Update on developments in tax policy for the week of October 16, 2023
Speaker of the House Drama continues
Everyone has heard the definition of insanity as doing something repeatedly and expecting a different result. That definition is often attributed to Albert Einstein, but there's no proof he ever said it. This week, You’d be right to assume that Rep Jim Jordan (R-OH) said it, as he pursued three unsuccessful attempts on the House floor in his quest to become the next speaker of the House. As I write this, The house has gone without a speaker for the last three weeks. As the chamber’s GOP conference has been unable to choose a leader, there has been discussion of attempting some kind of power-sharing arrangement with House Democrats that would extend and expand the role of current Speaker Pro Tempore Patrick McHenry (R-VA); however, that plan was apparently rejected by hardline conservatives among the House GOP. With Jordan now out of the picture, it remains unclear how the leadership void in the House will be filled.? At least nine House Republicans have declared their candidacy for the spot for another floor vote this week. None of the candidates appear likely to win a sufficient number of votes, so the House will likely go without a speaker for the foreseeable future.? I expect some kind of power-sharing arrangement will be hammered out between both sides to allow the House to start considering legislative business now that the White House has submitted an emergency funding request for Israel, Ukraine, and border security. While such a power-sharing arrangement is unprecedented, it isn’t clear how it would work. It certainly raises many logistical questions about how all legislation would be considered through the usual legislative process in the House.
The Cloakroom Says:
What does the leadership vacuum mean for the future of tax legislation for the rest of the year in the House? As we've mentioned previously, the tax package voted out of the House Ways & Means Committee earlier this year is waiting to be taken up on the House floor, but since the Speaker determines the Floor agenda, I wonder how it can be placed on the legislative calendar. Will the House Democratic leadership have to sign off on giving the tax bill the green light for a floor vote? Will each side engage in bargaining and horse trading to get important bills to the floor in such a power-sharing scheme?
Global Taxation
OECD’s goal of finalizing? Pillar I Global taxation treaty by year-end is in doubt
We reported last week that the OECD had released the text of the treaty to enact The proposed global digital services tax (DST), AKA “Pillar I” ?The Multilateral Convention to Implement Amount A of Pillar I would codify taxing rights to revenues from digital transactions of large multinational companies, many of which are based in the U.S., such as Gooigle, Amazon,? Meta, and Apple.
The OECD is aiming to have the agreement in place by 2024.? For the treaty to enter into force, the 30 countries that are home to at least 60% of affected multinational companies must ratify the treaty. This means that because the U.S. is home to some of the largest affected companies, U.S. ratification will be critical to the ultimate success of the pact. If a country ratifies the treaty, it must drop any existing digital services tax (DST) it may have in place. This brings Canada to mind. Over the summer, Canada vowed to enact its own DST by 2024 after the OECD announced it would delay implementation by a year.
Because many of the largest companies affected by the treaty are based in the U.S., U.S. adoption of the pact is critical to its worldwide implementation. However, U.S. adoption isn’t necessarily a sure thing. U.S. Treasury Secretary Janet Yellen said this week that the U.S. is not ready to sign the convention as certain issues must be resolved. Speaking at a meeting of EU Finance Ministers in Luxembourg, Yellen said that resolving those issues will take until sometime next year, blowing the OECD’s implementation goal by the end of 2023.
The issue is further complicated because, in the U.S., all treaties must be ratified by the Senate before the U.S. can sign them. The U.S. Constitution stipulates that all treaties require a two-thirds majority vote in the Senate for ratification.? It seems unrealistic to expect that two-thirds of the Senate would vote to ratify the convention, given the opposition to the plan among many Senate Republicans.? This could greatly impede the OECD’s hope to have Pillar I in place by 2024. As often occurs with controversial international agreements, many nations often take their lead from the U.S.
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The Cloakroom Says:
I am skeptical that the U.S. will ratify the convention by the end of this year. Expecting the Senate to approve the pact in the next few months seems unrealistic. Anyone familiar with how Capitol Hill works or, more specifically, the Senate, knows that arcane Senate rules and traditions allow any one Senator to hold up consideration of legislation, nominations, conventions, and international agreements, and it would not surprise me to see a Senate Republican block consideration of the Pillar I convention. Conceivably, an opponent of global taxation could hold up consideration much the way Senator Tommy Tuberville (R-AL) has done with military nominations in recent months. Another challenge to successful Senate approval of the treaty is the constitutional requirement that two-thirds of the Senate must vote to approve all treaties and conventions for ratification. Given the current makeup of the Senate, it seems unlikely that two-thirds (66 Senators) would vote to approve the convention when one considers how strong Republican opposition to OECD global taxation is.? If the Convention fails in the Senate, expect that global adoption of Pillar I would come to a screeching halt. Perhaps the Biden Administration would delay submitting the pact to the Senate until after next fall’s mid-term elections, hoping that the composition of the Senate would change enough to ensure ratification. However, when one considers the Senate Seats up for reelection next year, it doesn’t appear likely the numbers could change enough to realistically support ratification.? Does that mean There is little hope that the U.S. will ratify the convention? I think there is little chance the Senate will ratify the agreement. That may be the final nail in Pillar I’s coffin.? As always, we will closely monitor the situation in the coming weeks.
UK Tax transparency proponent says large multinationals dodged? nearly ?￡2 billion in taxes
British public interest group TaxWatch says big tech companies use complex and legal tax schemes to minimize tax obligations.
In a recent report, the“investigative think tank” claims that large tech companies, including? Microsoft, Alphabet, Meta Apple, Amazon, and Adobe, avoided? more than ￡2 billion by taking advantage of UK tax law to move profits overseas
TaxWatch says their findings illustrate how complex international tax rules can be “abused “by large multinational companies and called on the UK government to make more tax data publicly available.
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Other global taxation news:
Interesting tax Link of the week
Tax Administration and Policy
IRS announces new Free Filing service in limited states in 2024
The IRS announced it will unveil a new free tax filing service for simple returns in thirteen states in the 2024 tax filing season.?
The new pilot program, "Direct File,” will allow taxpayers to file their returns directly through the IRS. The new program has generated some controversy as companies that offer tax filing services have strenuously lobbied against the program, and it has led to speculation about the impact on companies like Turbo Tax and H&R Block. Senate Finance Committee Chair Ron Wyden (R-OR)? welcomed the IRS announcement.
IRS establishes withdrawal process for ERC claims
The IRS announced that a process has been created to allow companies to withdraw Employee Retention tax credit (ERC) claims while they are being processed. The Covid 19 Program designed to encourage and reward businesses for retaining employees during the pandemic has been rife with abuse as the IRS has been inundated with ineligible claims from companies that don’t qualify for the credit. Last month, the IRS enacted a moratorium on processing ERC claims. The pause was designed to give businesses time to withdraw or repay ineligible claims thus, the new process announced by the IRS was expected and will hopefully relieve the ERC processing backlog.
IRS to Pursue Large Corporations for Taxes Owed
The IRS is launching a new initiative to ensure that large corporations and some high-income individuals? pay the taxes they owe
Using funding provided by last year’s Inflation Reduction Act (IRA), the IRS will focus on these areas in its? crackdown on U.S. businesses:
The IRS says it will use the IRA funding to improve customer service and enhance its technological capabilities.