Republican Tax Bill Delay; Ways & Means gives OECD Tax Plan the Cold Shoulder; 199A Deduction Still Alive

Please Pass the SALT

We noted last week that House Republicans had made it known that they intended to bring their tax package to the House floor before the chamber adjourned for its August recess. However, the House will leave DC on Friday, and there’s still no sign they will get the bill to the floor by then.

Given the controversial issues some factions in the House would like to see addressed in the GOP package, we were skeptical they could meet that ambitious target date. As we also noted last week, those factions include proponents (primarily members from high property tax northeast states and California) of eliminating or reducing the $10,000 cap on the deduction of state and local taxes (SALT) that was instituted by the Tax Cuts and Jobs Act (TCJA) back in 2017.?

The Cloakroom Says:?

The very vocal “SALT Caucus” in the House has continued to push for language in the House bill to address their concerns. The other faction we mentioned last week is the House Progressives, who want to extend the Child Tax Credit (CTC). If neither side’s demands are met by the Republican bill managers any time soon, it remains unclear if the tax bill will make it to the House floor at all.? The Cloakroom will keep an eye on the bill through the fall.

Treasury Dept Taking Another Look at Proposed FTC Rules

After we published last week, the Treasury Department announced that it was reconsidering how it will implement Foreign Tax Credit rules, which govern when US companies can claim credit for taxes paid to foreign governments. Treasury issued the final regulations along with subsequent guidance last year and received heavy criticism from the business community, which maintained that the rules could lead to double taxation in certain situations.?

According to the recent announcement from Treasury, the new rules will not apply to the 2022 and 2023 tax years. The Agency says it, along with the IRS, will continue to consider changes to the rules.?

The Cloakroom Says:

Over my long career in government affairs, I have participated in countless rulemaking and comment letters, and it always surprises me when federal agencies seem to take comments from stakeholders seriously. So there may be a lesson here for people skeptical about the utility of submitting comments on proposed rules. This experience with the Foreign Tax Credit rules shows that making one’s feelings known is worth the effort.? My advice is If a proposed rule harms your organization, weigh in and make some noise!

Global Taxation

OECD Global Tax Plans Get Rude Reception at Ways & Means Committee Hearing

We mentioned last week that the Republican-led House Ways and Means Committee held a hearing on the OECD’s global tax plan, but because the hearing occurred after we published, we could not provide our take on it.?

Ways & Means leadership, who have not been shy in their opposition to the plan, assembled a witness list of experts who panned the plan. Witnesses and committee members said U.S. adherence to the plan would hurt U.S. companies, kill American jobs, cost the U.S. $120 billion in tax revenue, provide an economic advantage to China and surrender Congress’ Constitutionally-mandated taxing authority. Here is one opponent’s take on the hearing and the topic. Democrats at the hearing argued that the U.S. has no choice but to opt out of the OECD process to ensure that U.S. interests are represented.

The hearing underscored the challenges faced by the potential U.S. adoption of the OECD global taxation plans. Republican opposition, which seems to solidify more every day, was strongly in evidence at the hearing. As we’ve noted previously, U.S. adoption will rely on Democratic victories in the 2024 presidential, House, and Senate elections. Given the unpredictability of U.S. politics, those hoping for a global tax deal should place all their hope and optimism on a Democratic sweep in November 2024.

Are there any alternatives if the OECD effort fails? One NGO says there are. The U.K.-based Tax Justice Network says that the current OECD initiative is a failure and that the United Nations should step in and work to enact global tax reform. The group maintains that countries will lose nearly $5 trillion without UN intervention over the next ten years as multinational companies use tax havens to underpay taxes. Is it realistic to expect a UN-led effort will succeed? Barring a sea change in the U.S.? political environment, A UN global tax plan would likely face the same obstacles as the OECD plan today.

Accounting Policy and Tax News

PCAOB Sees a Drop in Audit Quality

The Public Company Audit Oversight Board (PCAOB) said audit deficiencies are on the rise. In a staff report, the audit watchdog said that it found at least one deficiency in 40% of audits performed in 2022 that it examined. The decline was attributed to staff turnover and a shift to remote work.

On the standard-setting side, Republican Members of Congress have asked The Financial Accounting Standards Board (FASB) to withdraw its proposed Income Tax Disclosure Accounting Standards Update. While it is unusual for Congress to try to influence FASB’s standard-setting activities, the request may have been spurred by a letter from six conservative groups urging House and Senate tax-writing Committees members to scrutinize the FASB proposal. The tax trade press reported the letter.? FASB received about 50 comments from stakeholders on the Income Tax Disclosure proposal, which is expected to be finalized later this year.?

The Cloakroom Says:?

Congressional scrutiny and oversight of the board’s activity is relatively unprecedented, and it is unclear how the FASB will respond or if Congressional tax writers will assume a more active role in the standard-setting process. Congressional involvement in the process could add a new element to the accounting standard-setting process.? The Cloakroom will monitor how Congress and the FASB respond.

You Can Come Out Now

It is time to stop fearing an unexpected knock on your door, as the IRS has ended the practice of unannounced visits to the homes and businesses of taxpayers with significant tax debt. Citing safety concerns, the service said the long-standing practice would be replaced by scheduled visits. IRS employees welcomed the policy change.

Other Tax Developments on The Hill

Another Bill to Make Section 199A Deduction Permanent Introduced in House

In what may seem like a case of déjà vu, another bill to make permanent the Section 199A deduction for certain pass-through business income has been introduced. (The Tax Cuts and Jobs Act that created the deduction of 20% of qualified business income is set to expire at the end of 2025.) Introduced by Rep. Lloyd Smucker (R-PA ), The Main Street Tax Certainty Act has bipartisan support with 92 cosponsors, including 25 Democrats and all Republican House Ways & Means Committee members.??

Sen. Ron Daines (R-MT) introduced a companion bill in the Senate. The Smucker bill is the second such measure introduced in the House this year to illustrate the degree of support for making the 199A deduction permanent. Despite the bipartisan support, it is doubtful that the bill will pass on a stand-alone basis as the provision may be included in a broader tax package the GOP may pursue later in this Congress or the next one.

OECD Funding Preserved in Senate Appropriations Bill

As reported earlier this year, House Republicans opposed to U.S. participation in the OECD global Taxation plan have pushed for cutting American financial support of the Paris-based international organization. Their effort was successful, and a provision to eliminate the funding was included in the House State Department and Foreign Operations Appropriations bill as approved by the House. According to a report in Bloomberg Tax, the Senate Appropriations Committee stripped the House language when it took up the measure this week.?

The reason for the different treatment in both chambers is attributable to the fact that Democrats, who generally support U.S. participation in the OECD, control the Senate’s committees, whereas Republicans, who generally oppose U.S. involvement in the OECD, control House Committees.? If the language is not included in the Senate version, Congress will likely be unable to strip funding and block the global tax plan. As the U.S. provides about 19% of the OECD’s budget, they must be breathing a sigh of relief in Paris.

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