Miller & Chevalier Chartered
TAX APPROVAL: The 10 most important questions (and a few more) about the reconciliation package: Part 2
August 10, 2021
Miller & Chevalier Chartered
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Last week we presented the first half of our “Top 10 Questions” on the upcoming reconciliation package. Here is the highly anticipated second half of the list.
- What is the date on which tax increases come into effect? The review and approval of the draft reconciliation in late autumn (at the earliest) suggests general entry into force for tax years beginning after December 31, 2021. Will the retroactive date of the increase in the capital gains rate proposed by the administration be retained? Will Congress consider other retrospective validity dates if it lacks the revenue to fund the package? If the COVID-19 Delta variant had a dramatic impact on health and the economy, would Congress actually consider an anticipated Effective Date?
- What about the upcoming changes to the provisions of the Tax Cuts and Jobs Act of 2017 (TCJA) regarding the deductibility of research and development expenses and the limitation on the deduction of interest expenses? Most consider it unlikely that, despite their popularity and bipartisan support, the Democrats would postpone TCJA-related provisions as part of the reconciliation package. But if individual tax breaks, such as an increase in the state and local tax (SALT) deduction cap, were included in the reconciliation package, wouldn’t those TCJA-related changes also be considered for inclusion? If not, a non-partisan tax law at the end of the year (see below) would probably be an ideal legislative tool for these changes.
- What about planned international changes?
Given the possible scope and application of the international proposals contained in the Green Paper and the international framework proposed by Senate Finance Committee Chairman Ron Wyden (D-OR), this is perhaps the area of greatest interest and uncertainty. Assuming the stricter changes to the global low intangible tax income (GILTI) are implemented as proposed, will other, stricter aspects of the GILTI regime be changed as well? Prospects for the lifting of the 20 percent haircut for the GILTI foreign tax credit? Is there a way to implement foreign tax credit carryforwards from GILTI? And what about the “Stopping Harmful Inversions and Ending Low Tax Developments” (SHIELD) provision? Will Congress go as far as the second pillar calls for and make the Erosion and Abuse Tax (BEAT) a real “secondary” rule, as it will not apply if the recipient of the offending payment of an income accounting rule?
- What is the timing of the adoption of the reconciliation package? There are some natural dates that could be paired with the adoption of the reconciliation package, such as the end of government funding on September 30, 2021 or the need to raise the federal debt ceiling sometime in the fall. And perhaps the last deadline, in the opinion of many politicians, is the end of the calendar year, as Democrats will likely be reluctant to pass partisan tax increases in the mid-election year. In addition, the ongoing OECD negotiations on the first and second pillars may have an impact on the timetable. In this regard, will Congress seek legislative changes to (1) adjust GILTI to come closer to the income inclusion rule and (2) either modify BEAT or repeal it in favor of SHIELD in order to achieve a rule that more similar to the under-taxed rule? Payment rule before or at the same time as the eagerly awaited OECD statement in October?
- How about a cross-party tax assessment at the end of the year?
Conventional wisdom is that once the Reconciliation Act was passed, Congress would consider a traditional year-end tax package that would focus on issues such as renewals, pension laws and technical fixes in a non-partisan way. After reconciliation, will the legal and political environment be conducive to considering such a package? Given such a package, will a delay in the adoption of the reconciliation package “be out of time”? Is funding required and if so, how?
Given the extremely compressed schedule on which Democrats are hoping to pass the Reconciliation Act, we expect a lot of action once both chambers return in September. Meanwhile, the tax writing committee staff is expected to be busy during the congressional recess evaluating proposals and exploring the potential content of the bill – this won’t be your typical sleepy August in Washington for everyone involved. No message doesn’t mean no action, so staying engaged is important. #TaxTake
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