several large progressive labor and economic groups, including the AFL-CIO, Center for American Progress and Institute on Taxation and Economic Policy (ITEP).
The CFFF’s request for a robust Direct e-File option aligns closely with a letter sent to Commissioner Werfel last month by a contingent of Democrats in the House and Senate. It is still unclear whether the planned Direct File tool that IRS will roll out in January will offer taxpayers a simultaneous state tax return or be able to accommodate those who are eligible for the earned income tax credit.
Notwithstanding Democratic support, several nonpartisan groups have questioned the merits of the Direct e-File development process. One such group, the congressionally-chartered Electronic Tax Administration Advisory Committee (ETAAC), released its annual report on June 28, recommending that the IRS closely evaluate current free tax-filing support—including the Volunteer Income Tax Assistance (VITA) program—before expanding investment into a new platform. ETAAC justified its hesitance toward the IRS-operated system by citing the tight development window of the pilot program and the up to $249 million in annual costs (or $2.5 billion over 10 years) that would be attributed to the upkeep of a potential full-scale platform.
Many Republican lawmakers have also raised concerns that the IRS does not possess the explicit authority to develop a Direct e-File system. Earlier this month, Senate Finance Committee Ranking Member Mike Crapo (R-ID) published an op-ed suggesting that the tool would create “an inherent conflict of interest” in which “taxpayers [could] never be sure they are being favored or disfavored” for using the platform. In a further attempt to block the program, GOP House appropriators included language in their IRS funding measure to prevent the agency from creating a “free, public electronic return-filing service option” without prior approval from both the House and Senate Appropriations and tax-writing committees.
At a Glance
Biden Highlights Tax Accomplishments and Upcoming Priorities. President Joe Biden published his Economics of Investing in America Report on July 14, promoting the administration’s ongoing tax and economic policy priorities in the leadup to the 2024 elections. The report began by criticizing policies enacted in previous administrations that President Biden believed “made offshoring to lower-taxed countries more attractive.” In contrast, the report asserted that several tax incentives enacted in the 117th Congress would counter this effect and bolster domestic-manufacturing investments in the semiconductor-production and clean-energy-technology sectors. President Biden further noted that his administration will continue prioritizing economic relief for certain areas undergoing energy transitions through support such as “bonus tax credits for legacy coal, oil, natural gas, and power plant communities.”
Key House Republicans Unveil Crypto Regulatory Framework. House Financial Services Digital Assets, Financial Technology and Inclusion Subcommittee Chairman French Hill (R-AR) and Reps. Glenn Thompson (R-PA) and Dusty Johnson (R-SD) introduced the Financial Innovation and Technology for the 21st Century Act (H.R. 4763) to develop a regulatory framework for cryptocurrency and other digital assets. Reps. Hill and Johnson also sent a letter to Securities and Exchange Commission (SEC) Chairman Gary Gensler, urging him not to “regulate by enforcement” by pushing SEC rulemakings that the lawmakers believe would jeopardize financial stability. The bill follows a lack of guidance by the Treasury Department and the IRS in issuing transaction-reporting guidance. The bill will be marked up in the House Financial Services Committee this Wednesday, July 26.
Brownstein Bookshelf
IRS Halts Unannounced Tax-Enforcement Visits. In a statement published on July 24, the IRS said it would “end most unannounced visits to taxpayers by agency revenue officers to reduce public confusion and enhance overall safety measures for taxpayers and employees.” The announcement comes after a letter last week from all 13 Senate Finance Committee Republicans expressing concern over “allegations of unannounced home and office visits by IRS agents.”
Hydrogen Group Requests Regulators Drop ‘Additionality’ Considerations. The Fuel Cell and Hydrogen Energy Association, U.S. Chamber of Commerce and Plug Power led a coalition of hydrogen producers on a letter requesting that the Biden administration refrain from imposing certain stipulations in expected regulations concerning the hydrogen tax credit.
Truckers Call for Repeal of Excise Tax. Several trade associations representing sectors of the freight industry sent a letter to the leaders of the congressional tax-writing committees to request support for legislation to end the federal excise tax on heavy-duty trucks and trailers.
Hearings and Events
House Ways and Means Committee
On Thursday, the Oversight Subcommittee will hold a hearing entitled “The Employee Retention Tax Credit Experience: Confusion, Delays, and Fraud.” The following witnesses will testify:
- Larry Gray, Partner, AGC CPA
- Roger Harris, President, Padgett Advisors
- Pat Cleary, President and CEO, National Association of Professional Employer Organizations (NAPEO)
- Linda Czipo, President and CEO, New Jersey Center for Nonprofits
Senate Finance Committee
The committee has no tax hearings scheduled for this week.
Public Sector
Tuesday, July 25
IRS
Employee Retention Credit Webinar